Cablevision: Q1 Results Suggest Dolans' Bid Is Too Low

| About: Cablevision Systems (CVC)

With the Cablevision (NYSE:CVC) board supporting the deal, it looks like the Dolan family’s $36.26 a share bid to take the company private seems destined to succeed. This is the fourth time the family has tried to buy the company, and the third since last fall, when it started the bidding at $27 a share.

However, Craig Moffett, the cable analyst at Bernstein Research, think the company’s first quarter financial results, reported this morning, provide fresh evidence for his belief that the price the Dolans are offering is still too low. “Cablevision’s solid Q1 results at once highlight why the Dolans remain so eager to take the company private, and at the same time why it may be hard to do so for only the proposed $36,” Moffett writes in a research note.

Cablevision reported revenue of $1.586 billion in the quarter, right in line with expectations; the company’s loss per share of 9 cents was close to the Street expectations of 8 cents. But Moffett notes that cable results were strong, “with unit growth meeting or exceeding expectations across the board, and revenue and EBITDA broadly in line.” He also says results at both the company’s Rainbow cable programming group and at Madison Square Garden “were surprisingly strong.”

Moffett notes that the company seems to be gaining market share in data and video despite increasing competitive pressure from Verizon (NYSE:VZ) on both fronts. He also notes that the company is showing reduced capital intensity, with cable capex 17% below his forecasts.

At the end of the day…the allure of Cablevision for privatization is predicated more on its free cash flow potential than on its remarkable resilience in sustaining revenue growth, he says. And the key to Cablevision’s free cash flow growth story is declining capital intensity. First quarter cable capex of $140 million represents just 12.7% of revenues, the lowest quarterly level ever, and down from a dizzying 27% of revenues a year ago.

Moffett thinks the stock is “starkly undervalued,” and suggests the current offer “may not be good enough to convince a majority of public shareholders to support the bid. “Once again, Cablevision - or at least the Dolans - may prove to be victims of their own success.”

Cablevision today closed higher by 29 cents to $36.19.


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