Cablevision Systems (NYSE:CVC), with a midday jolt of 22%, was Monday's largest percentage gainer on the New York Stock Exchange. Fueling today's rally was news that the Dolan family, which owns 20% of the company's shares but 71% of the voting power, wants to restructure the cable and telecommunications business and take it private.
Cablevision is the sixth-largest cable operator in the U.S., with 3 million households using the service in the New York metropolitan area. Its cable programming arm includes American Movie Classics, the Independent Film Channel, and Women's Entertainment. The company owns Madison Square Garden, Clearview Cinemas, and three New York professional sports teams -- the Knicks in basketball, the Liberty in women's hoops, and the Rangers in hockey.
Is the deal good for shareholders? Let's take a look.
The deal
The Dolan family is offering $21 a share in cash for the cable and telecommunication assets that generated $851.1 million in sales (70.2% of total sales) and $111.7 million in operating profits (96% of profits from the two operating groups) in the latest quarter. If completed, the deal will give the Dolans 100% of ownership of these assets, but it would require them to borrow $6.8 billion from Merrill Lynch and Bank of America.
Besides cash, the shareholders would also receive Rainbow Media Holdings, which would retain the remaining assets. The Dolans valued this company at $12.50, but with an operating profit of just $4.7 million on sales of $111.7 million, the company's financial structure would need to be investigated to determine its true value.
Investors clearly liked the pricing. Although the Dolans valued the deal at $33.50 per share, the stock set a new a 52-week high of $33.90 this morning. Since then, the stock has backed down closer to $32 a share. That's a more realistic valuation, given that this deal will not close for many months and -- though not likely, since the family has secured funding for the deal -- could still fall apart.
The family makes its case that the offer is 25% over Friday's close and represents "the highest value paid [on a per-subscriber basis] in a major cable transaction in recent years."
And now for the bad news. Look at this 10-year chart of the stock. It's not pretty. Also consider analysts' estimates that the company will earn only $0.33 a share in fiscal 2006, giving the stock a very high 98 times forward earnings multiple. Finally, consider Rainbow, in which the Dolans will still retain 20% of the stock. It posted sales and earnings declines in the most recent quarter.
So, is it a good deal for shareholders?
The offer on the table is clearly above market. In this observer's opinion, shareholders would be wise to sell now, take the profits, and run. If cable systems are becoming more valuable on a per-subscriber basis, then investing in companies such as Motley Fool Stock Advisor recommendation Time Warner (NYSE:TWX) and Comcast (NASDAQ:CMCSA) stands to be a much better action than sticking around to see whether the Dolan's can pull this deal off.
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Fool contributor W.D. Crotty does not own shares in any of the companies mentioned but does watch cable TV stocks with interest. Click here to see The Motley Fool's disclosure policy.
