Will Time Warner Go After Cablevision?

Charles and James Dolan's low-ball bid to take Cablevision private opens the door to competing offers

The father-and-son team of Charles and James Dolan, who control one of the most lucrative cable companies in the U.S. in Cablevision, is nothing if not unpredictable. In the three months since the pair first made a $27-per-share buyback offer to take their company private, they have stood by silently as investors pushed Cablevision (CVC) shares to $29. Clearly, the Dolans had been looking to get a bargain, but the robust stock market made their offer look almost ridiculous by yearend. In fact, some analysts suggested that the bid had the effect of depressing shares—a so-called Dolan Discount—and that they could have been trading even higher.

So with just weeks to go before a two-person special committee of the Cablevision board was expected to rule on the fairness of the $27 offer, the Dolans on Jan. 12 came out of the blue with a sweetened offer—$30 per share. But analysts and shareholders said it is still inadequate. "The Dolans' offer is too low," says Chris Marangi, an analyst with Mario Gabelli & Co., one of the largest shareholders in Cablevision. "They are trying to buy the company on the cheap. Any offer needs to be well into the 30s." Some analysts are projecting shares could be trading at $33.50 in 12 months as cable companies continue to win favor on Wall Street because of a diminished threat from satellite and more people signing up for cable packages that include TV, broadband, and phone.

It is unclear how the special committee will view the Dolans' new offer, which is due to expire on Jan. 17. But if it is rejected, it could mean that Time Warner (TWX), after nearly a decade of rumors that it would buy Cablevision, will finally step up to the plate. The media giant's cable business will start trading in about three weeks on the New York Stock Exchange as a separate stock. It has already begun trading on the "pink sheets" at $42 per share.

No Interest in Selling

Despite some erratic strategic decisions by the Dolans over the years that have often left Wall Street perplexed, Cablevision remains a prize, serving dense and highly affluent neighborhoods in Connecticut, New Jersey, and New York, particularly Long Island. Its penetration rates for TV, high-speed data, and phone services among its footprint of 4 million-plus homes are the highest in the industry. And Tom Rutledge, who runs Cablevision's cable operation, is considered one of the best in the business. Cablevision also owns cable channels, Radio City Music Hall, Madison Square Garden, the New York Knicks basketball team, and the New York Rangers hockey team. For Time Warner, which serves New York City and has long coveted the Dolans' holdings in cable, gobbling up Cablevision in a contiguous market makes great sense. Time Warner Chief Executive Richard Parsons has made no secret of wanting to expand the cable business, one of the best-performing units at Time Warner in the past year.

Just the same, the Dolans say they are not interested in selling. But analysts don't believe the Dolans have the wherewithal to raise their offer above $30 a share. Instead, if the $30 offer is rejected, Cablevision will most likely remain a public company under the Dolans, who control 75% of board seats. That would mark a second time that father and son failed to take the company private. In 2005, they tried to take the cable portion of Cablevision private, but withdrew the offer after failing to reach an agreement with a special committee of the board.

This time around, Wall Street is growing impatient with the Dolans' buyout effort. "We believe the Dolans are exercising poor corporate governance by publicly stating they would not sell the company whether they are public or private, given that we believe multiple bidders (particularly Time Warner Cable) would pay (today) in excess of 33% more than the Dolans' revised offer," wrote Pali Research analyst Richard Greenfield in a report dated Jan. 12. The report's title? "Do Not Let Chuck and Jim Dolan Steal CVC." Officials at Time Warner Cable, the nation's No. 2 cable operator with 13.5 million basic cable subscribers, are not commenting. One of the main reasons for Time Warner to issue shares representing 16% of its cable unit is to have a currency with which to do deals. The Dolans declined comment as well.

If the special committee of the Cablevision board were to approve the Dolans' latest offer for some reason, one industry follower suggests shareholders should reject it outright. Says Jake Newman, an analyst at research firm CreditSights: "We believe voting against a transaction would send the signal to the Dolans that shareholders are unhappy with the way the Dolans have sandbagged a sale of the company for so long."

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