Cablevision Entices Buyers With Lowest Value on Record: Real M&A
Cablevision Systems Corp. (CVC) is now the cheapest U.S. cable or satellite-television provider for potential acquirers from Time Warner Cable Inc. to Comcast Corp. (CMCSA) following the resignation of its chief operating officer.
After COO Tom Rutledge stepped down last month, Cablevision shares tumbled to the lowest level relative to free cash flow since April 2009, making it less expensive than any rival with a market value greater than $1 billion, according to data compiled by Bloomberg. The Bethpage, New York-based company and its controlling shareholder, the Dolan family, would demand more than $23 a share in an acquisition, said Albert Fried & Co., or a 62 percent premium to last week’s closing stock price (CVC).
Even at $23 a share, Cablevision would be valued at 7 times earnings before interest, taxes, depreciation and amortization in the past 12 months, the industry’s lowest takeover multiple for a publicly traded target on record, data compiled by Bloomberg show. While ISI Group says the Dolans may try again to take the company private after failed attempts over the last six years, Cablevision’s 3.63 million customers may also attract Time Warner Cable (TWC), Comcast or Charter Communications Inc., said Solaris Group LLC and Gamco Investors Inc.
“At this valuation level, it becomes something that investment banks will look at and try to encourage a bid,” Timothy Ghriskey, who oversees $2 billion as chief investment officer of Solaris Group in Bedford Hills, New York, said in a telephone interview. “It’s very attractive. There are advantages to combining with other systems that would benefit margins at this company, make it more profitable.”
Kim Kerns, a spokeswoman for Cablevision, Alex Dudley, a spokesman for New York-based Time Warner Cable, Jennifer Khoury, of Philadelphia-based Comcast, and Anita Lamont, for Charter of St. Louis, declined to comment on market speculation.
Cablevision climbed as much as 5.8 percent today before closing up 3.9 percent at $14.78 in New York.
Rutledge, 58, who had worked at Cablevision since 2002, announced his resignation on Dec. 15 for undisclosed reasons, pushing the shares down 8.5 percent the next day. He had transformed Cablevision into a company focused on cable infrastructure after the spinoffs of Madison Square Garden Co. and AMC Networks Inc. (AMCX) in the past two years.
Charter (CHTR), the fourth-largest U.S. cable provider by subscribers, named Rutledge chief executive officer less than a week later. Cablevision is the fifth-biggest cable operator.
The day after Rutledge’s exit was announced Cablevision shares fell to 4.7 times free cash flow, the lowest since reaching 4.6 times in April 2009 during the longest U.S. recession since the Great Depression. The stock closed last week at $14.22, or 5.21 times free cash flow (CHTR), making it the cheapest U.S. cable or satellite-TV provider with a market value greater than $1 billion, data compiled by Bloomberg show. The industry trades at a median multiple of 8.63.
“The recent COO departure could put this company in play given the substantial drop in the share price that occurred,” Todd Lowenstein, a portfolio manager who helps oversee about $16 billion for Highmark Capital Management Inc., said in a phone interview from Los Angeles. “The COO was considered one of the best executives in the cable industry. What that means for the company’s future? That’s what the market’s asking.”
A buyer would have to offer more than $23 a share to avoid pushback from shareholders, said Richard Tullo, an analyst at Albert Fried in New York. A deal at that price would value Cablevision’s equity at $6.55 billion, plus the assumption of $10.2 billion in net debt (CVC).
At 7 times Cablevision’s Ebitda of $2.4 billion in the past 12 months, it would be the cheapest takeover on record of a publicly traded U.S. cable or satellite-TV company, data compiled by Bloomberg show. Deals in the industry have been completed at a median of 18.5 times, the data show.
“Cablevision has to consider strategic alternatives,” Tullo said in a phone interview. “Going private or selling the company are both viable scenarios. As far as price, there’s a balance that needs to be struck with the reality of the situation and what shareholders will accept.”
David Joyce, an analyst at Miller Tabak & Co. in New York, said the hurdle to gain support from the Dolans may be closer to $30 a share. That would be more than double the current stock price and value the company at 7.8 times Ebitda, the data show.
“They can be patient, and they won’t be selling it for $15 a share,” Joyce said in a phone interview. “The Dolans aren’t going to leave a whole lot of value on the table. There’s a vast gulf between what they feel the company is worth and what the market is saying.”
Buying Cablevision makes the most sense for Time Warner Cable because of overlapping sales forces and technicians in the region, Vijay Jayant, an analyst at ISI Group in New York, said in a phone interview. Time Warner Cable could lower costs by cutting jobs, consolidating the companies’ master facilities for receiving TV signals and reducing programming fees, Jayant said.
“Time Warner is probably the natural player and could probably bid the highest,” said Highmark’s Lowenstein. “It’s a crown jewel asset. You’re not buying a rough-cut diamond.”
Comcast and Charter may also be interested buyers, Chris Marangi, a fund manager at Gamco in Rye, New York, said in a phone interview. A deal would increase scale, giving them more leverage in future programming negotiations with cable and broadcast networks. Gamco oversees about $35 billion, including about 15 million shares (CVC) of Cablevision.
The question is timing, Marangi said, as Time Warner Cable’s $3 billion acquisition of Insight Communications Co. is pending, Comcast is still focused on integrating NBC Universal and Charter just introduced Rutledge as CEO.
Limited growth prospects may hamper the multiple Cablevision can fetch in an acquisition, said Jayant. The company added almost 300,000 subscribers when it acquired Bresnan Communications Co. in 2010. Without Bresnan, Cablevision’s video customers have fallen 2 percent since 2005.
While Cablevision has gained market share in New York, northern New Jersey and Connecticut, there’s little more the company can do to expand its customer base, said Craig Moffett, an analyst at Sanford C. Bernstein & Co. in New York.
Verizon Communications Inc. (VZ) has built out its FiOS TV network to overlap with more than 40 percent of households in Cablevision’s New York metropolitan area, according to Cablevision’s regulatory filings. Verizon has also run promotions to recruit Cablevision’s customers in recent years.
Waiting to Sell
The Dolans, who own about 21 percent of the shares outstanding and control more than 70 percent of the voting power through a dual-class stock structure (CVC), may prefer to take the company private, Jayant said. Maintaining control of the company founded by 85-year-old Chairman Charles Dolan may still be a top priority for the family, he said.
“One theory is that first Cablevision goes private and it waits to sell itself,” Marangi said. “If you take it private, you stabilize the situation with management, you wait until you’ve got three good strategic buyers, and then you run an auction.”
It wouldn’t be the family’s first buyout attempt. In 2005, the board rejected the Dolans’ offer to buy the company for about $7.9 billion, or $33.50 a share. The family tried again in October 2006 and increased the bid twice before reaching a deal in May 2007 for $10.6 billion, or $36.26 a share. Investors Gamco, Clearbridge Advisors and T. Rowe Price Group Inc. then joined together to defeat the proposal.
“In hindsight, those prices the Dolans offered a few years back look like great prices,” Tullo said. Now, “Charles Dolan is very old. I’d say they’d be more likely to sell than go private.”
The family’s prior takeover attempts valued the company at as much as 15 times Ebitda, data compiled by Bloomberg show. Now, a rival cable operator could offer a 100 percent premium and pay only half that multiple.
“It’s a solid company,” said Ghriskey of Solaris Group. “It’s generating a really good dividend for shareholders, including the Dolans. They don’t necessarily have to do anything here. If somebody steps up and offers them a huge amount of money, great. It could be that a competitive company like Time Warner, Comcast or Charter might step in at this valuation level.”