Cablevision May Be Worth At Least Twice Dolan's Bid

Cablevision (CVC) is worth at least twice the $36.26 a share the Dolan family is offering to take the company private, Bernstein Research analyst Craig Moffett asserts in a research note Thursday morning. Moffett bases his conclusion on the financial model Cablevision included in a proxy filing for the deal made with the SEC last Friday.

The key to the story, Moffett says, is that Cablevision is projecting much higher free cash flow over the next few years - and lower capital intensity - than anyone on the Street has been expecting. He notes that Cablevision sees capital intensity - capital spending as a percentage of revenue - falling to 6% in 2011, down from 14.6% in 2006. The result, he says, is that the company expects to convert 80.3% of EBITDA to unlevered free cash flow by 2010, up from 20.7% in 2003.

“Cablevision’s recently filed proxy provides strong support for the bull case for all cable stocks,” he writes. “We believe a similar free cash flow dynamic can be made at Comcast (CMCSA), Time Warner Cable (TWC) and even Charter (CHTR) as capital spending ebbs” after two recent cycles of capital investment, one to improve the network, and a second to upgrade cable boxes and other customer equipment.

“In short, we believe Cablevision’s proxy supports a view that all the cable stocks are strikingly undervalued.” If the Dolans succeed in winning Cablevision, he says, “the obvious implication for investors would be to redeploy these funds, and then some, into other cable names.”

Moffett notes that Cablevision’s free cash flow estimate for 2010 is 18% higher than his own forecast. “If there was any doubt as to why Cablevision seems so eager to go private, here it is,” he writes. Moffett says the Dolans would be poised to generate more than $30 a share in cumulative unlevered free cash flow in just the four years from 2008 to 2011.

If you valued the company at 10x 2010 projected free cash flow, he says, the stock would be worth $69 a share today on a net present value basis, he says. If you used a 15x multiple, he adds, the stock would be worth $103 today.

Cablevision Thursday is up $1.27 at $37.70; Charter is up 20 cents at $4.41; Time Warner Cable is up 15 cents at $40.22; but Comcast is down 29 cents at $28.30.

CVC vs. TWC vs. CHTR vs. CMCSA 1-yr chart: