How to Save $46 Million at Cablevision: Take Out the Dolansby and
Drahi's Altice plans to implement performance-based incentives
CEO Goei: Top ten execs will probably leave after takeover
The French billionaire who’s agreed to buy Cablevision Systems Corp. for $17.7 billion plans to institute a performance-based culture at a U.S. company that pays its executives well -- and mostly in cash.
After Patrick Drahi’s Altice NV takes control of Cablevision, the New York-area cable operator’s top 10 executives will probably leave, according to Altice Chief Executive Officer Dexter Goei. That would eliminate three members of Cablevision’s founding Dolan family -- compensated a combined $46 million last year -- and their closest lieutenants from the management team.
Once they depart, Altice will replace Cablevision’s pay structure with one that emphasizes non-cash compensation, like stock options, Goei said in an interview at Bloomberg’s New York headquarters last week.
“If you have a lot of, granted, very talented people, but getting paid a lot of cash compensation with not really being incentivized to create value for shareholders, that kind of shows an example relative to the other 11,000 to 15,000 employees as to how they should behave,” Goei said. “We don’t like that. We don’t operate that way.”
Drahi, in taking over Cablevision and St. Louis-based Suddenlink Communications, will test his aggressive cost-killing management style in the U.S. for the first time. His goal of $900 million in annual savings at Cablevision within three to five years was met with skepticism by some analysts, including Craig Moffett, a long-time observer of the cable industry.
“It’s hard to imagine in a labor market like New York that you’re going to go to top executives and say, ‘by the way, I’m going to pay you 75 percent less than I used to -- enjoy,”’ said Moffett, an analyst at MoffettNathanson LLC.
The $900 million goal is equal to 48 percent of Cablevision’s operating profit, according to Bloomberg Intelligence analyst Erhan Gurses.
“This is a very ambitious target,” Gurses said.
Cablevision CEO James Dolan received $23.7 million in reported compensation last year, more than half of which was in cash, including a salary and cash bonus. In contrast, less than a third of Time Warner Cable Inc. CEO Robert Marcus’s $34.6 million 2014 pay package was in cash, according to data compiled by Bloomberg.
At Cablevision, three of the top five executives are Dolans -- including Chairman Charles Dolan, who built his empire over more than 40 years and now controls AMC Networks and Madison Square Garden Co., owner of the New York Knicks and New York Rangers teams. In 2014, those five received $67 million in total compensation. In contrast, Charter Communications Inc.’s top five executives made $35 million last year. Charter has double the market value of Cablevision.
“Somewhere in the range of $80 million to $90 million per year can go away in just not having that executive team,” Mike McCormack, an analyst at Jefferies LLC, said of Cablevision.
Charlie Schueler, a spokesman for Cablevision, declined to comment.
After taking over Numericable-SFR in France, Drahi merged it with Altice’s existing network to save on infrastructure investments. He also slimmed down management from about 200 mid-level executives to only a few and renegotiated almost every supplier contract. In the second quarter, profitability at Numericable-SFR, as measured by earnings before interest, taxes and amortization margin, increased 6.8 points to 38 percent of sales.
“When we took over SFR, the company was acting like daddy’s princess,” Drahi said in May, speaking to France’s National Assembly. “The princess spent money left and right, but it was mother company Vivendi that picked up the bills. Well, now the princess has a new dad, and this isn’t how my money gets spent.”
Under Altice’s remuneration policy, its top executives are eligible to receive annual salaries as much as 200,000 euros ($224,680) and participate in executive-bonus programs. The company paid out a combined 3.9 million euros in bonuses to executive directors and certain top managers last year, excluding Drahi, who elected to forego all cash compensation, according to its annual report.
“No one is making more than a couple hundred thousand a year” at Altice, Drahi said during the Goldman Sachs Communicopia conference in New York this month.
“I don’t like to pay salaries,” he said. “I pay as little as I can.”
As part of Altice’s initial public offering in January 2014, a number of company executives were granted stock options that vest through 2018. The value of Drahi and Goei’s awards has swelled to about $168.5 million each as of Monday’s close, according to data compiled by Bloomberg based on assumptions disclosed by Altice.
At least one analyst sees Drahi’s ambitious goal for Cablevision as feasible. Amy Yong, of Macquarie Securities USA Inc., said the $900 million savings target speaks to Altice’s confidence in executing its plan. Yong estimates that the company could cut $350 million in the first year, including $300 million from employee compensation.
“U.S. investors seem to think that number is aggressive, whereas European investors who know Patrick Drahi and have seen his track record have a lot of confidence in that number,” the analyst said. “He knows what works.”