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It's time to pull the plug on Cablevision
You don't have to dig too deep to realize Cablevision is a ticking debt-bomb. Among its troubles: a negative net worth, negative cash flow and signs it probably overpaid for past acquisitions.
By Jon D. Markman
Its a wonder that some large companies have any public shareholders at all anymore.
Not just the walking dead, like Nortel Networks (NT, news, msgs) and Lucent Technologies (LU, news, msgs), whose penny stocks are bound for the graveyard of tech history. But ticking debt-bombs such as Cablevision Systems (CVC, news, msgs), which appear on the surface to own thriving businesses yet could instead be the poster child for much that is amiss in stocks today.
Cablevision is a cable television and entertainment conglomerate whose shares were essentially flat from the start of the last decade through 1997 at a split-adjusted price of around $8, as bulls and bears battled to a tie over its prospects for paying down the mountain of debt it accumulated to build its original system. Then from May 1997 to February 2001, through the tech-stock bubble and well beyond, early bulls were rewarded for their patience as false optimism for a lucrative future helped the stock double and double and double again until it hit a peak of $91.50.
The provider of cable TV to 3 million households in the New York metropolitan area used its increasingly valuable shares and several issuances of debt as currency, buying virtually every valuable media property a monomaniacal mogul could see from the penthouse of a Times Square hotel room, including Madison Square Garden, the NBAs New York Knicks, the NHLs New York Rangers, Radio City Music Hall, The Wiz chain of stores, the Clearview Cinemas chain of urban movie theaters and a popcorn-bowl full of cable movie channels, including Bravo and American Movie Classics.
This list of assets looked impressive on paper, but the company never found the magic thread to stitch them all together in a way that added value and they began to collapse under the crushing weight of billions in long-term debt. Shares fell all the way to $4.80 in August this year amid the shameful collapse of another cable-industry jackdaw, Adelphia Communications (ADELQ, news, msgs). But then they proceeded to more than double over the next few weeks, as investors swelled with faith that executives would reward their patience again by shedding the companys money-losing movie theaters, cellular licenses and, improbably, even its namesake cable business. On Monday, rumors surfaced that Cablevision would sell its successful Bravo channel to NBC for up to $1 billion in General Electric (GE, news, msgs) shares.
The real numbers, please
Will that help? At this juncture, rational investors should stop and wonder whether the faith that was so amply rewarded in 1997 is still merited. Considering that the company has a negative net worth, and even friendly analysts on Wall Street believe it will be $300 million short of cash in 2003 and $600 million short in 2004, it is hard to understand why shares are not trading at prices closer to 95 cents than $9.50 these days.
Lets dig a little deeper. After a decade of steady losses and rising debt, Cablevision claimed in 2000 and 2001 to have finally earned some money -- $229 million in 2000 and $1 billion in 2001. Yee-haw. But in the last five quarters it has returned to its old ways, losing money faster than a Rockette can kick and witnessing an incredible deterioration in free cash flow.
Why the reversion? According to analyses of its quarterly financial statements by me and other independent researchers, it seems that even the profits it did report in 2000-2001 were pumped up with non-operating items and aggressive accounting. After adjusting for gains from those non-operating items -- mostly investments and cable system sales -- core earnings at the company were far lower than reported net income in both years. And the main reason that reported net income has turned negative again is that those non-operating items have disappeared.
Even bulls who believe that cable-system sales should be included in net income should examine the aggressive way that Cablevision accounted for them. In January 2001, according to published reports, Cablevision swapped its cable television systems in Boston and eastern Massachusetts with AT&T for cable television systems in northern New York suburbs plus 44.2 million shares of AT&T (T, news, msgs) stock valued at $893 million and $290 million cash. The concern: Not only did the swap represent non-recurring income that boosted revenue from an unprofitable cable operation, but it also represented what industry accountants normally consider an exchange of similar assets. That is, two cable companies essentially traded a system in one geographic region for a system in another geographic region. According to industry experts, recognizing gains on the exchange of similar cable assets is generally disallowed by accounting rules. Its not dissimilar to the capacity swaps that have gotten the telecommunications industry into so much trouble.
For more messiness, check out the cash-flow statements published in the companys latest 10-Qs and 10-K. Cablevision has recorded negative free cash flow for the past four years, and cash flow has been persistently less than net income all that time -- a classic sign of poor earnings quality. Moreover, free-cash flow has worsened substantially over the past four years, sinking from a negative $479 million in 1998 to a negative $714 million, negative $1.3 billion and negative $1.6 billion in succeeding years. Cash flow would have been even worse if not for the tax benefit of employee stock-option exercises.
The horror show at Cablevision can be most clearly observed, however, with a glance at its book value. Thats the total shareholders equity line on the balance sheet. It is highly negative, as liabilities on its balance sheet amounted to 115% of total assets through June 30, 2002. Bad as that is, there is little doubt that the companys assets are actually overstated, given that it is carrying a high level of intangibles -- about $1.5 billion -- that will probably have to be written off as impaired under new accounting rules. (A high level of intangibles, as I explained in this column, is a sign that a company significantly overpaid for assets in the past.) Although the $7 billion in long-term debt on the balance sheet is massive enough to merit concern, financial statements suggest that off-balance-sheet obligations -- including operating leases, letters of credit and guarantees -- amount to as much as $6.6 billion more.
Where's the outrage?
Why isnt the board of directors raising a stink about the companys lousy performance? Probably because it is in managements back pocket and is in part responsible for this debacle. At least six of the 12 board members are either employees of the company or its affiliates. James Dolan, president and chief executive, sits on the board along with one brother who is executive vice president, Tom Dolan, another brother, Patrick Dolan, who is president of an affiliated company, and their father, company Chairman Charles Dolan. The foursome exercise considerable influence over the board as its founding patriarchs, but its not as if they have ever gotten a challenge. In the last proxy, shareholders were encouraged to return the following old friends to the board: Charles Ferris, 69, director since 1985; Richard Hochman, 56, director since 1985; Victor Oristano, 85, director since 1985; Vincent Tese, 59, director since 1996; and William Bell, 62, director since 1985; Robert Lemle, 49, director since 1988; Sheila Mahony, 60, director since 1988; John Tatta, 82, director since 1985. Thats not a board, its a family funeral cortege.
In summary, Cablevision basically lost money every year of its existence, it is staggering under a colossal debt load, it has a negative net worth, its mountain of intangibles is likely to be written down, its cash flow is negative and deteriorating and its board is a showcase for the evils of crony capitalism.
While one brokerage analyst estimates the companys break-up value at $18 a share, that seems like a pipe dream considering the level of debt that goes with it. My own guess is that shares will drift back to the $5 area before long, and then completely out of sight. It will take a bankruptcy judge, not a white knight, to sort out and distribute the pieces of this monster.
Fine Print
It didnt take long for many of the PlungeWatch candidates that I mentioned in my Sept. 4 column (How to profit from a stock thats plunging) to fulfill their unfortunate destiny. HealthSouth (HRC, news, msgs), which sank 25% on Aug. 28 to $5.05 has gone on to sink by more than 20% three more times, and now rests at $3.05. The March 2003 $5 puts (.HRCOA) recommended at $1.35 are now going for $2.35. Likewise, the March 2003 $12.50 puts for Semtech (.QTUOP), which were $3.20 asked on Aug. 29, are now going for $4.30. The HealthSouth story is a classic of the PlungeWatch genre as it is under investigation by federal authorities over allegations of cheating on Medicare reimbursements. This is the sort of long-term trouble that can make the strategy effective. Appearances note: I will be speaking at the monthly meeting of the Atlanta chapter of the American Association of Individual Investors on Oct. 23. I will be at the Money Show in New York on Oct. 24 and 25, and at MoneyWorld 2003 in Fort Lauderdale, Fla., on Jan. 10 and 11, 2003.
While Jon cannot provide personalized investment advice or recommendations, he invites you to send comments on his column to jmarkman@microsoft.com.
At the time of publication, Jon Markman owned no stocks mentioned in this column.
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