Graham Holdings to Spin Off Cable One

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.”