Cablevision: But what vision?
James Dolan faced a critical performance last Thursday. The Cablevision CEO had summoned a meeting to convince key Wall Street investors and analysts that he had a battle plan to reverse the 90% slide and work the cable operator out of a cash crunch that looms next year.
By many accounts, the meeting was a failure, with some attendees outraged by giant holes in the company's plan. Yes, James Dolan and his father, Chuck, the chairman, said the company will sell some movie theaters and shut 60% of its ailing The Wiz electronics stores, both once touted as critical elements of Cablevision's New York-centric strategy.
Company stock has sunk in part because the company has surrounded its core cable-system and -network businesses with money-losing, capital-hungry or lame businesses.
But investors were angry last week over such things as the lack of detail on how, exactly, a dramatic chop in capital spending would affect growth at its cable systems. Or some justification for reeling in the Rainbow Media network tracking stock and forcing shareholders to take $800 million in Cablevision stock for a company valued at more than $4 billion 18 months ago.
The board of directors "determined it was in best interest of all shareholders, and we'll leave it at that" was all Vice Chairman Bill Bell would say. There was no further estimate on how much money Cablevision expects from assets it might put up for sale.
But it was easy to estimate what Wall Street thought: Investors trashed the company's stock, not only pounding it down 15%, from $8, on Thursday, but hitting it for another 15% on Friday morning.
Bear Stearns media analyst Ray Katz slammed the company, telling clients that "we believe management should have presented more detail." What investors needed was a comprehensive statement of "how they intend to get from here to there. But they didn't; instead, they left it to the investment community to piece together the information and arrive at their own numbers and conclusions. In the current environment, we believe this was a mistake."
Another analyst was more blunt: "That was the worst presentation I have ever seen. I thought it was a joke. How do you cut the [capital-expense] budget that much and not explain how it affects operations?" He was one of many who stalked out of the crowded meeting during the Q&A session.
James Dolan defended the company, saying that, in previous years, investors expected fast, furious growth and capital investment. "Now it's about disciplined growth," he said. "It's about risk-aversion."
He projected the moves will allow Cablevision to begin generating positive free cash flow by 2004—actual cash after interest expense and capital spending are excluded from operating cash flow.
Cable capital spending will be cut 35%-45% in 2003, from an expected $1 billion this year to $550 million-$650 million.
Part of that will come from renegotiating a purchase agreement that made Sony the sole vendor for digital set-tops much more advanced than ones being deployed by other MSOs. Cablevision had committed to buy up to $1 billion worth of set-tops at $350 each. Now the company has backed off and won the right to buy from other vendors at a price the company put at $215 each, although the executives didn't explain how they could get them so cheaply.
The company is also laying off 7% of its corporate staff, but executives refused to say how many workers that would hit.
In its free-spending days, Cablevision got into two ventures Wall Street would love to see the company sell or scrap. One is the Northcoast PCS phone operation in Cleveland, which was planning a rollout in New York. The Dolans said they'll consider selling or partnering but will shelve the New York launch.
They do plan to go through with the launch of a DBS venture, for which they have Loral Space building a satellite. That has eaten up $200 million so far and could require $500 million to $2 billion in more capital. James Dolan said funding for the DBS deal was committed through 2002 but would not say what company plans to do.
All in all, analysts are uneasy about the Dolans' rescue strategy. "I think it's a highly risky plan in that it leaves no room for error," said Morgan Stanley's Rich Bilotti. "Under almost any circumstance, it's going to require them to sell assets anyway." His favorite candidates: Independent Film Channel, WE: Women's Entertainment, non-New York sports networks and the wireless licenses.
But Chuck Dolan said the plan is sound: "The company will be positioned to move forward on its own resources without new debt or equity."
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