It looks like the Dolans -- the ruling family of Cablevision (NYSE: CVC) -- might just have made themselves a good deal.
The company, based on Long Island, has announced that it will pay $1.36 billion for Bresnan Communications, a cable operator in Colorado, Montana, Utah, and Wyoming. If it goes through, the all-cash transaction will mean that Cablevision has topped seven bidders for the western company's hand.
The selling owners of Bresnan include Providence Equity Partners and the Quadrangle Group, which coughed up $525 million to buy the company from Comcast (Nasdaq: CMCSA) in 2003. Funding for the purchase will consist of $1 billion in non-recourse debt, along with nearly $400 million in equity from Cablevision.
Given the deal's structure as an asset purchase, Cablevision will recover its equity contribution over time. This aspect of the transaction is less complex than it appears: Through an asset purchase, Cablevision will be able to apply the depreciation generated by Bresnan to its own net operating costs, thereby lowering its federal tax rate.
The amount that Cablevision is paying comes to about $4,400 per subscriber -- the typical way cable purchases are judged. On that basis, Cablevision isn't stealing Bresnan, especially because Cablevision generates about $450 in cash annually from each home passed, while Bresnan's take is closer to $250. But Cablevision Chief Operating Officer Tom Rutledge, formerly an executive of Time Warner Cable (NYSE: TWC), is confident that he can move the Bresnan needle higher.
Bresnan passes 630,000 homes and serves about 300,000 subscribers. Given where it operates, its primary competition comes from satellite operators DirecTV (Nasdaq: DTV) and DISH Network (Nasdaq: DISH) -- companies that don't offer phone or Internet -- and Cablevision thinks it can offer its triple-play to grab some of the market share.
The Dolans haven't been sitting on their hands of late. Along with three efforts to acquire the shares of their company's stock that they didn't already own, they purchased Long Island's Newsday daily newspaper. They paid $650 million for the fish wrapper in 2008, only to write off $402 million of its carrying value within months. (This former journalism professor and media analyst wonders why anyone would plunk down good money for a newspaper.)
Not long ago, Cablevision announced a decision to spin off Madison Square Garden and a host of related assets. It'll also institute a $500 million stock buyback. These appear to be sensible efforts. Maybe, just maybe, the Dolan Discount will eventually disappear. Fools should thereby be advised to watch what could become an interesting media investment opportunity.
