Third Strike: Dolans Are Out of Pitches

Cablevision Systems’ ruling Dolan family whiffed on its third attempt to take the company private last Wednesday.

Shareholders struck down the $10.6 billion proposal in a brief special shareholders meeting here. Now the question that remains for Cablevision: What next?

On deck: The Dolans could either shed assets to pay down debt and issue a cash dividend to shareholders, or sell the company outright, according to analysts.

Pali Research media analyst Richard Greenfield wrote last week that the family has several options: Selling some assets like its Rainbow Media Holdings programming division (AMC, IFC and WE TV). That could raise $4.6 billion and pare down some of its $11.3 billion in debt. Or the funds could be used to pay a special dividend to shareholders; buy an interest in regional sports programmer Yankees Entertainment & Sports Network; bid on wireless spectrum in upcoming FCC auctions; or sell the cable company to Time Warner Cable.

Of those options, Greenfield believes that selling assets and issuing the dividend are most likely.

In his report, Greenfield wrote that Cablevision could tick up the amount of debt it holds from its current level of about 5 times its estimated 2007 cash flow of nearly $2 billion to about 7 times in the next 12 months. That could translate into a $5.5 billion ($19 per share) cash dividend to shareholders, including the Dolan family.

Issuing a cash dividend to shareholders after a failed going-private deal is not a foreign concept to Cablevision. In 2005, after its first attempt to take the company private failed, the Dolans proposed borrowing $3 billion to dole out to shareholders. That dividend was approved in April 2006 and as a result each Cablevision shareholder — including the Dolans — received $10 in cash for every share they owned. The Dolans also eventually used some of that money to launch a second bid to go private, which failed.

But if the Dolans do plan to take another stab at going private, most analysts believe it won’t be at least until the middle of next year.

The rejection should come as no surprise, given the flurry of attention that preceded the meeting. Four of the top five non-Dolan shareholders had said they would vote against the deal — and some analysts believe shareholders left money on the table in rejecting it.

“It probably would have been wise to vote for the deal and just get out of it, take some uncertainty out and redeploy your capital in a company that’s got more obvious upside,” Miller Tabak media analyst David Joyce said. “That should have been the driver instead of trying to squeeze more out of the Dolans.”

But for some of the bigger investors, price wasn’t the issue. Getting in on a future sale of the company through a “stub equity” allotment in the private company was the bigger factor.

“We didn’t want a higher price, we wanted a piece of the back end,” Gamco Investors chairman Mario Gabelli said in an interview with Fox Business Network on Oct. 24. Gamco owns about 8.3% of non-Dolan shares and had said it would vote against the deal.

Joyce estimated that rejecting the Dolans’ latest offer would result in a $1- to $2-per-share decline in the stock. But he said that given the huge amount of free cash flow the company is expected to generate — $1.1 billion in 2007, growing to $2.6 billion by 2011 — could lead to a higher price for the stock in the long term.

“The stock could be at $41 within a year,” Joyce said.

As expected, Cablevision stock declined after news of the rejection leaked out, closing Oct. 24 at $30.82 per share, down 96 cents each. The stock continued to drop the following day to $29.40 each, but that was mainly due to a poor earnings report from the largest cable company in the country, Comcast.

In a brief statement after the 15-minute shareholders meeting at Cablevision headquarters last Wednesday, Dolan, obviously pained by the failure, tried to put a positive spin on the outcome.

“While we are disappointed that shareholders did not approve the transaction, there is really nothing negative about today’s outcome,” Dolan said at the meeting. “In fact, in many ways, it is a very positive event. We see today’s outcome as a vote of confidence in the prospects of Cablevision, its management team, its 20,000 employees and the industry’s future.”

This was the third time in three years that the Dolans have tried and failed to take the company private, but the first time that a potential deal was taken to shareholders for a vote. The Dolan family launched its first going-private offer for the company in June 2005, a complicated deal that priced the cable company at about $21 per share in cash and involved the spinoff of Rainbow Media Holdings as a special dividend to shareholders, valued at about $12.50 per share. That offer was rejected as too low, as was a $27 per share all cash offer — later raised to $30 per share — the following year.

The latest bid was made in May, a $36.26 per share offer that had the approval of the special committee. But shareholders, angry that the Dolans would leave them out of any future asset sales — particularly a sale of the cable company to Time Warner Cable or Comcast — believed that the family was trying to low-ball them once again.