Cablevision buys some Street cred

Analysts like Sundance

Cable operator Cablevision Systems has seen plenty of bad reviews for its acquisitions. But its $496 million deal to acquire Sundance Channel from General Electric (which currently owns a 57% stake), CBS Corp. (37%) and Robert Redford (6%) earned at least some thumbs-ups on Wall Street when it was unveiled Wednesday.

For one, the Dolan family-controlled Cablevision is using cash and stock, including 12.7 million GE shares that it received in its 2002 sale of Bravo to GE's NBC Universal.

Since that stock was held by Cablevision's Rainbow Media cable networks unit, "few of the investors with whom we have spoken even knew that it existed," said Sanford Bernstein analyst Craig Moffett, who called this "found money, if you will."

The GE stock is worth more than GE's $285 million stake in Sundance, meaning that Cablevision will get some cash back from the conglomerate and thereby further reduce its cash outlays.

A second plus of the deal is that it retires the GE shares in a tax-free way. Moffett estimated that it allows Cablevision to save a tax bill of $80 million or more.

Finally, "the price of the transaction itself, even before the tax benefit, looks reasonable," the analyst said.

Pali Research analyst Richard Greenfield, however, took issue with that view, arguing that the deal was expensive.

He estimated the network's annual operating cash flow only in the low $20 million range, making for a multiple of 24 times, or 16-17 times after synergies.

According to Kagan Media Research, though, Sundance generates about $40 million in annual operating cash flow.



Moffett pointed out that this would place the value of the deal at roughly 12.4 times operating cash flow, well below the average multiple of 21.3 times for the past seven network deals, according to Kagan data.

Creative- and programming-wise, Cablevision will have to provide more color on its Sundance plans at a later stage, though some things are already taking shape.

Redford will stay involved with the channel, though the parties didn't specify how Wednesday.

Also, while industry experts previously suggested that Rainbow could merge its IFC channel with Sundance, the company said Wednesday that it will operate them as separate and distinct networks. Analysts see some cost savings potential in overlapping functions.

And Cablevision signaled that it will use original programming to elevate Sundance as it has done with its other Rainbow channels, which include AMC, IFC and WE.

Rainbow Media president and CEO Joshua Sapan cited AMC's "Mad Men" and "Breaking Bad" as key original programming successes. "Sundance Channel has already established its own distinct voice through impressive programming like 'The Green' and 'Iconoclasts,' and our vision is to build on this type of original content, further strengthening the uniqueness of the network," he said.

Some on the Street would still love Cablevision to use its cash to buy back a weakened stock rather than make acquisitions. Moffett, for example, called the stock "starkly undervalued."

With that in mind, Cablevision's earnings call this morning is likely to feature questions about a rumored $650 million bid for Tribune Co.'s Newsday, which operates in Cablevision's Long Island backyard.

Compared to the Sundance deal, Moffett says he has "a harder time" seeing Newsday as value accretive acquisition, though.

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