Analysts Weigh in on Looming AMC Networks, Dish Legal Showdown

12:51 PM PST 09/17/2012 by Georg Szalai
AMC

Many on Wall Street have predicted a settlement, which could help the stock of the cable channels firm, but has so far not materialized.

A long-simmering legal battle between cable channel firm AMC Networks and satellite TV giant Dish Network is set to kick off its court phase on Wednesday, and Wall Street analysts have started to weigh in with scenarios and predictions.

The legal case focuses on Voom, the former satellite TV firm launched by Cablevision Systems owners the Dolan family whose successor is now part of AMC Networks, but the future carriage of that firm's AMC, IFC, Sundance Channel and WE tv channels is also potentially at stake.

In the runup to the legal showdown, expected to take four to six weeks, many analysts had predicted a settlement, which so far hasn't materialized. Many still argue though that a settlement would prove to be the best way to go for both sides. They say there is particular upside for AMC Networks' stock, which has been in a holding pattern ahead of the trial.

AMC is asking for damages of $2.5 billion plus interest of an additional $1 billion. Dish chairman Charlie Ergen, Cablevision chairman Charles Dolan, son and CEO Jim Dolan and AMC CEO Josh Sapan are all expected to testify in the trial.

Years ago, Cablevision sold the Voom satellite to the predecessor company of Dish, which agreed to carry HD channels created for Voom for 15 years as long as the Dolans' firm invested $100 million per year into the Voom service. Dish later argued that this spending failed to materialize and stopped carrying the Voom channels.

AMC, which Cablevision spun off as a separate business last year, has argued that the Voom legal dispute drove Dish to also stop carrying the AMC networks as of mid-year. Dish has argued that the AMC carriage dispute simply came down to carriage fees.

For Wall Street, the question has been how many subscribers Dish may lose without such AMC shows as Mad Men and how much revenue AMC Networks will lose without the Dish carriage fees.

Dish has downplayed the pain it expects from not carrying AMC Networks. "If we're just talking about AMC, that's one kind of thing," Ergen said on his latest earnings conference call. "But contractually, we were forced to carry three other channels that we weren't as interested in, in Sundance, WE and IFC, which…were very poorly viewed within our sub base."

"The termination of Dish Network's carriage will have a material impact on our revenues, adjusted operating cash flow and operating income in future periods," AMC Networks said in its latest earnings report. "Although Dish Network's termination has reduced the company's total subscribers by approximately 13 percent, the impact on our adjusted operating cash flow and operating income, if it continues, will be materially higher."

Morgan Stanley analyst Benjamin Swinburne earlier this month raised his price target on AMC by $1 to $43.

"We rate AMC as a relative "underweight" as we see other strong fundamental stories in media at lower valuations with less near-term risk," he cautioned though, lowering his worst-case scenario and raising his estimated impact of a permanent Dish carriage loss to $15-$20 per share, or $125 million in operating cash flow downside in 2013, up from his prior estimate of $90 million. "Despite recent share underperformance, risk/reward still appears unfavorable," he argued, citing "significant potential upside from a Voom litigation win and downside if the Dish distribution loss is permanent."

The stock market currently prices in a probability of about 20 percent that the lost Dish carriage  is permanent, according to Swinburne.

Stifel, Nicolaus analyst Benjamin Mogil said the court case could go "many ways," but added that "we view any lack of settlement before the trial commences as negative for our AMC Networks rating." He said his "buy" rating and $48 price target on the stock would come under review once a trial starts.

Susquehanna International Group analyst Vasily Karasyov on Friday reiterated his "positive" rating and $51 price target on AMC on Friday though. "We see a reasonable likelihood of a global settlement between Dish and Voom, which would include a renewed carriage agreement for AMC channels," he said.

Email: Georg.Szalai@thr.com

Twitter: @georgszalai

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