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Cablevision: The soap opera
Stock Spotlight: The company's boardroom battle is fine drama, but what's it mean for investors?
March 14, 2005: 10:11 AM EST
By Jessica Seid, CNN/Money staff writer
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NEW YORK (CNN/Money) - It sounds like a plot fit for a cheesy cable movie. A wealthy New York family caught up in a bitter boardroom battle that pits father against son. Can they patch up their differences or will greed and pride destroy their relationship forever?

But it is the true story of Cablevision Systems Corp., and with shares of the company up 16 percent so far this year despite the turmoil, investors are eager to find out what will happen next.

Chairman Charles Dolan and his family control Cablevision (Research), which is a fixture on the New York City scene since it owns Madison Square Garden, Radio City Music Hall, the New York Knicks and New York Rangers, in addition to the nation's sixth-largest cable system.

Drama has enveloped the family since Cablevision's board first voted in January, over the objections of Charles Dolan, to stop funding its satellite venture Voom, and sell its only operational satellite to EchoStar Communications Corp. (Research), another satellite-TV operator.

Charles Dolan's son, James Dolan, who is Cablevision's CEO, voted with the majority, sparking a public fallout with his father. The continuing battle over the fate of Voom has led Wall Street to wonder whether Cablevision might wind up as takeover bait for a larger cable operator.

But since the stock has already enjoyed nice gains, is it too late for investors to get connected to Cablevision?

All My Children

Voom reported a loss of $661 million last year and has been hemorrhaging red ink since inception, leading James Dolan, the youngest of Charles' three sons, to oppose his father and vote in favor of shutting it down.

Many on Wall Street agreed that it's a good move. According to Richard Greenfield, an analyst with Fulcrum Global Partners, the cost to run the Voom service over the next two years would be more than $1 billion, an expensive price to pay for a service that also competes with the company's core cable operations.

So it's not surprising that Cablevision's stock rallied after the company said it was pulling the plug on Voom. Shares hit a new 52-week high the day of the announcement. But that's not the end of the story.

After Cablevision's board voted to close Voom, Charles Dolan replaced three directors and filled a vacant seat -- with four executives believed to be more receptive to giving him time to finalize a deal.

Charles in charge

Charles Dolan's power grab has Wall Street speculating about what's next for the company, which has long been considered an attractive fit for larger rivals.

Cablevision's new board recently approved an agreement to keep Voom running for now and work with Charles Dolan until March 31 to find a way to sell the Voom business to him and another son, Thomas. Charles Dolan agreed to fund any costs incurred by the division with his own cash and stock in Cablevision.

If Charles Dolan succeeds in his bid to save Voom, many believe that could finally result in the sale of the entire company. But even if he fails, some think that the elder Dolan still might consider selling Cablevision anyway.

"The dynamics at the board and senior management level and Charles Dolan's seeming divorce from the cable business in favor of (satellite) moves him that much closer to selling the cable assets," wrote Bear Stearns analyst Raymond Katz, in a recent report.

With nearly 3 million cable subscribers in the New York City region, analysts say that Time Warner Inc. (Research), which owns CNN/Money, Comcast Corp. (Research) and Cox Communications would all be potential suitors.

Stay tuned

Wall Street's opinion of Cablevision is mixed. According to Thomson/First Call,18 analysts rate the stock a "hold" while 10 have rated it a "buy" or "strong buy."

But if Cablevision were to be taken over, it would likely be for more than its current price of about $29 per share. Shares of Insight Communications Co. (Research), the nation's ninth-largest cable operator, surged 22 percent after it received an offer to be taken private earlier this week.

Fulcrum's Greenfield wrote in a report that Cablevision could fetch between $35 and $40 per share in a takeover scenario. Still, even if Cablevision remains independent, shares look attractive.

Cablevision trades at about 10.8 times 2005 earnings before interest, taxes, depreciation and amortization, or EBITDA. Comcast, by way of comparison, trades at a slight premium of 11.3 times EBITDA, the most commonly used measure of profitability for cable firms.

Alan Bezoza, an analyst with Friedman Billings Ramsey, wrote in a recent report that putting aside the boardroom drama, investors should expect healthy results from the core cable business. As such, he thinks the stock should trade at $34, about 17 percent higher than its current price.

So regardless of what happens next in Cablevision's strange family feud, it looks like investors shouldn't change channels on this stock.

For a look at more cable stocks, click here.

For more market news, click here.

Bear Stearns has an investment banking relationship with Cablevision but Katz does not own shares of the company. Other analysts quoted in this piece do not own shares of Cablevision and their firms have no investment banking ties to the company.  Top of page

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