Cablevision Sends the Right Signals - Barron's

Cablevision (CVC) recently decided to spin off Madison Square Garden and its associated assets which, writes Barron's Jay Palmer, could be the first step to unlocking the stock's potential.

Cablevision is the fifth-largest cable-TV provider in the country. Spinning off Madison Square Garden [MSG] and related assets frees up Cablevision from spending close to $1B renovating the arena. It also allows Cablevision to simplify its balance sheet and present a clearer corporate picture to investors. Analysts expect the deal to add stability to Cablevision's profits and revenues.

The spinoff could also be the first step to a sale of the company itself, which could see shares go for nearly twice their recent $24. The Dolan family, which controls Cablevision, says it has no such plans, but it has previously made three attempts to take Cablevision private and some expect a fourth attempt. Without MSG, Cablevision becomes attractive as a pure-play takeover, and buyers could potentially include Comcast (CMCSA) or Time Warner Cable (TWX).

However, even if a sale occurs, it won't necessarily be in the short-term. Analysts note the Dolans have no reason to sell into a depressed market, so investors waiting for a deal will need patience.

In the meantime, despite the fact that the market has already matured, Cablevision continues to expand its underlying business. The number of digital-video subscribers and internet-data customers have both increased, and Cablevision has held up better than many rivals in basic cable, though numbers remain weak.

The company is profitable, with strong operating margins throwing off plenty of cash. With a nominal 2009 P/E multiple of 25, and a P/E of 18 for 2010, the stock may not seem like a screaming buy, but there's plenty of upside for investors willing to bet on an eventual sale of the company.

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For investors considering a stake in Cablevision, some additional salient information:

• Though Barron's listed Comcast and Time Warner (TWX) as potential buyers of Cablevision, there's also an argument to be made that the two companies might bypass Cablevision altogether and instead Comcast could enter into a megamerger with Time Warner Cable (TWC). Comcast and Time Warner Cable say they're not in merger talks, but Citigroup analyst Jason Bazinet calls such a merger "the most intelligent transaction" in the increasingly competitive digital market, and one which could yield $2.7B in annual cost savings.
• The same Citigroup analyst, Jason Bazinet, added Cablevision to his Top Picks Live list, pointing to little downside risk and plenty of potential upside from the MSG spinoff. His price target is $25. Bazinet downgraded EchoStar (SATS) and Time Warner (TWX) from the list because of their recent performances.
• Cablevision has been involved in an ongoing legal battle with TiVo (TIVO) about digital video recording. In June, the case went to the Supreme Court, which refused to review an appeals court ruling that Cablevision could in fact circumvent set-top DVRs and allow its customers to record programs directly on to its servers. The victory should give Cablevision a boost, and is also expected to lower the price of DVR services.

Comments

[thomas22a]

TiVo was not involved with the lawsuit. Please correct your article.

2009 Sep 13 02:48 PM

[thomas22a]

Why do you people make up this stuff?

2009 Sep 13 03:00 PM

[dtvfan]

You use TWC and TWX interchangeably when they are in fact two separate companies and have been for over a year. You might consider a fact-checker.

2009 Sep 17 11:46 AM