TCI sells Big Apple

Cablevision pays $1.2 billion for N.Y. systems

Tele-Communications Inc. is to sell its New York-area cable systems to Cablevision Systems Corp. for $1.2 billion in stock and debt, the two companies said Monday.

The deal is TCI’s first step toward implementing a new strategy of partnering with other cablers. TCI will emerge with 33% of Cablevision, which will be a “much more potent force” in the New York area, one analyst said.

Cablevision will continue to be controlled by the Dolan family. And the pricing of the deal is very much in Cablevision’s favor, prompting some Wall Streeters to speculate that further deals will be done between Cablevision and TCI possibly involving Cablevision’s New York sports channels, which would fit well with TCI’s cable sports joint venture with News Corp.

Taking stock

In Monday’s deal, TCI will sell 10 systems serving 820,000 customers in New Jersey and parts of New York for 12.2 million Cablevision shares and assumption of $669 million of debt. Announcement of the deal sent Cablevision stock up $9.75 to $44.37, increasing the price by $100 million to $1.2 billion.

Analysts said it was a good deal for Cablevision, because the systems earn $200 million a year before interest, taxes, depreciation and amortization (cash flow). With only $669 million of debt to be assumed, Cablevision can more than offset the higher interest expense with the cash flow.

Cablevision said the extra systems would increase its subscribers in the New York area to 2.5 million. “Today we have acquired the scale that is essential to providing the most advanced communications services to our customers,” said Cablevision CEO James Dolan in a statement.

Cablevision promised to include the new systems in a major upgrade of its New York-area systems. The TCI systems now rank well below Cablevision systems in technology.

Selling systems off to other cablers for stock is a new strategy introduced by TCI’s new president Leo Hindery, under the theory that TCI cannot effectively manage its far-flung group of cable systems.

TCI disclosed another partnership Monday, saying it would form a joint venture with Adelphia Communications to own a total of 460,000 customers in the Northeast.

Dixon says the 820,000 subs TCI is transferring to Cablevision are “orphan subs,” and he foresees a number of further transferrals of TCI systems in areas of the country where another cable operator could cluster them for economies of scale.

Consolidating its empire

A spokeswoman for TCI agrees with that interpretation, saying, “At the end of the day, TCI will wind up with fewer total subscribers.” With fewer subscribers, TCI “will be able to serve our remaining customers more efficiently.”

There is likely to be more in the deal for Cablevision, which needs to improve its balance sheet further.

People close to the cabler say it will soon spin off Rainbow Programming Services into a separate company, dumping some of Cablevision’s $5 billion debt load onto the new entity.

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