Fitch Improves Cablevision Rating Despite Spree

Fitch Ratings Firms outlook to stable from negative as Cablevision commits $850M to MSG rehab, Wi-Fi network.

By Robert Marich -- Broadcasting & Cable, 7/3/2008 9:42:00 AM

Cablevision Systems will invest $850 million to renovate Madison Square Garden and build out its Wi-Fi network, which is an overlay to its fixed wire service, corporate-credit-evaluation service Fitch Ratings Service said Wednesday, as it also firmed the New York-area cable-system operator’s outlook to stable from negative.

The sunnier outlook comes despite Cablevision spending $496 million to buy Sundance Channel through its Rainbow Media Holdings and forking over $650 million to acquire 97% of suburban daily newspaper Newsday.

Also, last year, shareholders rejected an offer by the Dolan family, the insiders running the company, to take Cablevision private. Management responded by going on an acquisition and building spree, taking an entrepreneurlike approach rather than simply being cautious and avoiding big outlays.

Cablevision -- which has 3.125 million subscribers and dominates the New York area, with annual revenue of about $6.8 billion -- is heavily leveraged, carrying various classes of debt that totaled $11.6 billion as of March 31, which Fitch rated. Of this, $2.3 billion matures before the end of 2009 and will have to be refinanced, although how is not clear. While noting that there’s a crisis in the credit markets, Fitch said it is not worried that Cablevision can refinance its maturing debt because it has strong relationships with lenders after years of being a good borrower.

Cablevision’s basic subscribers average the highest-spending of all large cable operators in the nation and are clustered in what enables benefits from mass scale, Fitch believes. But Cablevision subscribers will decline, although still be highly profitable, Fitch forecast.

The Wi-Fi mesh network, which will offer free local broadband to fixed-wire customers at no additional cost to consumers, “will certainly pressure near-term free cash flow generation,” Fitch said. It’ll extend cable into the wireless arena and, thus, expand the existing triple play of video, voice and broadband to a quadruple bundle.

Cablevision surprised analysts by revealing the Wi-Fi plan in a recent earnings call. “From Fitch's perspective, the Wi-Fi service is a defensive strategy aimed at retaining customers in light of increasing competitive pressures, principally from Verizon Communications,” the ratings service said. “The Wi-Fi network will be capable of producing speeds of up to 1.5 mbps [megabits per second], which is comparable to current wireless-data-network speeds. However, the service will have limited applications primarily due to the lack of mobility.”

Verizon recently filed to offer video services in New York, a Cablevision stronghold, to which Fitch responded that competitive pressures are part of the landscape.