Cablevision Buyout Looks Dead In The Water

So, is the Dolan family’s $36.36-a share buyout bid for Cablevision (CVC) now officially dead? It looks that way. The Wall Street Journal reports Wednesday that the cable company’s largest holder, ClearBridge Advisors, which holds a 14% stake, is going to vote against the deal. Other investors with another 20% stake - Mario Gabelli’s Gamco Investors Inc., T. Rowe Price and Marathon Asset Management - are also on the record opposing the deal.

Citigroup analyst Jason Bazinet Wednesday morning downgraded the stock to Sell from Hold, concluding that the deal is unlikely to succeed. He sees two risks. One is that it simply gets voted down by holders at a shareholders’ meeting next week. The other is that higher financing costs and deteriorating fundamentals cause the Dolans to back away. He cut his target price on the stock to $33, from $36.

Taking a much different view, Richard Greenfield, an analyst at Pali Research who has been loudly complaining for months that the Dolans' bid is too low, wrote a research note Wednesday asserting that he would own the stock here, even if holders vote against the deal.

With ClearBridge lined up in opposition, Greenfield concludes, “there is virtually no hope for the Dolan offer to succeed.” But Greenfield thinks the fundamentals at Cablevision provide “compelling upside” for the shares. He contends that based on expected 2008 free cash flow, the stock is worth over $47 a share.

If the deal fails, as he expects, Greenfield thinks the stock will head to the low 30s, particularly given the weak recent performance of cable stocks, and the low odds of a new bid from the Dolans. “The Dolans have no ability to take the company private again at current or higher prices given the current state of the debt markets,” he writes. And he says that given the Dolans have no interest in selling to Time Warner Cable (TWC) or Comcast (CMCSA), “the CVC investment story will shift back to free cash flow generation.”

And while Greenfield notes that 2007 cash flow is pressured by one-time spending issues, he says that “investors will increasingly focus on the free cash flow generation that is possible at CVC in 2008/2009,” even with increasing competition from Verizon (VZ), EchoStar (DISH) and DirecTV (DTV). He calculates that the company can generate $1.90 a share in free cash flow in 2008, and $2.68 in 2009 - and he contends those are conservative estimates, assuming far slower earnings growth that is actually in his model. If they can generate that kind of cash, he concludes, the stock will head substantially higher.