Rocks and Boulders

Cable Guys' Feud
Cablevision's various fights are obscuring the value of its attractive assets
By JACQUELINE DOHERTY

CABLEVISION SYSTEMS HAS BEEN GETTING plenty of publicity lately, more than it would like. Boardroom discord over the fate of its money-losing satellite business, Voom, captured the spotlight in recent weeks. So has the company's battle royal with New York City Mayor Michael Bloomberg over his proposed stadium on Manhattan's West Side that would compete with Cablevision-owned Madison Square Garden.
The attention paid these two events has obscured the value of Cablevision's lucrative, core cable operations. The cable business kicked in an estimated $1.17 billion of operating cash flow (earnings before interest, taxes, depreciation and amortization) in 2004, out of a total of $1.4 billion. The company's three established cable channels, American Movie Classics, Independent Film Channel and W -- Women's Entertainment, contributed much of the rest: $237 million.
Compare that to the satellite business's expected $209 million in negative Ebitda in 2004 and Madison Square Garden's $45 million contribution. The company is due to report fourth-quarter results Wednesday.
While shares are up substantially from a 52-week low of 16.68 in August to a recent 27.94, bulls believe the stock does not reflect the success and the opportunity of Cablevision's cable operations. Bear Stearns analyst Raymond Katz believes the shares are worth 35 by year end if the market assigns a value of $4,163 to each cable subscriber, which equates to 9.5 times the unit's 2005 estimated Ebitda.
Cablevision has entered into a contentious bidding war over land on Manhattan's West Side. Mayor Michael Bloomberg wants a stadium developed on the site, which could threated Cablevision-owned Madison Square Garden.
The real home run comes if the Bethpage, N.Y.-based company gets split apart -- which has been speculated about for years but may be closer to happening, given recent events. Were the company sold in separate pieces, the stock could be worth 40 or more, estimates Mario Gabelli, chief executive of Gabelli Asset Management, which owns the shares.
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Cablevision's fate lies in the hands of the Dolan family, which owns super-voting shares giving them 76% of the shareholder vote. Chairman Charles Dolan, 78, directly controls shares that give him more than 50% of the shareholder vote, according to a Bear Stearns estimate. His son, James, is chief executive and sits on the board along with brothers, Thomas, CEO the programming and satellite units, and Patrick, who's president of Cablevision's News 12 Networks. Critics have long charged the Dolans have run the company as a private fiefdom, often using corporate money to get involved in noncable businesses with disappointing results. Cablevision declined to comment for this article.
Charles, who was the force behind HBO and built Cablevision from the ground up, embraced the satellite business in 2003. James, who became CEO in 1995, pushed to buy electronics retailer The Wiz out of bankruptcy for $60 million and sank more than $200 million into the company before liquidating it in 2003. The younger Dolan also takes a direct interest in Madison Square Garden, with its losing basketball team, the Knicks, and the Rangers, who haven't lost anything because hockey season has been washed out this year.
"There's a temptation to give the company a 'Dolan Discount'," says Kurt Funderburg, an equity analyst at Harris Associates, an investment-management firm that advises mutual funds that own Cablevision shares. Still, his shop likes the stock, primarily because the Dolans also have assembled some of the best-clustered cable assets in the nation, serving some 4.4 million homes in the New York metropolitan area, many of which have the desire and the means to pay for more lucrative digital communication services.
Charles Dolan
Cablevision, like its peers, has seen the growth in total subscribers slow dramatically. At the end of the third quarter, the company estimated that video subscribers grew by only 0.5% in '04. This is in part because the company already serves about 67% of the homes it passes.
Cablevision's solution: Grab a greater share of its subscribers' wallets. Over the past seven years or so, at a cost of more than $5 billion, the company has upgraded its system to offer digital services. Last summer, it began offering new customers what it calls the Triple Play, a package that includes digital cable, high-speed Internet access and local and long-distance phone service for $90 a month for the first year, $115 in the second and $140 thereafter. Last week, Cablevision said customers who pay the standard $140 a month for the three services will get a $25 break on that.
The introduction of the Triple Play deal, adopted by 25% of new customers in the third quarter, helps explain why Cablevision's revenues per subscriber have increased nicely to $83.39 a month at the end of September, from $77.29 a month a year earlier. It also tops the $74.83 revenue per subscriber at Comcast and the $75.78 at Time Warner Cable, one analyst estimates. The trend has plenty of room to continue since only 45% of Cablevision's cable subscribers get digital service, 28% of potential customers have broadband Internet service and even fewer, 4%, have digital telephone service.
Naysayers worry about the threat from Verizon Communications and satellite companies. Verizon offers Internet access via digital subscriber lines, or DSL, at slower speeds but also lower prices -- as little as $29.99, versus the $49.95 Cablevision charges for cable modems. More ominously, Verizon began stringing fiberoptic cable across Long Island and Westchester last year with the aim of ultimately offering its own alternative to cable TV services. "It is our intention to get this technology and these services in front of as many of our customers as quickly as we can," says Verizon spokesman Mark Marchand.
James Dolan
That said, the build-out will be extremely expensive and is apt to be slow going. Just stringing the fiber through a neighborhood will cost $800 to $1,600 per house and the company has yet to line up content providers. In addition, Verizon may become distracted over the next year or so by its $6.7 billion offer for MCI.
Cablevision also faces competition from satellite outfits, such as DirectTV Group and EchoStar Communications. But satellite companies can't offer competitive Internet access or phone service on their own. Cablevision estimates under 15% of homes in its markets get satellite service.
Talk of selling Cablevision's cable operations heated up in the wake of Voom's sale. A few weeks ago the majority of Cablevision's board of directors, including son James, voted against papa Charles Dolan and decided to stop funding the satellite operation, which some believe burned through almost $1 billion since its inception and $75 million in the third quarter alone. The company then decided to sell Voom's Rainbow 1 satellite and licenses to operate satellites to EchoStar for $200 million.
The Voom sale reportedly marked the first time the board of directors ruled against the senior Dolan's desires, which has to have been painful and frustrating for one of the founding fathers of the cable industry. His response: a surprise bid to buy Voom's remaining assets and take on its liabilities.
Charles, his son Tom, and certain other holders of Cablevision class B common stock will form a private company, called Voom HD. The new company will receive Voom's 26,000 customers, 21 high-definition channels, spectrum licenses and leased capacity on some satellites. It won't pay Cablevision for those assets, but instead will be responsible for funding operating losses from theses assets and will relieve Cablevision from paying the cost of shutting down the operation. Cablevision's board must approve the deal and Charles Dolan hasn't made public how he'll finance the offer, which expires at month's end.
In the wake of the Voom sale, a number of Wall Street analysts raised their price targets on the stock because the deal eliminates a venture-capital-like cash drain on Cablevision. When Richard Bilotti at Morgan Stanley raised his price target to 31 from 21 he wrote that about $6 of the increase relates to the sale of Voom, due to the removal of its negative value and the lower debt the company will have at the end of this year. The deal also means Cablevision can generate free cash flow -- cash generated by operations and after capital expenditures -- in 2005 instead of 2007.
Table: Unlocking the Value1Tables: Rolling in Cash A Quality Cluster2
"We believe [the sale to Charles Dolan] creates conditions that move Cablevision another step closer to potential liquidation; signals Charles Dolan's divorce from the cable business; his commitment to cable's main competitor (direct broadband satellite), and makes the company smaller and 'cleaner' with fewer liabilities. We estimate liquidation value at $43 a share," wrote Bear Stearns' Katz in the wake of the deal. He assumes the company would receive a hefty $5,000 per subscriber in a sale.
The obvious way for Charles Dolan to fund the new Voom HD would be to sell his Cablevision stock. He may also need to step down from Cablevision if Voom HD competes directly with the cable operation. "It's as if the chairman of Coke just bought a Pepsi bottler," quips one observer. So, for the first time in years, Charles may have a double incentive to sell the company.
The two companies frequently mentioned as potential acquirers are Comcast and Time Warner. Comcast has operations up and down the East Coast, with the exception of New York. Time Warner's operations are contiguous with Cablevision's and a deal would make them more competitive with Comcast. Time Warner obviously is looking to expand its cable operations, as shown by its recent joint bid with Comcast for the cable assets of Adelphia Communications, and its improved financial standing helps matters.
"Four thousand dollars per subscriber is what we think the average cable system is worth and we think that Cablevision is worth a decent premium to that," says Funderburg of Harris Associates. When Cox Communications bought back its public shares last year it paid about $3,900 a subscriber.
Meanwhile, Rainbow Networks, with the AMC, IFC and Women's Entertainment, could be a nice fit for other entertainment companies including Viacom, Disney, NBC, Fox or Comcast. And most observers believe James Dolan would like to retain and continue to run Madison Square Garden and the sports teams.
Cablevision is certainly putting enough time into defending its MSG turf. The company has bid $600 million for a 13-acre plot of land owned by New York's Metropolitan Transportation Authority on Manhattan's West Side. The land is now used as a train yard and Cablevision would have to build a deck, at a cost of $250 million, over the tracks before the land could be developed.
Cablevision's move thwarted a $100 million bid from the New York Jets for the land, over which the football team would build a stadium that could also be used to host the 2012 Olympics, if New York City were to get the games, as Mayor Bloomberg fervently desires. The Jets bid includes another $375 million of funding from New York City and State to build the deck over the trains. The MTA has asked Cablevision and the Jets to submit their best bids and a letter of credit by March 21 and has opened up the bidding to other developers as well.
Cablevision officials say the ultimate cost to the company would be less than $600 million because it will find partners to develop the site. Most Wall Street observers don't believe Cablevision will go through with the bid. But the situation shows how the company again is straying from its most valuable asset: its cable properties. If it were to stick to that, Cablevision's shares would be worth a lot more.