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Cablevision Sells Voom to EchoStar

Jan 24, 2005  •  Post A Comment

The dream-or nightmare-is over.

Wall Street cheered late last week after Cablevision Systems put its failing high-definition satellite business Voom out of its misery, striking a deal to sell its lone satellite and the attendant ground operations to EchoStar Communications for $200 million cash.

The deal immediately removed a dark cloud that has loomed over Cablevision for the past 18 months. It also triggered renewed speculation about the fate of three national cable networks-AMC, IFC and WE: Women’s Entertainment-that were to help fund the Voom venture. Cablevision has said it is exploring strategic alternatives for the channels, which could include sale.

Cablevision will run the Voom service during a transition period until the deal is completed. It is expected that EchoStar will shut down the Voom service.

Cablevision shares surged on the news of the Voom sale, with investors at midday Friday bidding up Cablevision’s stock to $28.27 a share-an 11 percent premium over the day-earlier close. Volume Friday was 10 times Cablevision’s daily average.

Craig Moffett, an analyst at Bernstein research, called the move to sell Voom “a welcome signal that Cablevision, its independent directors and its CEO James Dolan are all appropriately respectful of their fiduciary obligations to Cablevision’s public shareholders.”

The news was also good for EchoStar, whose shares were up 1 percent Friday at midday.

Almost from the moment Cablevision announced plans to launch a high-definition satellite business, investors and analysts have seen the idea as a fool’s errand, raising questions of whether Cablevision’s founding Chairman Charles Dolan, long a pioneer in the cable industry, had lost his status as a visionary.

Making matters worse, Voom was proving to be a cash drain that had failed to register with consumers. All told, Cablevision spent between $500 million and $750 million on the service, but had only 26,000 subscribers as of the 2004 third quarter. Even then it was still suffering from a high rate of customer defection, or churn. In that same quarter Voom lost $75.3 million.

Cablevision officials had planned to spin off the satellite service and the three cable channels into a separately traded company, but after several delays those plans were tabled in late December. In a filing at that time, Cablevision said it was exploring strategic alternatives for the satellite service and cable channels.

At the same time, Cablevision board members were growing increasingly restive with Voom’s performance, its status as a cash drain and potential fallout that could occur as a result of Cablevision continuing to fund what was clearly a struggling business.

It all came to a head last Tuesday in an emergency board meeting, during which the board voted to sell Voom, a move Charles Dolan opposed. Among the directors voting to dump the service was CEO James Dolan, who has often operated in the shadow of his father and until now had rarely asserted himself to his father. Questions are now being raised as to how James Dolan’s move will affect his and Charles Dolan’s relationship with respect to running the company.

A Cablevision spokeswoman said the company would have no comment beyond the statement issued Thursday night announcing the sale.

Because EchoStar had lagged behind rival DirecTV Group in offering high-definition channels, analysts for months had speculated that EchoStar was a likely candidate to buy Voom. Mr. Moffett noted that by purchasing the Voom assets for $200 million, EchoStar will be able to offer high-definition channels to 40 markets sooner and at a lower cost than had it built and launched its own satellite, which he estimated would have cost $250 million and taken two years to get into orbit. In addition, EchoStar gets for its money a fairly new satellite with a 16-year life and no performance problems. Additional satellites that Cablevision ordered from Lockheed Martin are now expected to be canceled, as permitted in their contract.

With Voom exiting the Cablevision stable, the cable operator is likely to turn its attention to its three cable networks. Despite their robust cash flow, analysts believe a larger content company would have a better time running the networks, particularly if they are large players such as Viacom, The Walt Disney Co. or NBC Universal, all of which have leverage on retransmission consent.

What’s more, there could be an appetite for cable channels out there. Two weeks ago Viacom Chairman and CEO Sumner Redstone said at an analyst conference that he is interesting in acquiring more cable channels at the right price.

If the cable channels were sold, Cablevision would largely become a pure-play cable company. That could revive oft-mentioned speculation that Time Warner might consider acquiring Cablevision’s cable assets, which adjoin their own in the New York metro area. (The company also owns the New York Knicks professional basketball team, the New York Rangers pro hockey team, Madison Square Garden and Radio City Music Hall, but the cable operations generate the lion’s share of the company’s revenue and profit.)

Richard Greenfield, an analyst at Fulcrum Global Partners, agreed, noting that given the showdown between Charles Dolan and the Cablevision board over Voom, now might be the right time for Time Warner to take a look at Cablevision.

A Time Warner spokesman declined to comment on the speculation.