Cablevision Loses Its Tunnel Vision
Last fall, Charles F. and James L. Dolan, the father-son duo who run Cablevision Systems Corp., faced angry institutional shareholders in a series of tense, unpleasant meetings. "Investors were just fed up," says one. "This company was ridiculously undervalued, staying overleveraged, and doing stupid deals when the market reality of cable had changed."
It was bad enough that the Dolans' Long Island-based cable empire was widely thought to have rebuffed overtures in recent years by two telephone companies offering around $100 a share. At about 25 last fall, Cablevision's stock was way off a 1993 high of 72 and embarrassingly near its 1986 initial public offering price of $14.50. Debt at the sixth-largest cable company was so high that "just for the equity to be worth something, it had to trade at the highest multiple in the cable business," says Merrill Lynch & Co. analyst Jessica Reif Cohen. True, Cablevision had great assets--Madison Square Garden, the highest revenue-per-subscriber numbers in the industry, and the biggest cable system in the New York market. But the Dolans seemed cavalier about their investors' concerns (the Dolans' supervoting shares make their control unassailable) and about the partnering efforts of their cable-industry peers. "They marched to their own drummer," says Reif Cohen.
Nowadays, the Dolans are stepping to quite a different beat. And Wall Street is applauding, as Cablevision's stock has surged by 168% since those tense meetings last fall. A cheerful Mario Gabelli, whose funds' largest holding is 4.3 million Cablevision shares, says that he expects Cablevision's assets to be worth $230 a share in 1999. Says Gabelli: "Everything has come together."
What brought the Dolans in from the cold? Analysts and investors say the Dolans grew to realize that the company's assets could be far more valuable if they relinquished some of their legendary autonomy. That led to three deals this year (table, page 108) that gave Tele-Communications Inc. Chairman John C. Malone and President Leo J. Hindery greater influence with the company. Also, the naming of James Dolan, now 41, as chief executive in late 1995 was significant, since the younger Dolan is seen to be more conciliatory than his hard-bargaining father.
Once a deal announced in June closes, TCI will be Cablevision's largest shareholder and Malone and Hindery will have seats on Cablevision's board. But already, the positive developments at Cablevision reflect "the influence of John and Leo," says an institutional investor. Cablevision would not comment for this story, but the addition of Malone and Hindery to Cablevision's board may wean the company a bit from spending huge sums to support business ventures tied to various members of the Dolan clan. In the latest proxy, for example, the company disclosed it made payments of nearly $200 million to Dolan family interests--ventures ranging from a TV programming guide to a wireless project. Meanwhile, the company's entire cash flow from operations in 1996 was just $200 million, and net losses were more than $330 million.
NET GAME. Malone and Hindery will perhaps have less patience for Dolan family transactions of such scale. After all, Cablevision's business practices are now of intense interest to TCI: In June, TCI swapped the cable systems it had in suburban New York for about a third of Cablevision's equity. On the heels of that deal came another with TCI's Liberty Media unit and News Corp. that enabled Cablevision to pocket $850 million as the company folded a ragtag assortment of regional sports channels into Fox Sports Net.
Then, on Oct. 2, the Dolans agreed to join the At Home Network, a high-speed Internet service founded by TCI, Comcast, Cox Communications, and other cable companies. In the deal, Cablevision was given the right to buy about 10% of publicly traded At Home for $5.5 million--the same terms enjoyed by the founding partners. On paper, Cablevision's At Home stake is already worth $318 million. These arrangements were all the more remarkable for managing to turn the Dolans into team players after they had been industry mavericks for so long.
Cablevision was able to wrest such attractive terms largely because the company dominates cable everywhere in the key New York market except Manhattan, which is the turf of Time Warner Inc. Any high-speed Internet service badly needs those metro New York customers, and Cablevision was able to use its geographic advantage to get very advantageous terms. "New York is a very important market to the At Home strategy," says Hindery. "It's the premium, premier market in the U.S."
Indeed, as the cable industry recovers from competitive threats posed in recent years by telephone companies and direct-broadcast satellite companies, the focus is now to cluster huge systems in discrete markets rather than assemble a hodgepodge of small systems across several states. With its systems clustered in the New York market, Boston, and Cleveland, Cablevision is perhaps the best-situated major player in this regard.
What's more, the large New York-area clustering allows Cablevision a tremendous advantage as it collects the cable-TV rights for the New York Yankees, the Mets, the Islanders, the Nets, the Devils, and the two teams Cablevision owns outright, the Knicks and the Rangers. Cablevision can spread the cost of acquiring those rights across what will be, after the TCI deal closes, 2.5 million cable customers.
HOLLYWOOD PARTNER? For the Dolans' next big deal, investors are hoping for a spin-off or some sort of transaction for Rainbow Media Holdings Inc., the Cablevision unit that holds Madison Square Garden, the sports teams, the msg Network, and entertainment-oriented cable networks such as AMC, Bravo, the Independent Film Channel, and Romance Classics. NBC Inc. holds a 25% stake in Rainbow; Merrill's Reif Cohen estimates that Cablevision's share of Rainbow's entertainment assets is worth about $700 million. A likely partner for those assets would be a Hollywood studio without substantial cable distribution of its own, such as Sony Corp. or mgm.
That's a lot of partners for the onetime lone wolf of the cable business. But as the Dolans have lately come to realize, it's considerably more rewarding to run with the pack.