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October 12, 2006

Another Attempt To Take Cablevision Private

I finally had a chance to review all of the news stories and analyst reports about the Dolan family’s latest attempt to take Cablevision (CVC) private. My conclusion is that I think this deal will get done with a small sweetener.

On the one hand, I can see good reason for the special committee of independent directors to reject a deal at $27. The Dolan’s are making much of the fact that their latest offer is a premium to their 2005 offer. However, CVC’s EBITDA is growing by around 15% in 2006 and will likely grow by at least another 12% in 2007. Therefore, solely by rolling the clock forward the deal price should be higher.

On the other hand....

CVC shares are up huge this year and shareholders have pocketed a $10 special dividend. This should materially reduce the emotional reaction of major shareholders to being ripped off in the current deal. Additionally, the current deal is straightforward, being all cash and easily financed. Also, according to one analyst, Delaware law leaves the Dolan’s in a pretty strong position to ignore other offers should they emerge given their 70% plus voting control. Finally, the Dolan’s probably have a pretty good idea of how the independent directors will look at the new offer given that they went through the process just a year ago.

The Dolan’s are saying that CVC should be private because competition could lead to difficult decisions including increased capital spending. I am sure there is some truth to this along with my bearish hypothesis that CVC’s EBITDA and free cash flow growth could slow markedly in a few years as triple play penetration maxes out and Verizon (VZ) rolls out its fiber optic network.

There is probably more truth to the view that the Dolan’s want to get 100% of control of CVC with other people’s money now at a cheap price with the knowledge that they can flip it in 2-3 years when EBITDA is likely to be 20-40% higher. Even if the current favorable sentiment toward cable stocks moderates by then and the Dolan’s ultimate exit multiple is only at the current 7-8 times EBITDA, they would still be locking in a price 20-40% premium for 100% of the economic interest.

I have little doubt that if CVC were for sale to the highest bidder, Comcast (CMCSA/CMCSK), Time Warner (TWX), and private equity would push the price solidly into the $30s. But it seems unlikely to get that far in the near future. The Dolan’s are in a strong position legally with a justifiable but cheap offer. This makes the most likely scenario acceptance of the current deal with a small sweetener of $1-2.

Arbitrageurs will probably play this form the long side but the upside isn’t likely enough to entice fundamental investors currently on the sidelines to get long. That means unless you believe that CMCSA or TWX will go public with a statement that would be willing to pay a substantial premium to the Dolan’s offer in a friendly deal, there is probably little reason to worry about CVC until the current offer is accepted or rejected.

Posted by Steve Birenberg at October 12, 2006 09:12 AM in CVC