Cablevision Follows the Money

Why the cable giant is selling Rainbow Media instead of issuing a tracking stock
Craig SchneiderJanuary 11, 2001

You’ve got to hand it to Charles Dolan.

He always finds a way to make top dollar from whatever venture he undertakes.

For years, the chairman of Bethpage, N.Y.- based Cablevision Systems was noted for charging some of the highest cable TV rates in the country. And Dolan was also a pioneer in developing the tiered-service approach.

Now comes word that last week Cablevision postponed a shareholder vote for the third time to create a tracking stock for its Rainbow Media operation, which includes programming assets such as American Movie Classics, Bravo, and Women’s Entertainment, formerly Romance Classics. Instead, it’s going to sell the entire operation for $5 billion, according to media reports.

Why? Because this is the best way to fetch top dollar.

In case you forgot, tracking stocks don’t represent an equity share in the company. They simply track the performance of a division or subsidiary. Therefore, shareholders have no claim on the assets. However, companies like General Motors–an early innovator when it issued tracking stocks for EDS and Hughes Electronics–used this device to isolate and highlight smaller operations within the conglomerate that might have been overlooked by investors.

So, the theory is that by issuing a tracking stock a company can unleash the true value of a hidden gem. It’s a variation of the old sum- of-the-parts theory that Wall Street investment bankers frequently trot out.

They do represent (when they work as designed) a way to highlight a company’s strengths by attracting attention from analysts and investors.

However, Dolan is smart enough to realize that investors aren’t enamored with tracking stocks, most of which have floundered since they were issued.

For example, AT&T Wireless’ tracking stock is down about 33% from its issue price in April 2000. NBCi is trading below $4, way down from its 52-week high of $106.13.

Mindful of this, other companies, including media giants like Dow Jones, have scrapped plans to issue tracking stocks in recent months.

Meanwhile, Dolan is aware that when Viacom recently bought BET, it shelled out 22 times BET’s cash flow.

Programming companies typically fetch 12-14 times cash flow, calculates Derek Baine, a senior analyst at media researcher Paul Kagan Associates.

“I would suspect they [Cablevision] will get 18 times to 20 times cash flow,” predicts Baine.

Cablevision officially says in a release that it continues to “evaluate all of its options and alternatives related to the assets that would comprise Rainbow Media Group.”

Most analysts assume the sale will include the same non-New York programming assets that have been slated for the tracking stock.

Virtually no analyst thinks Cablevision will include New York-based assets such as Madison Square Garden, the New York Knicks and New York Rangers sports teams, which play in the arena, MSG Network, which broadcasts the teams’ games on cable television, and the landmark Radio City Music Hall.

This assumption is drawn in part from Cablevision’s defined structure of its proposed tracking stock that excluded certain New York assets. But more importantly, the company has made a visible effort to cluster its assets in the New York area, and selling those assets would be a departure from that strategy.

However, Kagan’s Baine thinks Cablevision might sell many of the New York assets as well, including the sports arena and teams. “I think in all likelihood they would sell the whole kit and caboodle,” he says. “My guess is if they were going to do the whole sale, they would do everything including MSG. It just depends upon price. Anybody will sell at the right price.”

Aren’t there huge synergies between MSG and its cable systems? “I don’t think that’s really an issue,” Baine says. If MSG is sold, Cablevision can simply craft long-term agreements with the buyer to carry the network on its cable systems, Baine says.

Certainly, if he’s right, Dolan would be fetching top-dollar for the sports operation as well. David Lee Smith, a Dain Rauscher Wessels analyst who is skeptical of a New York Rainbow asset sale, estimates that the Madison Square Garden properties, including the MSG Network, are worth as much as $3.5 billion, more than triple the $1 billion that Cablevision paid for them three years ago.

According to Forbes magazine, the Knicks are worth $395 million, up 18% from a year-ago and are considered the highest valued team in the NBA, throwing off $152 million in cash flow. The Rangers also top the NHL valuation list at $263 million, up 12% from a year-ago, but the team has a negative cash flow of $1.4 million.

If all of these assets are sold, Cablevision would wind up almost exclusively a cable systems operator with 3.2 million subscribers– seventh in the nation–according to the most recent industry figures. It is also a very successful seller of high-speed Internet access via cable modem.

Notes Smith: “These are assets increasing in value and cash flow.”

Dolan knows.