May 6, 2008: 6:28 AM EDT
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Seeking method in Cablevision's madness

Look out shareholders. By Cablevision's logic, buying Newsday makes perfect sense.

By Devin Leonard, senior writer

NEW YORK (Fortune) -- The bidding for Tribune Co.'s Newsday has attracted some of the biggest names in the New York media world. News Corp.'s Rupert Murdoch led the charge with a $580 million offer. New York Daily News owner Mort Zuckerman quickly matched it. Now Cablevision's Dolan family has lobbed in a high bid of $650 million. Cablevision's involvement is the most puzzling of the three. After all, the Dolans are cable guys, not newspaper publishers. Nevertheless, there's a strange logic to it.

Think of it this way. Zuckerman and Murdoch actually need the Long Island daily. Murdoch could wipe out the estimated $50 million in annual losses at News Corp's (NWS, Fortune 500) New York Post by combining the back-office operations of the two tabloids and strengthen the Sunday Post by luring Newsday's Sunday advertisers with package deals.

Zuckerman doesn't want that to happen. That's why he's chasing Newsday. But he's not just acting defensively. The News owner could also save money by merging his paper's printing and distribution operations with Newsday's.

In other words, it would be perfectly reasonable for either Zuckerman or Murdoch to buy Newsday. The same can't be said for Cablevision (CVC, Fortune 500) chairman Charles Dolan and his son, James, the company's CEO. It isn't just their lack of experience in the newspaper business. Newsday just doesn't seem to fit naturally with Cablevision's assets. Sure, the cable company owns five local news stations and seven traffic and weather channels. Perhaps Newsday's reporters and columnists could be of assistance. There could also be opportunities to cross sell advertising.

But Cablevision would do just fine without Newsday. It might even do better. After news broke in March of Cablevision's interest, Pail Research analyst Rich Greenfield lowered his target price for the company's shares from $22 to $20. "We increasingly believe a meaningful portion of [Cablevision's] free cash flow over the next couple of years appears to be headed for a series of non-core acquisitions," he wrote at the time.

That's an interesting way to describe a company's strategy. The Dolans have always had a unique approach to vertical integration. Under CEO James Dolan, the company embarked on one of the cable industry's most curious acquisition binges. It bought assets that made a lot of sense, such as Madison Square Garden (which included the New York Knicks and the New York Rangers), and some that made less sense, like Clearview Cinemas and the ill-fated Wiz electronic store chain. Yet, even the purchases that appeared to offer synergistic benefits, like MSG, haven't translated into shareholder value. Although revenues and operating income have risen in recent years, Cablevision's share price is only about 5% higher than it was five years ago.

Given this history, Cablevision's bid for Newsday makes sense in a perverse way. The cable operator will almost surely make the same sort of tenuous arguments that it has made in the past. This is the same company that tried to justify the purchase of the now-shuttered Wiz chain by saying it could use to the retail outlet to push its premium television shows and sell tickets to events at Madison Square Garden.

They may have to be even more imaginative with Newsday. Early on, Charles Dolan talked to New York Observer owner Jared Kushner about forming a joint venture to run Newsday. Kushner no longer appears to be interested. Now Cablevision has proposed a joint venture with the Tribune to operate Newsday, although it seems unlikely that a joint venture with the Tribune will be able to achieve the same kind of cost savings at Newsday as it might have if it could have combined the Long Island daily's operations with those of Kushner's paper.

None of this has stopped the Dolans from offering a higher price for Newsday than News Corp. and the Daily News. The company may even prevail. The Tribune finds the cable company's offer "compelling" according to someone familiar with the negotiations.

Shareholders may grumble if Cablevision wins Newsday. But there's little they can do. The Dolans control Cablevision because the family owns 100% of the company's Class B shares, entitling it to elect nine of Cablevision's 12 board members.

The Dolans say they aren't happy about Cablevision's stock performance either. They have repeatedly offered to take the company private. Investors have balked. They say the Dolans are low-balling them.

Perhaps it's time for them to rethink their position. Cablevision's CEO said, during a recent conference call that "management for the moment is focused on growth and growth strategy." We all know how fast newspapers are growing. What will Cablevision go after next-a record company? To top of page

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