Future of Cablevision; Dolan Family

by Eric Plunk on Oct 24, 2007 3:31 PM EDT Comment 15 comments

A majority of shareholders rejected an offer today by the Dolan family (including Indians owner Larry Dolan) to privatize Cablevision, which the Dolan family owns about two-thirds of.

The buyout plan offered by the Dolan family was $36.26 per share and current shareholders saw this as too low.

Had this buyout gone through, the Dolan family would taken Cablevision off the stock market--where they claimed the company is undervalued.

The impact on the Indians may only be tangential but it's interesting to watch as perhaps more cash in Larry's pockets may help the Indians.

http://www.marketwatch.com/news/story/shareholders-turn-down-cablevision-buyout/story.aspx?guid=%7BE 331533C-72A9-4D31-A5DE-B9490A4B4EBE%7D

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Re: Future of Cablevision; Dolan Family

We can pay CC Sabathia in preferred shares of Cablevision stock! It will be like the dotcom days all over again!

by Toxicadam on Oct 24, 2007 4:07 PM EDT reply actions 0 recs

Re: Future of Cablevision; Dolan Family

The biggest news here is that the Dolan family has the cash to do the buyout, but even that isn't really significant, I don't think. I think they can well afford to run the team at a break-even, and for the next few years at least, that will be enough to remain competitive.

by Jay on Oct 24, 2007 5:12 PM EDT reply actions 0 recs

Re: Future of Cablevision; Dolan Family

i don't think it tells us anything about how much cash the dolan family has on hand. presumably the buyout would have been leveraged; a dolan holdco selling debt on the theory that it's positioned to exploit a market inefficiency.

by emil minty on Oct 24, 2007 5:54 PM EDT up reply actions 0 recs

Re: Future of Cablevision; Dolan Family

Still not something you do if overall cashflow (or availability of credit) is a concern. Last thing you want is to end up giving one of your lenders a piece of the company, or have the company sitting under too large a debt burden to operate effectively. They're not buying it to break it up.

by Jay on Oct 24, 2007 6:15 PM EDT up reply actions 0 recs

Re: Future of Cablevision; Dolan Family

in this situation i don't think you can equate overall cashflow and availability of credit. the dolans could be all the way in the red--their credit availability for a buyout like this comes from their present equity position in the target and, i presume, a willingness to scrap present mgmt. and some mba can correct me if i'm wrong, but i don't think there's anything wrong inherently with a high debt/equity ratio. that is, the ratio itself doesn't negatively affect operation/performance. what it does is make retained earnings erratic, which creates problems with dividends/stock price, which is most problematic when your equity is public. jacking your debt/equity ratio is one of the efficiencies you can exploit when going private, and is probably part of the reason they're trying to do it.

by emil minty on Oct 24, 2007 6:43 PM EDT up reply actions 0 recs

Re: Future of Cablevision; Dolan Family

Well, jacking your debt/equity ratio has the obvious financial benefit of providing tax deductibility on your interest payments, but you also have to consider that debt is not going to be cheap at all in the current market environment. The financial distress of a highly leveraged position would require the Dolan's to have substantial coverage for their interest payments.

Banks just are not going to be making the kind of deals they have over the past few years. Conservatism is becoming popular again. The debt covenant is back in vogue.

So while I agree that nothing is inherently wrong with a high debt/equity ratio, lending institutions may see things differently in the current environent.

by Pronktastic on Oct 24, 2007 7:13 PM EDT up reply actions 0 recs

Re: Future of Cablevision; Dolan Family

a solid point.

jay is, apparently, never wrong.

by emil minty on Oct 24, 2007 7:28 PM EDT up reply actions 0 recs

Re: Future of Cablevision; Dolan Family

No, actually, you convinced me you had it right, but it ultimately depends on a lot of other variables we don't know. It seems like you're characterizing it as a struggling company or a company in a great position, and I have no idea if either is the case.

Tax deductions on interest are great, but all expenses are deductible. You don't take on unnecessary expenses just because you can deduct them. At least, I don't. Unless it's something cool of course.

by Jay on Oct 24, 2007 10:26 PM EDT up reply actions 0 recs

Re: Future of Cablevision; Dolan Family

I see what you are saying, but I wasn't really arguing interest expense vs. other expense. What it comes down to is debt vs. equity.

Conventional financial theory (Modigliani-Miller theorem) says that in a world with no taxes, capital structure of the firm does not matter. But since we have taxes to consider, the cost of debt is reduced by the tax shield from interest payments. So in theory, a firm maximizes its value by slanting towards a capital structure that is nearly all debt (if you ignore the effects of financial distress). This is one of the reasons leveraged buyouts occur that result in such high debt/equity ratios.

I was merely saying that raising that much debt in this market might be difficult.

Also! It appears I have hijacked this discussion to a realm far beyond its original intent. I doubt Mr. Dolan is reading LGT for financial advice.

by Pronktastic on Oct 25, 2007 12:19 AM EDT up reply actions 0 recs

Re: Future of Cablevision; Dolan Family

I'm just screwed up enough that I would actually relish more discussion of this.

My short answer would be, application of M-M rests on a small hill of "all else being equals" and other sundry assumptions. One common one is that it doesn't make sense for a business to hoard its own equity when it could be using the cash for something else -- similar to the idea that you should go ahead and take money out of your home every good chance you get.
All fine, but still, a lot of where that kind of thinking can lead is pretty unsound, particularly in leading a firm to expand/invest in an area just because they have the capital available to do so, and, "What the hell, it's not like it matters what our capital structure is!" Which often is exactly what leads to the distressed situation.

But really, I'm in over my head on this, and I can tell that you're not.

by Jay on Oct 25, 2007 9:58 AM EDT up reply actions 0 recs

Re: Future of Cablevision; Dolan Family

M-M is apt here, but considers only the firm's cap structure. there is also(!) the consideration that leverage, inherently, magnifies investment profitability (from the perspective of the dolans). and we're talking about going private here: no fid duties to an investing public, no securities class actions resulting from stock price volatility.
it's not a "what the hell" situation; you lever right up to the point where, as a result of the leverage, the coupon on your debt sale approaches your return on investment.

by emil minty on Oct 25, 2007 11:17 AM EDT up reply actions 0 recs

Re: Future of Cablevision; Dolan Family

Leverage is part of these "going private" deals,
but the big money is made by buying "cheap", fixing up the company, and selling it for a substantial multiple of what was paid. CVC itself already well-leveraged.

The shareholders of Cablevision were not willing to let the Dolans buy at the price they named.
They want an open auction.

According to the NY Times, the bankers financing the Dolans are happy that the deal did not go through because the commitments were made before the credit crunch hit and they would have lost a bundle on selling the debt.

by palcal on Oct 25, 2007 11:57 AM EDT up reply actions 0 recs

Re: Future of Cablevision; Dolan Family

Very interesting about the lenders. I have to imagine the Dolan's missed the very small window they had then.

by Pronktastic on Oct 25, 2007 2:05 PM EDT up reply actions 0 recs

Re: Future of Cablevision; Dolan Family

I wonder how much money the Dolans actually made this year. I presume that they were in the black. It would be quite sad if they actually lost money.

extremely optimistic about next year

by gahnki on Oct 24, 2007 8:40 PM EDT reply actions 0 recs

Re: Future of Cablevision; Dolan Family

i've always gotten the impression that Larry Dolan is fairly unimportant in the Dolan hierarchy. he's not even mentioned in the article. anyone have any idea what kind of stake he owns in Cablevision?

by jeremy on Oct 25, 2007 9:30 AM EDT reply actions 0 recs