TO: MII MANAGERS FROM: BILL TAYLOR SUBJECT: CABLEVISION SYSTEMS (CVC) SHORT DATE: APRIL 23, 2007

Transcription

1 TO: MII MANAGERS FROM: BILL TAYLOR SUBJECT: CABLEVISION SYSTEMS (CVC) SHORT DATE: APRIL 23, 2007 Company Overview Cablevision Systems, Inc. is a U.S. cable multiple system operator (MSO) serving mainly the New York City metropolitan area. It was founded by Charles Dolan in 1973 in Delaware, initially created to serve suburban communities on Long Island. Headquartered in Bethpage, NY, the company boasts its position as the fifth largest cable provider in the U.S. and serves over 3.1 million basic cable subscribers. It operates as three main segments: Telecommunications Services, Rainbow, and Madison Square Garden. Within the Telecommunications Services segment, the company operates a cable television business, a residential telephone service, a commercial telephone service, and high-speed internet services. The Rainbow segment refers to its interests in national programming services, which include the following cable channels: American Movie Classics, Women s Entertainment, Fuse, and Independent Film Channel. Rainbow also holds interests in several local and regional networks, including News 12 and FSN New York. The Madison Square Garden segment owns and operates the Madison Square Garden Arena and adjacent theater, the New York Knicks, the New York Rangers, the New York Liberty, and the regional sports programming networks, MSG Networks. Cablevision s 3.1 million basic cable subscribers account for 68.5% penetration of residential homes passed. Its digital cable service, io Interactive Optimum Digital Video, has over 2.5 million customers with a penetration rate of 78.2%. The Optimum Online segment serves over 2.0 million high-speed data customers with 44.7% penetration and over 1.2 million Optimum Voice digital telephone customers at 26.5% penetration. The company also provides telecommunications packages to business in New York through its Optimum Lightpath brand, which provides highspeed data and voice services to businesses, hospitals, municipalities, and school systems. A new service that Cablevision will be Management Overview Charles F. Dolan is the Chairman of Cablevision Systems, a position he has held since 1985 when he took the company public. In addition to founding Cablevision, he also created Home Box Office Inc. in 1971, the first premium programming service in the cable television industry. James L. Dolan is the President and CEO of Cablevision, overseeing both the telecommunications and MSG segments. He has held his post as CEO since 1995 and President since He is the son of Charles Dolan, the founder. Charles Dolan employs five of his family members as Cablevision executives, with positions ranging from President and CEO to Director. Charles Dolan is the father to James L. Dolan (President and CEO), Patrick F. Dolan (President of News 12 Networks), Marianne Dolan Weber (Director),

2 Thomas C. Dolan (Executive VP, Chief Information Officer); and he is the father-in-law to Brian G. Sweeney (Director). Selected Financial Metrics 2-Yr. Share Price VALUATIO MEASURES Market Cap (intraday): 9.55B Enterprise Value (23-Apr-07) 3 : 21.49B Trailing P/E (ttm, intraday): N/A Forward P/E (fye 31-Dec-08) 1 : PEG Ratio (5 yr expected): N/A Price/Sales (ttm): 1.61 Price/Book (mrq): N/A Enterprise Value/Revenue (ttm) 3 : 3.63 Enterprise Value/EBITDA (ttm) 3 :

3 Industry Comparison Name Share Price as of Close on P/E 4/20/07 (TTM) EPS (TTM) Market Cap ($ billions) 2006 Revenue ($ millions) % Change from Profit ($ millions) % Change from 2005 # of Employ ees % Change from 2005 Cablevision Systems (CVC) $ N/A $ (0.45) $ 9.56 $ 6, $ (126) (234) 18,007 8 Virgin Media (VMED) N/A (3.65) , (984) (228) 16, Echostar Communications (DISH) , (60) 21,000 - Charter Communications (CHTR) 3.31 N/A (4.13) ,613 7 (1,370) (41) 15,500 (10) TiVo (TIVO) 6.55 N/A (0.53) (48) (39) 451 Sprint Nextel (S) , ,329 (26) 64,600 (19) Level 3 Communications (LVLT) 6.12 N/A (0.74) , (744) (18) 5,800 (3) Verizon Communications (VZ) , ,197 (16) 242, Alltel (AT) , ,129 (15) 14,889 (30) News Corp (NWS) N/A - N/A 25, , ,300 8 CenturyTel (CTL) ,448 (1) ,400 (7) Viacom (VIA) N/A - N/A 11, , , Mediacom Communications (MCCC) 9.00 N/A (1.13) , (125) 44 4,295 Telephone & Data Systems (TDS) , ,500 - AT&T (T) , , , NII Holdings (NIHD) , , Citizens Communications (CZN) ,126 (2) ,446 (11) RCN (RCNI) N/A (0.32) (11,856) 91 1,800 Time Warner Cable (TWC) , , ,700 6 Comcast (CMCSA) , , , Qwest Communications (Q) , ,383 (2) DirecTV (DTV) , , , Liberty Global (LBTYA) , ,500 (5) The above table lists selected financial metrics for Cablevision and many of its competitors in the telecommunications and entertainment industries. The list is sorted by Percent Change in Profit from 2005 to 2006, for which Cablevision ranks last. The company ranked just above it, Virgin Media, is a leading cable provider in the U.K., so it is not even a direct competitor to Cablevision. While it is not operating at the greatest loss on this list, its most recent annual change (234% decrease) is the most dramatic. Its Percent Change in Revenue from 2005 to 2006 was 15%, but a large interest cost on its enormous debt pushed it into the red in Short Position Thesis Points Unpredictable Management The Dolan family has gained notoriety in the cable television and entertainment industries for being unpredictable in their corporate strategies and decisions. A clear example exists during the auction for a then-bankrupt Adelphia in 2005, where Time Warner, Comcast, and Cablevision offered as much as $16 billion in cash. After Cablevision made an offer of $16.5 billion and saw Time Warner and Comcast offer for $17.6 billion, Cablevision quickly abandoned the auction and offered no comments or reasons for backing out to the financial press. Tradition Asiel analyst Jea-Hun Shim was not surprised to see Cablevision leave, contending that it is notorious for its M&A gamesmanship. Cablevision also has had issues with pleasing is customers over network carriage disputes. In 2002, Cablevision refused to carry YES, the official Yankees television network, which deprived New York City Yankee fans of games for the entire season (ESPN). Federal and state legislatures pressured the company to reach an agreement by the 2003 season.

4 The cable operator has also never carried the NFL Network, which deprived fans of watching at least one nationally-broadcasted NFL game per week of the season. In a stint with the NFL in December 2006, Cablevision fought to provide a free preview of the programming of the December 28 th Texas Bowl, while the NFL offered a free week of the NFL Sunday Ticket programming. Cablevision accepted the free week of programming, but in an unexplainable move, they refused to publicly promote the free preview or even include it on its listings. NFL Sunday Ticket has a contract agreement with DirecTV through the 2011 season, at which time Cablevision would like to carry the programming. In 2005 and 2006, the Dolan family attempted to take the core cable business private, but its most recent attempt was denied by board members in early Directors contended that the family s bid for $30 per share was too low a value to acquire the telecommunications segment and take the Rainbow segment public. In 2004 and 2005, when Mayor Michael Bloomberg was encouraging the construction of a new stadium in Manhattan s West Side, Cablevision provided funding for an advertisement campaign to prevent the stadium from being built. The New York Jets would have been the primary users, but Cablevision s block on this plan was an essential part of the city s failed bid for the 2012 Olympics. The Rainbow segment of Cablevision also created a satellite television provider, called VOOM, which boasted the greatest number of HD channels in In 2005, Cablevision board members, disputing with the Dolan family, ultimately decided to shut down the service in April 2005 (Associated Press). Charles Dolan ousted three board members in this dispute, which drew substantial public backlash. Limited Growth Expectation In 2006, pay-television subscribers increased overall, defying forecasts as MSOs added more than 2.28 million net new customers, compared to 2.1 million in These numbers reflect cable, satellite, and telephone customers combined. Share prices for these companies showed an up-trend by the end of 2006, but industry experts and Wall Street analysts agree that the market expansion will not be large or fast enough to warrant continued share price growth. Oppenheimer analyst Thomas Eagan predicts the total expansion in 2007 to be near 1.75 million, with the large majority of the growth pointing to satellite subscribers. Another theory that analysts (Reuters, S&P) suggest is the link between cable customers and the slowing housing market. Because of the dramatic decrease in homebuilder expansion, the typical popularity of cable television in large urban and suburban areas is also slowing. Since satellite reaches more customers across the nation, it can continue to grow faster while cable operators must wait for more housing developments to spring and lay more cable to those developments. The top 10 U.S. cable television operators increased their subscriber counts by only 200,000 in 2006, compared to losing 215,000 in 2005 (Reuters). The most likely cause for this recent increase is the growth of the triple-play market for consumers that look to subscribe to digital cable, high-speed internet, and digital voice as a package from the same MSO. Cable operators tend to grow at slower rates in general, because it derives most of its new business from selling its existing customers more services, such as digital phone and high-speed internet. In effect, the New York City metropolitan area is already saturated with Cablevision customers and is poised to switch from the long-time standard, Cablevision, to a more attractive alternative in

5 Verizon or AT&T or a satellite network that offers better programming and more services for the same price. Strength of Competition Direct competitors in the New York City metropolitan area include Comcast, RCN, and Time Warner. Of these cable television providers, Comcast and Time Warner are the strongest competitors and pose the greatest threat for market share. Each company has a much larger balance sheet and can effectively address the substantial amounts of debt that cable companies require in order to lay infrastructure to new locations. In addition, both are in the top four companies ranked in order of Percent Change in Profit from 2005 to 2006, which is due in large part to the increased demand for triple-play subscription packages. Comcast, in particular, has posted 27 consecutive quarters of cash flow growth of 10% or more, suggesting that its new ventures in subscription packages and HD programming are taking shape and poising it for an even stronger Telecommunications providers AT&T and Verizon are posing new threats to the standard U.S. cable operators, as they are busy installing infrastructures to offer similar triple-play packages that include high-quality digital cable television. Verizon s FiOS, its new broadband service, boasts highspeed internet speeds of up to 15 Mbps, which is double the speed of typical Comcast and Time Warner speeds. AT&T s U-verse, the brand name for its array of upcoming internet protocol (IP) services, also expects to pose a serious threat to Cablevision s New York City metropolitan market, offering the same triple-play services that Comcast and Verizon do, but over phone lines instead. Risks A recent technological innovation and popular product among pay television subscribers is the digital video recorder (DVR), which is a set-top box that customers place next to their televisions and record to a hard drive the shows that they watch. In March 2006, Cablevision announced its own version of a DVR service, except it will feature a unique functionality that has never been tested before by other DVR providers (TiVo, Comcast, etc.). Cablevision plans to store the recorded programming remotely on its own servers instead of on a hard drive in the customer s home. This announcement immediately yielded a lawsuit by CNN, TNT, Twentieth Century Fox, Universal Studios, Paramount Pictures, Disney, CBS, and NBC, who claimed that the network DVR would constitute copyright infringement for effectively rebroadcasting programming from those networks. Judge Denny Chin of the United States District Court, Southern District of New York, ruled in favor of the prosecuting networks. Cablevision is appealing that ruling, maintaining that this service would be no different from the original Betamax ruling in Sony Corp. v. Universal Studios in 1984, in which the decision allowed home users to record programming to a video cassette. If the appellate court overturns the first decision, this service will likely provide Cablevision a substantial growth in revenue, which could boost it away from its loss from Continuing Operations. Though the Dolan family has failed both in 2005 and 2007 to take the cable operator private and spin off Rainbow to a publicly traded company, Cablevision s enormous debt load limits the company s ability to withstand adverse business conditions or raise additional capital through debt or equity issuances for expanding its services. Time Warner has previously expressed interest in acquiring the company, though the Dolan family has previously ruled out selling the company (Wall Street Journal). Therefore, the financial press still mentions the attractiveness of Cablevision s lucrative New York City market and the possibilities of a deal in 2007 or 2008.

6 Value-Added Research For my research, I contacted: Michael Hopkins, Editor at MediaBiz.com Jeffrey Williams, Editor at Satellite Business News Todd Spangler, Editor at MultiChannel News Shirley Brady, Editor at Cable360.NET Glen Dickson, Editor at Broadcasting Cable.com Josh, HDTV Sales at Best Buy The overarching takeaways from my VAR contacts were that Verizon and AT&T s efforts to expand into the pay television market are turning heads and ramping expectations across the industry. Josh at Best Buy touted Verizon s FiOS as the best bet for choosing digital cable television, as soon as it is available. He mentioned that the overall price for their subscription package is cheaper than Comcast s comparable service, though an initial look at the prices showed that they were both priced at about $99. My ideas to look at the financial strengths of Cablevision against its competitors in all industries of cable, satellite, and entertainment came from Michael Hopkins and Todd Spangler. Shirley Brady suggested I look into the Dolan family s impact on the company over the years to find information supporting a short thesis. Looking at all of the VAR I have done for the three company pitches I have done, I agree that VAR is the most important way to start researching a company. Even after reading through the Yahoo Finance and WSJ Research sites, approaching an expert and asking them to explain their industry is the most efficient way to develop a clear view of the industry and the issues that a company is facing at any point in time. For other MII members doing company research, I would recommend starting with VAR before even reading many articles or financial statements on a company. It makes the process easier and more effective. Ideas for MII Looking at the presentations this semester and comparing them to last semester, I believe that MII has done a better job in adhering to its educational goals. Having guest speakers come is beneficial, but the real value in being a member of the club is doing research on a company and pitching it to the other members. As far as scheduling events, I would suggest that the first month (at least) of the semester should be dedicated to pitching stocks and the later months to hosting guest speakers. This would give new members a chance to learn about what the club does and develop a skill of asking good questions about investments so that they might find more value in hearing a guest speaker and engaging in their presentation. Another idea is to change the food selection at the meetings. Personally, I would very much appreciate having subs from, say, Jimmy John s, at least once or twice during the semester. Pizza is a great option because of its low cost, but I bet the members would appreciate a little variety.

7 I think organizing a short trip to New York City at some point during either the fall or spring semester would give members a great opportunity to see Wall Street and learn about life in the big city. There are plenty of UVa alumni and former MII managers/members working in the city, and I know many of them would be happy to host an event for us. I would expect students to have to arrange ways to pay for the trip on their own, but maybe MII could offer some sort of stipend for the travel and accommodation expenses. Even though the Commerce Career Services organizes the Investment Banking trip for third-years, this trip would provide a unique opportunity for members of all ages to see New York and visit not only investment banks, but also asset managers, hedge funds, private equity shops, or the floor of an exchange. Reserving the movie theater in Newcomb or another space for showing Wall Street or Boiler Room would be a good type of event for MII members to relax and get to know fellow members. Doing this during finals, possibly on the evening before a reading day, might be a good idea. A major task that MII could pursue is publishing a financial journal of sorts. I would see this publication as being released at the beginning of each school semester, in which MII members, McIntire students, or UVa faulty had contributed articles concerning macroeconomic trends and important observations upon the financial world. An official publication would set MII apart from other student organizations, both at UVa and around the country.