Why Did the Dolans Sell Cablevision? (Analysis)
"The Dolans must have seen the writing on the wall," says one analyst.
With its focus on the lucrative cable systems surrounding New York City, Cablevision Systems has often been seen as an attractive takeover target for bigger U.S. cable operators, but the founding Dolan family hadn’t been willing to sell, until now.
The Dolans didn’t offer up much in the way of an explanation as to their sudden change of heart beyond a feel-good statement from 88-year-old Charles Dolan, who founded the company in 1973. It reads, in part: “Nearly half a century later, the time is right for new ownership of Cablevision and its considerable assets. We believe that Patrick Drahi and Altice will be truly worthy successors … We expect that Cablevision will be in excellent hands.”
European cable firm Altice, controlled by French-Israeli billionaire Drahi, has agreed to pay $17.7 billion for Cablevision, roughly 22 percent more than where its stock had been trading, and The Hollywood Reporter set out to answer the questions (without Cablevision’s participation since it declined to comment): Why did the Dolans sell, and why now?
“Cable valuations are very high. It’s a good time to be a seller,” says Lee Charles, a partner who specializes in cable transactions at the international law firm, Baker Botts.
Charles says the sales price is more than eight times cash flow whereas cable firms typically trade at around a multiple of six.
“Cable TV is a mature industry and it’s increasingly more difficult to grow profits as easily as it had in the past,” he says. “Cost of content is going higher, with no end in sight, and with cord-cutting they figured it was time to take the big multiple. They’re doing this from a position of strength. Cablevision’s assets are among the most valuable in the industry.”
The Dolans have also parlayed Cablevision into two more companies, AMC Networks and Madison Square Garden Co., the latter of which is separating into two separately traded entities, one housing the media assets and the other the entertainment, venues and sports, including the New York Knicks and New York Rangers.
Not only does AMC and the soon-to-be two MSG companies offer more upside due to them being less mature businesses, says Charles, they’re also more fun to operate.
“Personally, I’d be happier running NHL and NBA franchises and the Madison Square Garden than a cable distributor,” he says. “They’re just sexier assets, especially in the New York area.”
“The Dolans must have seen the writing on the wall,” adds MoffettNathanson analyst Craig Moffett. “With pressure on pay TV subscribership industry-wide, and with local competitive challenges in going up against Verizon FiOS, things weren’t going to get any easier … everyone is a seller if the number is high enough.”
In a research note Thursday from Wells Fargo analyst Marci Ryvicker, she noted that the Dolans have a 72 percent voting stake in Cablevision, so the sale to Altice is a done deal barring government approval. “We don’t foresee any major regulatory hurdles,” she concludes.
Indeed, SNL Kagan says the combined company will control less than 4 percent of the overall video subscription share in the U.S.
Some observers also suggested that founder Charles Dolan’s advanced age played into the decision to sell, given there are likely tax and estate-planning benefits built into the deal.
“The window for M&A is starting to close, so the family timed it well and at the end of the day, they are focused on creating shareholder value,” says Macquarie Securities analyst Amy Yong. “I also think it speaks to where the strategic direction of the family is headed, as they focus on growing AMC Networks and prepare for the split of MSG and growing their sports-entertainment franchise.”
Wunderlich Securities analyst Matthew Harrigan in a report said he had expected a Cablevision sale next year to Charter Communications, in which John Malone’s Liberty Media owns a big stake. He said Thursday, though, that Drahi’s “killer instinct” led him to pursue Cablevision after he tried unsuccessfully to acquire Time Warner Cable, which is being acquired by Charter Communications.
Many, of course, predict this latest pay TV deal, coming on the heels of the AT&T-DirecTV merger, won’t be the last. Altice previously agreed to purchase Suddenlink and with Cablevision it suddenly becomes the fourth biggest cable provider in the U.S. It might want to move up in the ranks. “To be successful in the U.S., you need scale,” says Charles. “They’ll be an aggressive suitor of assets and every cable company but Charter and Comcast are ripe for the picking.”
Yong says Cable One, privately-held Cox Communications and Mediacom are likely takeover targets. “This could prop up multiples in the industry,” she says.
“U.S. cable consolidation continues,” wrote Evercore ISI analyst Vijay Jayant. “The U.S. cable industry is currently experiencing a wave of consolidation. Scale, network contiguity and overhead efficiencies and the belief by some managements that they can run those businesses better will likely consolidate the cable industry to 3-4 scaled operators rather than over 500 operators, most of them sub-scale.”