Broadband Cable Association of Pennsylvania


August 26, 2013

Time may be running out for Cablevision Systems Corp. to find a buyer.

With its highest valuation in two years, the $4.8 billion cable operator founded four decades ago by Charles Dolan should take advantage of a surge in cable matchmaking to sell, according to Macquarie Group Ltd. Bethpage, New York-based Cablevision jumped 42 percent in just eight weeks as speculation heated up about deals in the industry and shareholders Paulson & Co. and Gamco Investors Inc. said a sale is likely.

Cablevision, which tried and failed to take itself private in 2005 and 2007, is dwarfed by larger peers including Time Warner Cable Inc. and Charter Communications Inc. That puts the company at an even bigger disadvantage if it misses out on a wave of consolidation as cable operators seek more bargaining power with channel owners. Charter, backed by billionaire John Malone, is considering combining with Time Warner Cable or Cox Communications Inc., people familiar with the matter have said. "It's the perfect setup to sell the company," Amy Yong, an analyst at Macquarie in New York, said of Cablevision. "But they've got to act now because there are definitely other assets in the mix. So if they want to be considered, they should raise their hand."

Cablevision may make an attractive target for Charter or Time Warner Cable, Gamco said, as video distributors look to gain leverage against TV networks that are demanding annual fee increases of 10 percent or more. Google Inc. may also have interest if it wants to expand its TV and broadband business beyond Google Fiber, said Sabina Nyckowski, an analyst at Guggenheim Securities LLC. While Cablevision has shown little interest in being acquired in the past, the company's tone shifted this month. "You never say never," Chief Executive Officer Jim Dolan, Charles's son, said during Cablevision's earnings conference call this month about potentially merging or selling the company. "Our plans are to continue to proceed in terms of operating the company in the best interest of the company and its shareholders." Charles Schueler, a Cablevision spokesman, declined to comment on the possibility of a sale. Time Warner Cable's Justin Venech, Charter's Alex Dudley and Leslie Miller at Google declined to comment on potential interest in Cablevision.

Shares of Cablevision, which focuses on providing cable service around New York, reached a two-year high of $19.79 on Aug. 12 after a two-month surge fueled by takeover speculation. The rally pushed its enterprise value to 9.3 times earnings before interest, taxes, depreciation and amortization, the highest since 2011, data compiled by Bloomberg show. Today, the shares fell 1 cent to $17.78. Cablevision's value is rising amid more U.S. cable and satellite industry takeovers. In 2013, $21 billion in transactions have been announced, which would be the highest full-year total since 2008, data compiled by Bloomberg show. John Paulson, the billionaire owner of hedge fund Paulson & Co., told CNBC on July 17 that Cablevision is likely to be acquired. Gamco's Chris Marangi said in an interview that the Dolan family, which controls 73 percent of Cablevision's voting rights, should part with the company now to maximize returns. Paulson & Co. and Gamco together own almost 20 percent of Cablevision's Class A shares, according to data compiled by Bloomberg.

For Cablevision's stock, "it's difficult to see meaningful near-term appreciation from here absent" a takeover of the company, said Marangi, a Rye, New York-based money manager at Gamco, which oversees about $41 billion. Cablevision's video customers have fallen for four straight quarters. The company's net income fell to $234 million in 2012 from $292 million in 2011 as it recovered from Superstorm Sandy and increased capital expenditures to improve its broadband speeds and Wi-Fi service. Cablevision should consider selling itself now while it can fetch an attractive takeover valuation, said Scott Goginsky, a research analyst and money manager at Milford, Pennsylvania-based Biondo Investment Advisors LLC. Biondo oversees $400 million and owns Cablevision shares. "The stock has done pretty well," Goginsky said in a phone interview. "With all the consolidation taking place and all the talk of it, it's probably the best time for them to sell as far as being able to get a premium multiple."

Liberty Media Corp. Chairman Malone says he wants Charter, the fourth-largest U.S. cable company, to be a "horizontal acquisition machine." Liberty acquired a 27 percent stake in Charter earlier this year. Malone's premise is based on the idea that larger cable providers have more power to resist demands for higher fees from the channel owners such as Walt Disney Co., Comcast Corp.'s NBC Universal and Viacom Inc. The desire to get bigger has driven Liberty's conversations to combine Charter with Time Warner Cable or Cox, the third-largest U.S. cable provider, people familiar with the matter said in June and August, respectively. Cablevision, the fifth-biggest operator, should put itself on the block or risk being left out when consolidation occurs, said Macquarie's Yong, who rates the stock "neutral." Cablevision has taken several recent steps that make itself more digestible for an acquirer.

Since June, Cablevision closed its digital publication Newsday Westchester; shuttered OMGFAST, a wireless broadband service in Florida; and significantly reduced its annual investment in MSG Varsity, a high school sports TV network. It also sold Clearview Cinemas, spun off AMC Networks Inc. in 2011 and Madison Square Garden Co. in 2010. "They're down to the core business now," Goginsky of Biondo said.

If Cablevision can't find a suitor in the cable industry, technology companies including Google could be interested, Guggenheim's Nyckowski said. Google has already rolled out its own TV and Internet distribution service, Google Fiber, in several U.S. markets. "Non-traditional companies that want to get into the online video space like Google should be looking at Cablevision," she said. While cable assets may be appealing, Cablevision may be left without a dance partner because its growth potential is likely stunted, said Craig Moffett, an analyst at Moffett Research LLC in New York who has a "sell" rating on shares.

After selling Optimum West, Cablevision's video customers have probably topped out at about 2.9 million amid competition with DirecTV, Dish Network Corp. and Verizon Communications Inc.'s FiOS, he said. "Cablevision is very likely going to lose market share," Moffett said. "They can't raise prices at the rate of the rest of the industry because of the competitive overlap with FiOS. If Cablevision doesn't get acquired, and I think the odds are very low, then Cablevision stock is a bubble waiting to pop." The pressure to do a deal is mounting for cable companies of Cablevision's size, as evidenced by Time Warner Cable's blackout of CBS Corp.'s channels for the past three weeks, said Todd Lowenstein, a Los Angeles-based fund manager at HighMark Capital Management Inc., which oversees $19 billion. The only ways to combat increasing costs for programming are blackouts or getting bigger, he said. "We're at an inflection point," Lowenstein said in a phone interview. "We've hit the upper limit of consumers' willingness and ability to pay for cable. To get the upper hand, cable needs to scale up and get bigger - and fast." Bloomberg