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A Harbinger of More Moves

8/15/2008 8:00 PM Eastern

Cablevision Systems
CEO James Dolan's recently completed listening tour with top investors could have been spurred by fears that a new shareholder, known for its activist slant, would make waves.

Pali Research media analyst Richard Greenfield observed last Thursday the emergence of Harbinger Capital as a major shareholder could have inspired action.

“While the Dolans' control of [Cablevision] prevents any major hostile actions, we believe the Dolans may be trying to head off a public 'war-of-words' in the media and/or proxy battle for the independent board seats at CVC,” Greenfield wrote.

Dolan said during Cablevision's regularly scheduled second-quarter earnings conference call with analysts on July 31 the company would seek alternatives to boost the public value of the company and would also seek shareholder advice.

Later that week it was revealed that Dolan, chief operating officer Tom Rutledge and chief financial officer Michael Huseby planned to meet with several large investors, squired by Gabelli & Co. representatives.

A first act by Cablevision came last Friday: It said its board approved a 10-cents-per-share quarterly dividend for Class A and Class B shareholders, payable on Sept. 18.

Collins Stewart media analyst Tom Eagan called the dividend a “goodwill gesture” by the Dolans to show shareholders they are listening to their concerns and taking actions to close the valuation gap.

Eagan said the “listening tour” with investors is partly for goodwill and partly to gauge Wall Street reaction to various options, including paying dividends, buying back stock and selling or spinning off assets.

“I think that there is more to come,” Eagan said, adding that the $120 million Cablevision will spend on the dividend still allows the company to do a buyback.

Eagan estimated that raising $1 billion in additional debt would only increase Cablevision's leverage ratio by half a point from 4.9 times to 5.5 times 2008 estimated cash flow.

The company is also generating free cash — $320 million so far this year, and an estimated $750 million to $800 million in 2009 — that could be returned to shareholders in various forms.

Cablevision would not say whether the Harbinger investment influenced them in any way — issuing a statement that it “welcomes all investors” — but company officials may have reason to expect at least a little turbulence.

Harbinger is headed by Philip Falcone, a former Barclays Capital trader who made billions of dollars betting against subprime mortgage bonds.

Harbinger bought big stakes in media firms Media General and The New York Times Co. earlier this year and, by threatening proxy fights, were able to negotiate seats on their boards of directors.

Falcone did not return calls for comment. A spokesman said Harbinger does not comment on its investments.

According to securities filings, Harbinger owns its Cablevision stock in two funds — 7.6 million shares in Harbinger Capital Master Fund and 3.87 million shares in the Harbinger Capital Special Situations Fund.

The 11.45 million shares owned by the two funds give Harbinger 4.9% of Cablevision's outstanding stock, making it the fifth largest Cablevision shareholder outside of the Dolan family.

It could be difficult for Harbinger to try to force change at Cablevision with a stake that size: the Dolan family controls 74% of Cablevision's vote. But Miller Tabak media analyst Joyce said Harbinger will likely try to team up with other minority investors. “There is strength in numbers,” Joyce said.

Unlike Media General and The New York Times Co., Cablevision is outperforming its peers operationally, which could make it harder to convince other large shareholders to seek a big shakeup.

“They can't complain about how management has managed this company operationally, it's been tremendous,” Eagan said. “And they [management] haven't shied away from trying to increase shareholder value — they haven't been passive. I think Harbinger sees a stock that has a higher value broken up.”

Harbinger may have already reaped a healthy profit from its Cablevision investment. The SEC filing is a quarterly statement investment funds are required to file, so the holdings are as of June 30, the end of the second quarter. Between March 31 and June 30 — the time Harbinger would have had to buy the Cablevision stock — the MSO's stock price was as low as $21.43 and as high as $27.25. The stock closed at $31.31 on Aug. 14.

Even if Harbinger bought all of its shares at the peak price during the period ($27.25), it's already made a $46.5 million profit.

The stock price was on the minds of investors during the listening tour, according to one cable executive privy to the meetings.

A popular suggestion was to substantially repurchase stock.

“In general, people are favoring buybacks,” said one cable executive who attended the meetings but asked not to be named. “One of the questions was: 'You offered $36.26 per share [to take the company private in 2007], and the stock went to $20 [per share]. Why didn't you buy back shares then?' They didn't have an answer for that.”

The current state of the credit markets would make it difficult to finance a share repurchase through debt. Some analysts have suggested the company could sell or spin-off its Rainbow Media Holdings programming arm, which was also discussed at the shareholder meetings, the executive said.

The executive said shareholders are looking more at a partial Rainbow sale to finance a buyback, not a full spin-off or sale. Several shareholders noted Rainbow's AMC — enjoying a high profile currently for multiple-Emmy-nominated drama Mad Men — may be at a valuation peak and could be ripe for sale. Some analysts have estimated that AMC alone is worth $2.8 billion. Proceeds could then be combined with Cablevision's expected $750 million in free cash flow next year to fund a substantial buyback.

“Nothing says you have to sell all of Rainbow,” the executive said.

September