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Cablevision Investors Ponder Privatization

Now comes the hard part for Cablevision Systems Corp. (NYSE: CVC) -- getting shareholders to go along with a deal that will allow the Dolan family to take the New York-based cable operator private.

That's the challenge ahead after an independent committee approved a $36.36 a share offer from the Dolan Family Group valued at $22 billion, including debt. (See Cablevision Keeps Family Ties .)

Cablevision shares were down $0.22 cents (0.61%) to $35.68 in late trading Thursday.

Given the solid earnings Cablevision posted Thursday and its free cash flow potential, the share price agreed upon might be a tough sell for investors, according to Sanford C. Bernstein & Co. Inc. Senior Analyst Craig Moffett. (See Cablevision Posts Q1.)

The key to the MSO's cash flow growth story, he said in a research note, is "declining capital intensity." In the first quarter, for example, Cablevision's $140 million in capital expenses represented just 12.7 percent of revenues. That, Moffett noted, is "the lowest quarter level ever, and down from a dizzying 27 percent of revenues a year ago."

Investors who have funded Cablevision's investment phase "understandably view Cablevision – and indeed the whole cable sector – as starkly undervalued (a view with which we concur)," Moffett wrote. "A proposed valuation multiple that is little better than the prior offer (only higher due to the passage of time) may not be good enough to convince a majority of public shareholders to support the bid. Once again, Cablevision – or, at least, the Dolans – may prove to be victims of their own success."

Cablevision execs declined to elaborate on the deal Thursday morning during the company's earnings call with reporters and analysts.

"Obviously on behalf of the Dolan family, we were very pleased to reach an agreement with the company," said Cablevision CEO and President Jim Dolan. "The process has now begun, and while it is too early for us to address the questions we know you have, rest assured we will be available to address those questions at the appropriate time."

Jim Dolan declined to be specific when an analyst asked when a vote on the deal could be expected.

Company officials did chime in on "win-back" questions stemming from competition with Verizon Communications Inc. (NYSE: VZ) and its FiOS service.

Cablevision COO Tom Rutledge said Verizon's video service footprint had expanded to about 660,000 homes, with "construction activity" for a total of 990,000 homes passed in the MSO's territories, which pass about 4.5 million homes.

"And they are having an impact on our business, which you can see in our subscriber growth," he said.

In the first quarter, Cablevision signed up 65,000 digital video customers, versus 164,659 in the year-ago period. Still, Cablevision ended the period with a digital penetration of 80 percent, well ahead of its industry peers. It also managed to add 12,000 basic subs.

Despite FiOS competition, Cablevision did see sub growth in other areas, albeit slower growth year-over year. The MSO added 78,000 high-speed Internet customers in the quarter, versus 112,289 a year ago, and 109,000 phone subs, compared to 133,967.

— Jeff Baumgartner, Site Editor, Cable Digital News

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