Dolans Seek Private Life

Cablevision Systems Chairman Chuck Dolan has found a startling way to put an end to the Dolan Discount, the markdown on Cablevision’s stock price due to recent company controversies: He is using it to his advantage.

If investors are going to mark Cablevision’s stock down for fear of more company controversies, then he doesn’t really need their support. Chuck can buy them out on the cheap and keep any of the upside of Cable­vision’s value in the family.

Last week, I wrote that, even though Cablevision Systems is the best-performing in the industry, it trades at 20%-25% less than its cable-operator peers. Many investors have avoided the stock out of anxiety over top management’s inconsistent moves, like the money-burning Voom satellite venture and its last-minute $16.5 billion bid for Adelphia.

Dolan’s proposed buyout is, in some ways, brilliant: He grabs just the lucrative cable systems. Outside investors get stuck with the slow-growing Rainbow Media division. His son, Cablevision CEO Jim Dolan, goes from running everything to running the Rainbow’s networks and sports teams.

But the deal is also bizarre. Dolan’s advisers have structured it in a way that will force Cablevision and its shareholders to pay hundreds of millions of dollars in taxes. Rainbow is slated to be spun off to shareholders. In particular, the structure of the spinoff of the Rainbow cable networks and sports teams is unusual. Typically, companies make sure that spinoffs are tax free to shareholders. But the Dolans’ advisers have structured this one so that it is taxed twice, analysts say; both Cablevision and shareholders will get a tax bill for hundreds of millions of dollars from the spin.

Usually, unneeded taxes like these would be an abomination, even on a deal this large. But I expect that a more tax-efficient structure might leave Dolan vulnerable to attacks from rival bidders, notably Time Warner and Comcast. Or perhaps Chuck Dolan wants so much to be rid of interference from pesky board members that he doesn’t care about the taxes.

The Dolans control 21% of Cablevision’s equity, so they need that much less cash to complete the transaction. And their ownership of Cablevision’s supervoting Class B stock gives them 71% of its shareholder votes. Chuck Dolan can’t simply ram through a deal on any terms, but he can refuse to sell the company to rival bidders who will doubtless pop up.

The bid values all of Cablevision at $18.2 billion. Subtract the company’s debt, and the equity is priced at $9.2 billion. Buying out public shareholders will cost $7.9 billion. But spinning Rainbow back cuts that by 37%.

So at the end of the day, Chuck Dolan proposes securing complete control of Cablevision’s cable properties. He will pay outside shareholders $5 billion in cash.

So outside investors are to receive $33.50 per share: $21 in cash and a share of Rainbow allegedly worth $12.50. The Dolan family will then own 100% of the systems. But it will also keep 20% of publicly traded Rainbow.

Dolan’s announcement touts how the deal gives shareholders a 25% premium over recent trading prices. Cablevision’s stock jumped around 20% on the news, settling in around $32.25.

Looked at in a certain way, Dolan contends, it is even a 46% premium. I look at it differently. As recently as March, Cable­vision’s shares traded at $30.47. So even if you accept the claimed $33.50 buyout price, investors are getting just a 10% premium.

There is another good reason for the buyout: absolute control. Dolan discovered during the Voom fight that, even with a majority of the shareholder votes, the board of directors’ accountability to shareholders means that he doesn’t truly control the company. Even at age 78—when other billionaires are focused on estate planning—Chuck Dolan wants to make a mark. He was willing to incur $1.3 billion in losses for a high-definition satellite-TV startup.

Voom would add one last great venture to his legacy. But Chuck Dolan was smacked down by the board. Now, for a few billion dollars in loans, he can take his ball and go home.

The buyout dovetails with the view of longtime Dolan friend and fellow cable pioneer John Malone. Dolan purged the three members of the board under his control and recruited Malone and two other new allies.

“Chuck’s problem is, he’s a public company and he really should be a private company,” Malone told B&C in April. “To be willing to play the cards as hard as Chuck plays the cards, you almost have to be private. It is hard to find public directors who will support the management in a transaction they perceive to be as risky as Voom. If you’re going to be exceptionally successful, you need an exceptional leader who has got to be a risk-taker, and he needs a board of directors who will support him.”

E-mail comments to jhiggins@reedbusiness.com