Cablevision Won't Get Rid of James Dolan That Easy

NEW YORK ( TheStreet) -- On news of the abrupt departure of Cablevision System's ( CVC) chief operating operator Tom Rutledge, speculation swirled that the company could be up for sale with the likes of Verizon ( VZ), Time Warner Cable ( TWC) or even Comcast ( CMCSA) waiting in the wings to snap it up.

But Rutledge's resignation won't spark an immediate sale while the current chief executive and chairman James L. Dolan - part of the company's founding family and one of its largest shareholders -- remains in power.

That's because the Dolan's enjoy running Cablevision, despite what some see as the family's lack of ability to do so for the enjoyment of customers or the profit of shareholders.

Starting in 2005, the family embarked on multiple $10 billion efforts to take the company private in debt-fueled leveraged buyout deals. However, after the recession and a slow growth outlook for Cablevision's voice, video and broadband packages - in addition to a Verizon's FiOS expansion in the New York area-- the Dolan's have been more prone to let go of pieces of their media empire rather than the entire company.

In 2010, Cablevision spun stakes in Madison Square Garden ( MSG) and this year the company spun its ownership of AMC Networks ( AMCX), both in billion-dollar plus IPO's done at opportunistic prices. MSG is up nearly 50% to its IPO price while AMCX is up 2%.

It's unclear if Rutledge's abrupt departure would get the Dolan's to consider completely selling out, especially since the company's shares are in the basement. "We think that the 41% decline year-to-date in the stock price makes it a sub-optimal time to sell the company from the perspective of the Dolan family, which could make it difficult to reach an agreement on price, particularly given potential buyers' concern over the organic growth potential of CVC's business," writes Bryan Kraft of Evercore Partners.

On news of Rutledge's resignation, Cablevision shares slumped nearly 15%, putting year-to-date declines of over 64% for 2011. For a family-run company that timed previous spins in 2010 and 2011 opportunistically, they may not be excited to sell at its current deflated valuation.

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Potential buyers may also not be too excited about Cablevision even if it may be opportunistically priced. Cablevision's growing Optimum online business currently has an industry lagging revenue per user and its New York-area "triple play" package market share lead is being challenged by Verizon.

"We see no near-term or medium-term catalyst that justifies a premium valuation," writes Jessica Reif Cohen of Bank of America Merrill Lynch. Overall, a bid by a logical acquirer such as Time Warner Cable would be contingent on a belief that that a takeover could create cost synergies that would outweigh slower revenue growth and market share losses, not to mention a premium bid to the company's present share price.

" Rutledge's departure is not necessarily synonymous with any near-term Time Warner Cable bid or private equity deal, and may detract from topping the price given Rutledge's aura," writes Matthew Harrigan of Wunderlich Securities.

Without synergies, its unlikely that industry-leader Comcast will be particularly interested in Cablevision's unstable New York-area foothold.

In addition, competition issues holding up over many blockbuster mergers in 2011 may make potential bidders more wary of antitrust authorities, potentially precluding bids from some large and emerging "triple play" package players.

Nevertheless, fostering competition against Comcast may even predispose regulators to a combination with an equally large player like Verizon or Time Warner Cable. However, Verizon is already a dominant player in the New York metro market where it's FiOS packages are challenging Cablevision's market share and overlap with 40% of subscribers. Added regional concentration with a Verizon tie-up and lessened competition would likely be unappealing to antitrust regulators.

For national wireless cellular carriers who also offer cable and broadband services a different set of issues emerge. Any potential non-New York centric national carrier interest for cable and broadband services from AT&T ( T) or T-Mobile also is unlikely. Both are currently locked in a heated antitrust battle with the Department of Justice on their $39 billion merger.

However, in the long term, a Time Warner Cable bid seems most likely if the Dolans were to throw in the towel. Time Warner Cable currently operates in some of the New York and New Jersey areas where Cablevision has a small presence. Cablevision's presence in New York City, Long Island and Connecticut would be attractive to draw out savings on expenses like marketing and infrastructure.

"Despite market concentration with Time Warner Cable's Manhattan and Queens plant, the regulators would not block a deal given the considerable continued size gap to Comcast and more competitive video market and high service data markets," says Harrigan of Wunderlich Securities in an emailed note.

Ultimately, it doesn't seem likely that in the near-term, a strategic acquirer would come in for Cablevision -- especially considering the Dolan's past and the only handful of potential bidders. Price, competitive pressures and antitrust concerns may make a Cablevision sale unlikely in the near term.

-- Written by Antoine Gara in New York