Cablevision Shares Soar On Merger Hopes, But Are They Realistic?

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Investors either love or hate Cablevision, but its fans are running the show today: Company shares touched a four-year high, and are up 7.6% in afternoon trading, after billionaire Patrick Drahi told the Wall Street Journal that his Luxembourg-based telecom company, Altice, has its eye on the Long Island-based cable operator and privately held Cox Communications. Also today, an analyst released a bullish report that described Cablevision as well positioned to be either a seller or a buyer as the industry consolidates.

Altice has a deal to buy Suddenlink, but came second to Charter in bidding for Time Warner Cable after Comcast scrapped its plan to buy the No, 2 cable company. Drahi told the Journal that he’s undaunted: “We’ll buy a second, a third and one day we’ll be able to say: ‘Hello Mr. Comcast!’ or ‘Hello, Mr. Charter!’ ”

Cablevision’s systems in the suburbs surrounding Manhattan could make it attractive. They “fill the hole in the doughnut in the NY metropolitan area” where TWC controls Manhattan, FBN Securities’ Robert Routh says today as he initiated coverage with a price target of $30.21 — suggesting a 21% rise from yesterday’s closing price of $24.85.

But there’s no consensus. Just two weeks ago MoffettNathanson Research’s Craig Moffett said Cablevision’s shares are only worth about $8, calling the company “all but unacquirable.”

In his counterargument, Routh notes that Wall Street already undervalues Cablevision by pricing the stock at about 7 times its cash flow. Compare that to the more than 10 times cash flow that Altice agreed to pay for Suddenlink — a much smaller company in “less valuable markets.”

What’s more, Liberty Media’s John Malone’s big investments in Charter Communications indicate his belief that “domestic cable is an area worth investing in presently.” Comcast’s failed effort to buy Time Warner Cable, and Charter’s current one to acquire TWC and Bright House Networks, “hint that more consolidation is on the way in the domestic cable space. This should bode well for all in the industry as a rising tide lifts all ships.”

Cablevision CEO Jim Dolan has made it clear he believes it makes sense to combine his systems with TWC’s Manhattan properties. And if Charter doesn’t want to buy Cablevision, then “there is a chance that [Dolan and his family] actually are buyers of cable” — for example if Charter decided to sell Manhattan to help reduce the amount of debt it’s assuming to buy TWC, Routh says.

The Dolans also could take Cablevision private. They’ve tried before and “there is a chance they may look to do this again as interest rates are still low enough that at the right price they could likely get such a deal done.”

But Moffett says it’s no slam dunk for the Dolans, who also control the New York Knicks.

Cablevision already has so many customers in its markets that it has little room to grow, and could shrink as it grapples with tough competition from Verizon’s FiOS.  As a result, “Cablevision isn’t just an outlier; it might as well operate in a different industry than its peers. …The industry’s worst footprint is also the one getting worse the fastest.”

What about the logic of combining systems in and around NYC? The benefits that would come from consolidating services “are undermined by the sheer size and density/congestion of the New York market,” Moffett says. And most of the benefits “largely stem from Time Warner Cable’s presence in Manhattan, not from Cablevision’s presence in Manhasset.”

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