Stock of the Day
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Cablevision (CVC)
Can Cablevision Escape the Dolan's Whims?
Looking for another sign that credit conditions may be improving? Cablevision is ready to get back into the M&A game. The Dolan family, which owns about 24% of the New York cable giant but controls 71% of the voting stock, has been making noises about restructuring Cablevision for a long time now. Over the last 4 years, they have tried numerous times to take the firm private but have been unable to do so. They also flirted with the idea of divesting some assets. The latest word out of the Long Island based cable operator is that they are thinking about spinning off the Madison Square Garden (MSG) division which houses the firm's glamorous assets -- including the Knicks, the Rangers and the MSG arena itself. Wall Street is always up for these kinds of restructurings and that is a part of the reason the stock, at one point yesterday, was up almost 18%.
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Cablevision announced Q1 earnings yesterday. The numbers were mostly strong and within expectations. Revenue was up 11% to $1.9 billion and the company turned in a profit of $20.2 million or 7 cents a share, much better than a year earlier loss of 11 cents a share. But the real attention grabber was a statement that management is going to look into spinning off Madison Square Garden L.P. Cablevision consists of the core cable operations which have a huge presence in the New York market, the MSG unit which includes the sport teams and the namesake arena, the Beacon Theater and a lease on Radio City Music Hall, and Rainbow Media which houses cable channels such as AMC, IFC etc. Investors have long complained that these disparate assets share little synergies and have no business being a part of Cablevision. Time Warner (TWX: Charts, News, Offers) faced similar criticism and hence, it spun off Time Warner Cable (TWC: Charts, News, Offers) not too long ago.
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The Dolans, for the most part, have resisted this line of thinking. They have shown an inclination to keep the company together and preserve the cable business along with the trophy assets. So the last few years, they have tried to unsuccessfully take the entire Cablevision operation private so they wouldn't have to deal with complaints from shareholders. So this new announcement about spinning off MSG comes as a surprise because it is a departure from previous thinking. The stock jumped yesterday because this is exactly what the market wants. Ideally, investors would prefer that Dolans separate MSG from the cable business and then sell that cable business (which would have a higher value as a standalone entity because MSG eats up a lot of the free cash flow right now) to a larger cable company such as Time Warner Cable or Verizon (VZ: Charts, News, Offers). Both of them would pay a substantial premium for the cable business because they value the New York area subscribers heavily. For Verizon especially, an acquisition of Cablevision would mean that some of the pressure on the FiOS service, which Verizon is promoting heavily in New York, would come off. The Dolans can continue running the spun-off MSG entity which most analysts value at $1.5 billion. It has limited profitability though.
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So will this ideal scenario play out and unlock value for Cablevision shareholders? Given the past erratic behavior of the Dolans, the odds can't be too high. The Dolans are prone to changing their minds very quickly and this idea of spinning off MSG could just be a fad. Plus one also has to seriously question their management skills and whether they would be to able to pull off a spinoff of MSG and sale of the cable assets. Newsday, the Long-Island newspaper, is a great example of their sub-par business savvy. As is obvious to most people, the newspaper business or atleast the print part of it, is headed towards extinction. But the Dolans, for some reason, last year decided that this would be a great time to get in and paid $650 million for Newsday (outbidding Rupert Murdoch in the process, i.e. someone who knows more about valuing newspapers than anybody else on the planet). Shortly thereafter, they had to write off more than half the value of the deal to account for the deterioration at Newsday. Additionally, they recently announced that they will buck the trend towards free-ad supported content by making Newsday's website available only to Cablevision's cable subscribers. That is a flawed strategy and will further depress Newsday's value.
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Some people believe that the Dolans intentionally wasted money on Newsday in order to depress the stock which would make it cheaper for them to take the company private. Either way, counting on the Dolans to do the most sensible thing going forward would be a substantial risk but one that could have a tremendous payoff given the strength of that core cable business.
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Profile |
Click here to view a detailed profile of Cablevision.
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