Cablevision on Thin Ice

What is it with CEOs today? How many more need to be sent off to the big house before corporate managers learn that they can't run public companies like private fiefdoms?

Today's mini-rant is brought to you courtesy of Cablevision (NYSE:CVC) CEO James Dolan and, more generally, the entire Dolan clan, which controls more than 70% of the voting rights at Cablevision despite owning only about 20% of the equity. Back in June, Dolan and his family made an unusual buyout offer to Cablevision's board. They offered to take private the most profitable bits of the business -- its cable and telecom units -- at $21 per share. That cash, plus shares of Rainbow Media, a public company that would comprise Cablevision's remaining programming and entertainment units, would then be spun off to Cablevision's current shareholders.

Round two
Despite months of negotiations, the Dolans were ultimately unable to persuade Cablevision's board to accede to their offer. On Oct. 25, the Dolans withdrew their proposal -- and fired a parting shot, "suggesting" that the board issue a special one-time $3 billion dividend to shareholders instead.

Approval of the dividend would have two effects. First, it would distribute roughly $10 a share to Cablevision's shareholders -- including approximately $700 million to the Dolans themselves. (It's good to be the king.)

Second, and more importantly for shareholders who plan to stick around after collecting their checks, the dividend would require Cablevision to take on about $2.8 billion in additional debt. That's right, folks. Cablevision doesn't actually have $3 billion to pay its shareholders. In order to finance it, Cablevision would need to up its net debt to nearly $13 billion, or about twice the company's own market cap. (If you're getting déjà vu, you may remember how Viacom (NYSE:VIA) spun off Blockbuster (NYSE:BBI) in 2004, extracting a $900 million dividend in the process.)

The Dolans argue that Cablevision produces enough cash flow to finance the extra debt. But when this Fool looks at Cablevision's cash flow statements, he sees nothing but negative free cash flow in every single quarter over the past three years. How the firm could remain solvent in that situation, after piling on even more debt, is beyond my ken. The most amazing aspect of this saga? Cablevision's board is actually considering this proposal. Astonishing.

Four months ago, in reviewing the Dolans' buyout offer, my fellow Fool W.D. Crotty concluded that investors should "sell now, take the profits, and run." Based on this week's developments, I second the motion. If the Dolans get their way, if they can somehow convince both the board and Cablevision's lenders to OK the firm taking on more debt to finance this $3 billion dividend boondoggle, then fine. Take your dividend, and then abandon this ship before it hits the iceberg.

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Fool contributor Rich Smith does not own shares of any company named above.