Cablevision's Credibility Gap Grows
Scott Moritz
12/20/05 - 03:30 PM EST
Updated from 2:48 p.m.
Wall Street's doing some serious wondering about the wild and wooly Dolans atop
Cablevision (CVC).
The company's disclosure of a violation in its loan agreements has turned the spotlight on a $266 million transaction benefiting the family led by Chairman Charles Dolan and his CEO son James.
The Bethpage, N.Y., cable shop said Monday that it had to cancel a planned $3 billion dividend and a $1 billion financing deal after finding it had breached a promise to bankers. With their 20% stake in the company, the Dolans would have pocketed about $600 million in the dividend payout.
On a conference call with analysts Monday, Cablevision executives attributed the violation to a "technical" error and said it wasn't related to "any underlying financial weakness." To show how minor the violation was, the company pointed to a misstatement of an $18 million loan from a supplier.
But to seasoned observers who have watched the company stumble at nearly every turn this year, the explanation came up short.
"The company disclosed one technical covenant breach that appears so small that it raised myriad questions among investors as to why the special dividend was canceled rather than just postponed," says Creditsights analyst Jake Newman in a report Tuesday.
"It doesn't make any sense," said one New York hedge fund manager. "You don't cancel a $3 billion dividend over an $18 million accounting error."
The company says it takes the violation seriously and is looking for other possible breaches. But skeptics say they are inclined to believe there is something more behind this latest blunder.
Which is why a big personal loan to the Dolan family has been the center of speculation this week.
In February 2000, the Dolan family trust received $266 million from Bear Stearns in a so-called forward purchase agreement covering 7.98 million shares of Cablevision. The agreement requires the Dolan family trust to provide the shares in three installments.
But the Dolan family hasn't turned over the shares, and Bear hasn't asked, the family's lawyer says. He says the deal has a collar that means the family won't be responsible for covering the stock's decline over the intervening years. At recent prices, the shares pledged under the Dolan forward sale are worth around $80 million less than what the family received from Bear Stearns.
Personal loans to industry fat cats were common during the freewheeling late '90s. Extending personal loans to executives became popular during the boom era as a way of staying in a company's good graces and firmly on the deal gravy train. Cablevision is a big client of Bear Stearns. It was only after the bust came that these arrangements started to be questioned.
Bear Stearns representatives declined to comment on the status of the forward sale. Bear reps and Cablevision both say the deal has no effect on Cablevision's current financial situation.
Asked on the conference call if the personal loan had any bearing on the breached credit agreement, CEO Jim Dolan replied with a terse "no."
Cablevision stock hit a low for the year Monday on word of the dividend-killing credit breach. The shares were down 9 cents to $23.06 at midday Tuesday.
Given Cablevision's failed venture into consumer electronics with The Wiz; the costly and jettisoned Voom satellite TV fiasco; the failed bid to take the company private; and now the broken dividend promise, investors aren't exactly enjoying the ride.
One analyst gave the company demerits for its sloppy management. In a research note Monday, Prudential Equity Group analyst Kathy Styponias said she was cutting her Cablevision discounted cash flow valuation by 25% "to reflect management's unpredictable nature."
"This latest news causes us to question the internal control structure and oversight functions at the company," Styponias writes in the report. Styponias has a neutral rating on the stock. Prudential Equity Group makes a market for Cablevision shares.
Investors like the company's solid cable properties and sustained subscriber growth, but some don't seem to trust the team that runs the business.
"At this point, they have no right to the benefit of the doubt," says the money manager.
