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Doling It Out

5/16/2008 8:00 PM Eastern

Less than a year ago, a majority of minority shareholders rejected a generous offer by the Dolan family to take Cablevision Systems cable operations private, in part because they may have wanted to rein in the family’s sometimes-maverick ways. Six months later, the Dolans are showing no signs of settling down, instead launching a mini-acquisition spree in the past six months costing upwards of $1 billion.

The Dolans’ $36-per-share offer for the remaining shares of Cablevision they didn’t own was voted down by a majority of minority shareholders last October. Last week Cablevision announced its third acquisition in six months — the $650 million purchase of Long Island, N.Y. newspaper stalwart Newsday.

Cablevision’s Buying Spree
Over the past six months, Cablevision has announced acquisitions with a total value of about $1.2 billion.
Asset Price
SOURCE: Company reports
The Chicago Theater $20 million
Sundance Channel $496 million
Newsday $650 million

In winning Newsday, Cablevision beat a $580 million bid from News Corp. (which owns the New York Post and Wall Street Journal) and New York Daily News owner Mort Zuckerman.

In the past six months, Cablevision has acquired a music venue (the landmark Chicago Theatre in Chicago) for about $20 million; the Sundance Channel for $496 million and now Newsday. That list doesn’t include one big deal that apparently got away — its partnership with IAC/InterActiveCorp to purchase AEG Live, a live concert Web site, for an estimated $100 million. That deal fell through, according to published reports, after the partners could not agree on the ownership structure.

All the while Cablevision has been turning its acquisitive eye away from its cable operations, those systems have been running like a well-oiled machine. In the first quarter, the cable systems reported 10.5% revenue growth, 13% cash flow growth and managed to grow every subscriber metric — basic video customers included — despite stiff competition from Verizon Communications.

Analysts for the most part were puzzled by the Newsday acquisition, adding that while there are some synergies, particularly on the advertising front, they don’t appear to come close to the $650 million price tag.

“In essence, it could be a very expensive client or contact or lead list,” Miller Tabak analyst David Joyce said of the Newsday deal.

Cablevision declined to comment on the Newsday deal beyond its press release announcing the transaction. But in an interview with his own cable-news channel, News 12 Long Island, Cablevision CEO James Dolan said that the deal was made to help both the newspaper and the cable company.

“We saw the opportunity to purchase Newsday as an opportunity for Newsday to come and help us with the rest of our businesses, but also to apply the assets and strengths of businesses we now own into helping grow Newsday,” Dolan told News 12.

But aside from being a Long Island institution — much like the Dolan family itself — the Newsday acquisition seems far removed from Cablevision’s core business.

In a research report shortly before the Cablevision bid was accepted by Newsday parent Tribune Co., Pali Research analyst Richard Greenfield joked that buying the paper was a “great way to use upwards of $400 million of Cablevision’s free cash flow from its high-margin cable business and plow it into a low-margin newspaper business with declining revenues.”

It should be noted that Cablevision plans to fund the Newsday purchase through the issuance of bonds, not through free cash flow. But that doesn’t mean the company won’t service some of that debt through its free cash flow in the future.

According to the deal, Tribune will receive $612 million in cash, a 3% equity interest in Newsday Media Group valued at about $20 million and another $18 million in prepaid rent under leases for certain facilities. The newly formed Newsday Media Group — including the paper, free New York City daily AM New York, several weekly shopper publications and a Long Island lifestyle magazine — will report to current Cablevision chief operating officer Thomas Rutledge.

Collins Stewart media analyst Tom Eagan, who does not currently cover Cablevision but has in the past, said that the recent spate of acquisitions could simply be an example of buying assets at the low end of the market.

“It’s not like they are making these acquisitions at peak multiple levels,” Eagan said. “They are making these acquisitions after significant stock pullbacks. In times of lower valuations, there are companies that are sellers and there are companies that are buyers. Obviously they are acquisitive right now.”

Eagan said that there could be an ultimate agenda to the buying spree.

“I wouldn’t be surprised if they are adding assets so ultimately they can restructure the company,” Eagan said. Whether that means that another privatization bid — or an outright sale — is in the future remains to be seen.

September