The Dolans’ Bargain

Shares of Cablevision are worth at least twice what the Dolan family is offering — $36.25 per share — to take the company private, Bernstein Research cable analyst Craig Moffett said in a recent research note. We asked him about his analysis that the company is worth at least $69 per share.

How do you figure that Cablevision is worth twice the Dolans’ offer (and the current share price)?

Craig Moffett: I’ll be honest, to some extent all we did was report the news. Sometimes the numbers speak for themselves and don’t need a lot of elaborate analysis. When we originally upgraded Cablevision back in March, we did it because we thought Cablevision could deliver $5 per share in free cash flow in 2010, as capital intensity started to fall. Well, it turned out that they could do a whole lot better than that. Cablevision’s own numbers suggest that they’ll delivery unlevered free cash flow north of $8 per share in 2010. What investors pay for is cash. And Cablevision has got cash in spades.

Do you see the same cash-flow dynamics for other cable operators?

Moffett: I do, but not right away. The difference between Cablevision and the rest of the cable industry is simply timing. Cablevision launched voice over IP two years before anyone else. And they have lived through the RGU bubble that followed in its wake. Now RGU growth is decelerating. At the same time, Cablevision pushed digital set-top box penetration much more quickly than its peers. And they are now simultaneously coming down the far side of the mountain on digital rollout costs as well. Comcast, Time Warner, Charter and everyone else are likely to follow a very similar trajectory, but not until they have hit the similar inflexion point, which for most of them isn’t until the end of this decade.

Its numbers were 18% higher than your forecast. How does Cablevision generate that much free cash flow without tipping off the Street?
 
Moffett: Because the capital spending budget for most cable companies is a black box. Investors try mightily to figure out how much of the capital spending budget is maintenance and how much of it is growth. But it is a highly imprecise, almost speculative exercise for outsiders. Cablevision management, on the other hand, has visibility that we don’t have. And their own forecasts suggest that he capital spending required at this point in the cycle is a lot lower than people on the Street had expected.

You may have just answered this question, but why isn’t the market seeing this value and pricing shares accordingly?

Moffett: That’s a somewhat different question. That’s why they didn’t see it in advance. Now the question becomes whether the Dolan bid serves as a floor under the Cablevision floor under the stock price or instead is acting like a ceiling. Only time will tell. But if the deal is voted down by the shareholders, we’ll get a much clearer sense, at that point, what kind of valuation the public market has put on the stock.

Rob Garretson is a business and technology writer based in Gaithersburg, Md.