Cabler’s Motives Under Question

Jun 27, 2005  •  Post A Comment

Could Cablevision Systems’ founding Dolan family’s proposal to take the company private be an indirect way of putting the cable assets up for sale?

It’s a question being asked by more than a few Wall Street analysts as the market digests the surprise announcement last week that the Dolans had submitted a $7.9 billion plan that would take the cable business private while spinning off the rest of the company, including the Rainbow Media cable channels and Madison Square Garden, into a separate, publicly traded company.

There is certainly precedent for multiple-system operators going private. Thanks to investors’ fretting over the fierce competition confronting cable operators from the satellite industry, and soon from the telephone companies, cable companies are likely to face more scrutiny from investors, especially if an MSO must begin spending more to acquire and retain subscribers. Against that backdrop, a number of cable companies-including Cox Communications and Insight Communications are choosing to avoid the aggravation of temperamental investors.

What’s more, in the case of Cablevision, the company has also seen its stock price take a hit because of a slew of issues that many investors have regarded as distractions, ranging from the company’s failed launch of a satellite service to the fight it waged against the construction of a football stadium on Manhattan’s West Side that would have directly competed with Madison Square Garden. In addition, some investors have worried about a battle that raged earlier this year between Cablevision Chairman Charles Dolan and CEO James Dolan, his son.

With investors fretting so much and bidding down cable stock prices, it’s easy to see why Cablevision might want to close up shop and avoid the drama that comes with being a public company. However, there is growing speculation that Cablevision’s privatization plan, which involves buying outstanding shares at $33.50 each, might be a pretext to beginning an auction of the cable assets. Indeed, several analysts believe the Dolan family offer might serve as more of a message to potential suitors that in order to have a shot at the cable assets, they will need to top the Dolan offer.

A major factor in determining whether such a scenario plays itself out could be the three independent board members impaneled to review the Dolan offer. They were named last Wednesday, though the company refused to identify them. Aryeh Bourkoff, a cable analyst at UBS Securities, last week said that if the panel’s advisers demand a higher bid from the Dolans, it could “create a bidding process” by compelling would-be buyers to step up with sweeter offers.

And the list of candidates could include some big names. Cablevision’s cable systems have long been regarded as some of the most attractive assets in the cable industry. Generally located in the suburbs surrounding New York, Cablevision has long been envied by other cable operators because of its ability to dominate the markets it serves, staving off competition from satellite, while at the same time generating far and away the most cash flow per subscriber of any MSO in the United States.

But in an age of consolidation, the company, which has around 3 million subscribers, has stood out as not jumping on the merger bandwagon and now remains a comparatively small operator overshadowed in size by Comcast and Time Warner Cable, both of which operate systems near Cablevision markets and are mentioned as potential buyers. That has led to years of speculation that the company would be absorbed by one of these larger operators, though little comes of it in part because of the high price that Chairman Charles Dolan has demanded for the cable properties. Private-equity players, lured by cable’s predictable and substantial cash flows, are also potential candidates.

Richard Greenfield, an analyst at Fulcrum Global Partners, said potential suitors would do well to think long and hard about making a play for Cablevision at this point because it could be the last time they get a close up view of the company: “Once private, the lack of a public market trading value for [Cablevision] would appear to make an acquisition more complicated” and probably more expensive, “with the buyer having far less information.”

Spokespeople from Cablevision, Comcast and Time Warner declined to comment.

However, some analysts believe neither Time Warner nor Comcast would step up and make a play for the company, given that both companies are in the throes of their recent joint deal to acquire Adelphia Communications.

William Drewry, an analyst at Credit Suisse First Boston, pointed out that while both cable companies have the financial capacity to acquire Cablevision’s cable assets, doing so might slow down, and could potentially complicate the closing of the Adelphia transaction.

The cable systems aren’t the only Cablevision assets talked about as being potentially for sale. The Rainbow assets have also generated a fair amount of chatter, with the cable channels-AMC, IFC, WE: Women’s Entertainment and Fuse-being considered likely to be put up for sale at some point.

Indeed, a number of observers noted that with Liberty Media Chairman John Malone announcing earlier this month his resignation from the Cablevision board to avoid potential conflicts of interest, he might make a play for some or all of the cable networks.

But even that could face some resistance. Mr. Drewry noted that James Dolan, who will run the publicly held spinoff company, “may have a preference for running the business rather than selling it.”