Wells Fargo Securities media analyst Steven Cahall initiated coverage of the cable distribution sector on Tuesday, citing the businesses’ strength in broadband service, but joining the growing chorus of analysts calling for Comcast to spin off its NBCUniversal programming unit. 

Cahall, who already covers cable programmers, initiated the sector with an “overweight” rating on Cable One and Charter; “equal weight” for Altice USA and “underweight” for Comcast.

Cahall expected his rating on Comcast would be controversial, but wrote he arrived at his ‘underweight” rating because he believes that although all of the company’s businesses are good, they’d be better apart.

Several analysts have called for Comcast to spin-off its NBCUniversal unit, and Cahall joined the growing chorus, writing in his report that Comcast’s cable and communications business is “value trapped in an inefficient capital structure.”

He called for the media giant to either sell off the NBCU division, spin it off along with its British satellite TV business Sky, or merge it with another media business. He prefers the third option, suggesting that a merger with WarnerMedia, via reverse Morris Trust, makes the most sense. 

He estimated a combined NBCU-WarnerMedia would have an equity value of about $253 billion.  

Outside of a NBCU-WarnerMedia deal, Cahall was encouraged by the industry’s consistent broadband subscriber growth, and wrote that declining capital expenditure needs also means that free cash flow generation should remain strong.

“There's a utility nature to Cable that signifies a great space for the long-term investor,” Cahall wrote.

But it was just that broadband strength that could pose problems in the future. The analyst noted the high penetration rates for cable broadband -- about 76% -- estimating it could be even higher (92%) in households with annual income above $25,000.

“Population growth is helping, but we think broadband industry subscriber growth will be modestly decelerating in the years ahead to ~2% by 2022,” Cahall wrote, adding that while average revenue per unit should rise slightly, it will be at a decelerating pace. “Given this, we're picking our spots in Cable and it's no coincidence that our Overweights - Cable One and Charter - have the best passing growth trends.”

Cahall was less concerned about declining pay TV video trends, adding that most cable companies trade off video losses for broadband gains. 

“We think the Cable sector has successfully deleveraged stock narratives from pay TV, so we don't view video declines as a significant risk going forward,” he wrote.

Pressured by a declining subscriber base for its flagship sports channel, Liberty Media chairman John  Malone speculated Thursday that The Walt Disney Co. could spin off ESPN, merging the rest of its operations with a deep pocketed suitor, perhaps Apple.

Disney has been under sharp criticism as its ESPN subscriber base has plunged in the past few years. In October, those losses mounted as Nielsen estimated monthly customer declines doubled to more than 600,000 subscribers.

Talking to CNBC anchor David Faber Thursday, Malone said that Disney could be ripe for the taking because it is one of the few remaining large content-owning distribution companies left and doesn’t have a dominant shareholder. Those were attributes that many analysts said attracted AT&T to Time Warner.

“If someone went after Disney, my guess is Apple would have to finally make a decision,” Malone said, adding that in that scenario Disney would spin off ESPN as a separate entity. “ESPN could be owned and protected by a distributor in the U.S. and Apple would be more interested and have a lot more in common in terms of international branding. Fundamentally [Apple CEO] Tim Cook is a global player and fundamentally ESPN is a domestic service.”

Malone claimed no inside knowledge of a potential deal, adding that “When these tectonic plates start moving, it’s just fun to speculate.” He also gave his opinion on what could be in store for Facebook and its founder and CEO Mark Zuckerberg.

“At what point is he [Zuckerberg] going to want to step into this video space in a meaningful way,” Malone told Faber. “The question is when his growth slows and he’s looking for his next thing, what’s his next thing? My guess is he starts looking at video more seriously.”

Malone added that wouldn’t mean that Facebook would have to start producing its own content, but that “it might make sense for him to own some.”

Malone commented on the pressure for Disney chairman and CEO Bob Iger to reverse recent subscriber trends.

“I think the equity market has got that bug in their head that this is a longer term problem that he [Iger] has, and that somehow or other there is going to be some solution,” Malone said. “Otherwise, Disney should be trading at a substantially higher multiple. …It’s a quality global brand. ESPN in order to solve the issue of having to pay more every time the contract went up, they went long. At the moment that looks adverse.”  

Madison Square Garden Co. said its board of directors has approved the long-awaited split of its sports and entertainment assets, creating a media company dubbed MSG Networks Inc. and a sports and entertainment unit that will retain the Madison Square Garden Co. name.

The distribution will take place on Sept. 30 to MSG shareholders of record as of Sept. 21.

Madison Square Garden first announced its intention to split the company in October.  As part of the split, its cable sports networks MSG Network, MSG + would be housed in the MSG Networks unit while its professional sports teams (including the New York Knicks and New York Rangers) and entertainment venues like Madison Square Garden, Radio City Music Hall, The Forum and the Chicago Theater would remain in the Madison Square Garden Co.

For the distribution, each MSG Class A common stockholder will receive one share of the new Madison Square Garden Company Class A common stock for every three shares of MSG Class A common stock held as of the record date. Each MSG Class B common stockholder will receive one share of the new Madison Square Garden Company Class B common stock for every three shares of MSG Class B common stock they hold as of the record date.

“We are now one step closer toward our goal of creating two distinct, focused companies for investors, said MSG CEO Doc O’Connor in a statement. “The live sports and entertainment company will comprise a portfolio of celebrated venues, legendary sports teams and exclusive entertainment productions, while the media company will continue to own and operate award-winning regional networks that deliver compelling sports and entertainment content. We are confident that this transaction will further enhance the long-term value potential of both companies as each continues to build on its considerable record of achievement.”

Upon completion of the spin-off, MSG’s current repurchase program, through which $241 million of MSG Class A common stock has already been purchased, will be terminated and the new Madison Square Garden Company will have in place new Board authorization to repurchase up to $525 million of its Class A common stock.

 “Our anticipated stock buyback program for the new sports and entertainment company is a reflection of our confidence in the strength of those businesses, and of our continued desire to generate greater value for stockholders,” O’Connor said in a statement.

Statement containing details regarding the distribution of the new Madison Square Garden Company common stock and the new Madison Square Garden Company’s business and management following the spin-off will be mailed to MSG stockholders prior to the distribution date.

The spin-off has been structured to qualify as a tax-free distribution to MSG stockholders for U.S. federal income tax purposes. Cash received in lieu of fractional shares, however, will generally be taxable. MSG stockholders are urged to consult with their tax advisors with respect to the U.S. federal, state, local and foreign tax consequences of the spin-off.

Beginning on Sept. 17, and continuing until the occurrence of the distribution, MSG expects that its common stock will trade in two markets on the New York Stock Exchange: In the “regular way” market under the symbol “MSG” and under the current name, “The Madison Square Garden Company”, and in the "ex-distribution" market under the symbol "MSGN WI" and under the new name “MSG Networks Inc.”

The new Madison Square Garden Company Class A common stock is expected to begin trading on a “when-issued” basis on the NYSE under the symbol “MSG WI” and under the name “The Madison Square Garden Company” beginning on Sept. 17. "When issued" trading of the new Madison Square Garden Company Class A common stock will continue until the distribution occurs.

The completion of the spin-off is subject to the effectiveness of MSG’s Form 10, funding of the debt financing at MSG Networks and the new Madison Square Garden Company common stock being authorized for listing on the NYSE, as well as certain approvals and consents.   

Cable One, the Phoenix-based cable arm of Graham Holdings, is slated to begin when-issued trading on the New York Stock Exchange on June 11, giving investors some insight into what Wall Street really thinks about small-market MSOs.

Graham Holdings announced plans to spin off Cable One in November, and the stock will officially trade on NYSE (under the symbol “CABO) on July 1. But in the meantime, investors will get an early glimpse of how the market could value the company via when–issued trading under the symbol “CABO WI.”

According to some people in the cable financial community, some investment bankers estimate the market could value Cable One as high as 8 times to 8.5 times forward looking cash flow. That would be a pretty high public multiple -- other cable stocks trade in the 7 times range -- but would be in line with the 8 times to 10 times multiples paid for public and private cable companies recently.

When-issued shares can be bought or sold like ordinary securities, except that transactions do not settle until the stock is formally issued. The attraction: trading in when-issued shares usually require a small down payment of about 25% of the value of the shares and no margin or loan debt is needed for the balance until the settlement date, which can be weeks in the future.

Cable One has been at the forefront of the battle over high-programming costs, dropping Viacom’s suite of networks – including MTV, Comedy Central, Nickelodeon and VH1 – 14 months ago after the two could not reach a carriage deal. Cable One has claimed that Viacom demanded carriage fee increases of more than 100% despite ratings declines at many of its channels. Viacom has claimed it is merely seeking fair compensation for its content.

Dropping Viacom has taken a chunk out of Cable One’s programing expenses. According to its financial statements, programming costs have dropped “significantly” since it dropped Viacom more than a year ago, but so have its customer rolls. Graham’s 10-Q first quarter financial statement filed in May stated that Cable One has shed about 20% of its video customer base (to 421,331 from 524,563 in March 2014) in the past 12 months and has placed a lower emphasis on video product sales.

“Due to rapidly rising programming costs and shrinking margins, video sales now have less value and emphasis (video PSUs were down 20% over the first quarter of last year) and programming costs have been reduced significantly,” Cable One said in the 10-Q. The company added it is focusing more on “higher lifetime value customers who are less attracted by discounting, require less support and churn less.”

The spin will be a tax-free distribution to Graham shareholders of record as of June 15, who will receive one share of Cable One stock for every Class A and Class B Graham Holdings share they own.  Earlier in June, Graham announced that Cable One also will issue about $550 million in debt, which will be used to pay a one-time cash dividend to Graham Holdings.

Graham Holdings said that its board of directors has authorized management to proceed with   plans to spin off its Cable One cable assets, a deal that could be completed next year.

Cable One, which has about 476,233 video customers in 19 states, is currently embroiled in a carriage battle with Viacom, whose networks have been dark to the operator’s customers for about seven months.  The operator, which has seen its video subscriber rolls dip 15% since Q3 2013, has said it is downplaying video in favor of broadband service. 

Graham Holdings stocks soared on the news – shares rose as much as 11.7% ($92.76 each) to $886.05 per share in early trading Nov. 14.

 “After a careful review of strategic options, we believe that a separation of Graham Holdings and Cable One will create value for the companies and our shareholders,” said Graham Holdings chairman Donald Graham in a statement. “The separation will position Graham Holdings to pursue continued growth opportunities, while enabling Cable One to focus entirely on its video, Internet and voice services and to attract a more natural stockholder base.”

The proposed transaction will be structured as a tax-free spin-off of Cable One to the stockholders of Graham Holdings. The transaction is contingent on the satisfaction of a number of conditions, including completion of the review process by the Securities and Exchange Commission of required filings under applicable securities regulations, other applicable regulatory approvals and the final approval of transaction terms by the board of directors of Graham Holdings.

In a research note, Nomura Securities analyst Adam Ilkowitz wrote that the spin could be a another step in the rationalization of the Graham family’s media holdings – they sold the Washington Post to Amazon founder and CEO Jeff Bezos for $250 million in 2013 – but also could make it easier for the cable operator to participate in industry consolidation.

“Cable One is a smaller, rural-focused cable operator that has recently struggled with programming costs and may benefit from an increase in scale,” Ilkowitz wrote.

The analyst placed a $2 billion to $2.5 billion enterprise value on Cable One, based on a 6.5 times to 8.25 times cash flow multiple. Cable One reported 2013 cash flow of about $302 million. 2013 cash flow margins of 37.4% were similar to larger operators, he wrote.  

Ilkowitz noted that Cable One’s decision to emphasize data over video could lead to further margin expansion, “though growth may prove tough.”

Liberty Media said Thursday that it will go ahead with plans to spin-off its cable interests – mainly its 27% interest in Charter Communications – into a separately traded public company named Liberty Broadband.

Liberty first announced its intention to spin off the assets in a tracking stock in March. But the company said the transaction will be a hard-spin, similar to the one it made with former subsidiary Starz last year.

"We believe a separate Liberty Broadband will offer investors greater choice and transparency, and is well-timed with Charter's agreements with Comcast, which will result in Charter owning or serving over eight million video customers," Liberty CEO Greg Maffei said in a statement.

The move comes days after Charter agreed to a deal with Comcast that would involve the sale, swap and spin of about 3.9 million subscribers valued at about $20 billion.

With that deal, Charter would acquire 1.4 million customers from Time Warner Cable, would receive a 33% interest in a spin-off company with about 2.5 million customers. In addition, Comcast and Charter would swap systems with about 1.6 million customers.

Liberty Broadband would include Liberty’s Charter interest as well as its global positioning satellite subsidiary TruePosition, its minority equity investment in Time Warner Cable and certain deferred tax and deferred revenue liabilities, as well as liabilities related to the Time Warner call option.

Liberty Broadband could go off on its own to acquire cable assets, but Maffei said on a conference call with analysts to discuss first quarter results that Liberty’s respect for the Charter management team, the benefits of scale and the synergies inherent in the Charter assets “make it unlikely that we will go outside of them [Charter] inside the U.S.”

In the spin, Liberty shareholders would receive one-fourth of a share of Liberty Broadband common stock for each share of Liberty Media they own. In addition, stockholders will also receive a subscription right to acquire one share of Series C Liberty Broadband common stock for every five shares of Liberty Broadband common stock they receive in the spin-off.

Liberty said the subscription rights are being issued to raise capital for general corporate purposes of Liberty Broadband and will enable the holders to acquire shares of Series C Liberty Broadband common stock at a 20% discount to the 20-trading day volume weighted average trading price of the Series C Liberty Broadband common stock following the completion of the spin-off.

Liberty expects to complete the Liberty Broadband spin by the end of the year.