Cablevision stock spikes

Despite lift, S&P cuts company's debt rating

NEW YORK — Cablevision did its share price a huge favor Monday as the company hinted for the first time that it would consider selling its flagship three million-household cable franchise to fellow New York area cabler AOL Time Warner.

Company stock also got a lift from news late last week that it may be able to sell its mobile phone business for upward of $700 million thanks to a recent FCC ruling on mobile phone providers.

Still, while analysts generally praised the news, many remain skeptical about the Dolans’ commitment to making major immediate strategic changes. The company also is notorious for raising expectations of deals and failing to follow through.

But if in fact a sea change in attitude is afoot at the Dolan family-controlled company, it won’t come a minute too soon for frustrated shareholders. The characteristically complacent company has posted three consecutive quarterly losses, a stock price trading at one-fourth of its value a year ago, and a large funding shortfall for next.

In a rare and candid interview with the New York Times, the father-son management team of Charles and James Dolan admitted for the first time that it might be time to monetize some of the assets it’s “not in love with,” including the “crown jewels” suburban New York cable system.

At the same time, the Federal Communications Commission on Friday took a major financial burden off of U.S. wireless carriers, which increases the likelihood that Cablevision’s Boston and New York area wireless carrier Northcoast Communications could be acquired soon by newly emboldened operators Verizon or Cingular Wireless. Northcoast could fetch $500 million-$700 million, which on its own could alleviate Cablevision’s projected funding shortfall for next year.

Credit rating down

S&P nevertheless on Monday cut its debt rating on Cablevision, citing continued uncertainty about future cash flows.

According to S&P analyst Catherine Cosentino: “Satellite competition has been exacerbated by Cablevision’s ongoing dispute with the YES network. Moreover, the company has lost 17,000 subscribers since the beginning of 2002 and projects that basic subscriber losses for the full year of 2002 will be roughly between 1.0% and 1.5%.”

S&P also noted delays in rolling out Cablevision’s digital cable offering in 2002. To date, barely 1.4% of the company’s cable subs are digital.

The credit downgrade didn’t stop the stock from gaining 6.5% to close at $11.70. Over the past month since it disclosed plans to cut capital spending, Cablevision’s stock has doubled in value, though it remains a far cry (along with the other quoted cable stocks) from its trading levels last year, which in Cablevision’s case was $40.

Cablevision sources declined to comment on the various sale options the company might be looking at, nor could they confirm the status of any talks with Time Warner Cable or possible Northcoast suitors. The company isn’t disclosing the status of takeover talks for Clearview, but acknowledged that it is unlikely to recoup the full $245 million that it initially paid for the chain.

Lukewarm reception

Last month the company outlined what analysts described as a lukewarm plan to bridge the $600 million-$1 billion funding gap. Its measures included putting its unprofitable Clearview Cinema chain up for sale, closing down half of its Wiz retail electronics stores, laying off 7% of non-essential staff, and scaling back plans to expand its Lightpath telephone and ISP business.

The Dolans said they have every intention of keeping their prized cable programming assets (such as AMC and Bravo) as well as its New York sports franchises (Knicks, Rangers and Liberty) and even its DBS satellite project. Still, speculation continues that cablevision might swap its stake in Fox Regional Sports Network for News Corp.’s minority position in Cablevision-controlled Madison Square Garden plus MSG network and sports teams.

The 3 million-home Cablevision system is certainly a neat match with Time Warner Cable, which is due to be spun off in an IPO next year as part of AOL TW’s disentanglement from AT&T in its Time Warner Entertainment unit.

Proceeds could help pay for a Cablevision system merger and the Dolans hinted they would prefer a joint venture arrangement with AOL, presumably to retain some control over program network carriage.

Selling off the cable distribution platform on its own could endanger the viability of some Rainbow channels that compete with Time Warner or Turner equivalents.

Cablevision’s comments suggest any offer for Rainbow would have to have a huge premium attached. There are a number of possible suitors for the Rainbow assets, including MGM (a 20% shareholder) and Viacom.

Cablevision redeemed the balance of Rainbow Media Group’s tracking stock in August on the expectation it could sell the valuable cable network properties or else utilize its untapped borrowing capacity to strengthen its own balance sheet.

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