At current prices, the Dolan family has several choices.
First, the Dolan's can apply the $600 million in annual free cash flow directly toward stock buybacks, reducing the share count by nearly 15% every year.
Second, they could take the company private themselves (as they've tried to do before). Cablevision's stock is worth about $4.2 billion and its debt load is about $10.3 billion, adding up to an enterprise value of $14.4 billion. Let's suppose the company was offered to be taken private for $17 billion, implying an equity valuation of $6.7 billion (17 - 10.3 = 6.7).
If this math is correct, then investors would be looking at a 61% premium to the current share price. Don't scoff. This is target is less than what Cablevision was worth early in 2011.
The third option:
Time Warner Cable
(TWC - Get Report)
or another such entity could also offer a similar price and pull off an accretive deal.
Cablevision has the industry's best demographics, due to the relative affluence of its Long Island, New York, New York City and New Jersey customer base. Time Warner and others have long coveted that footprint and the $150 monthly bills that this demographic engenders.
What are the odds the Dolan family will put the company on the block? "The sale of Cablevision, in some respects, is both natural and perhaps, inevitable. We may only be arguing about timing," notes Smith Barney's Jessica Reif Cohen. She adds that shares should trade up to $21, even without a sale, as that translates into a 10% free cash flow yield where its peers trade.
Risks to Consider: Further economic weakness in 2012 may lead more consumers to "cut the cord," which would reduce Cablevision's customer base and substantial free cash flow.
Action to take: Buyout or not, this is a cheap stock when you measure the market value against the company's impressive free cash flow. The Dolan family may simply stay the course and pay off debt while buying back stock. Even if this happens, Cablevision's enterprise value would steadily fall, making the highly-prized customer base an even more undervalued asset. If we apply Smith Barney's $21 target to Cablevision, then this works out to be about 40% upside.
Disclosure: Neither D. Sterman nor StreetAuthority, LLC hold positions in any securities mentioned in this article.
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