Time to Pull the Plug on Cablevision
By Jon D. Markman
Managing Editor, MSN MoneyCentral
09/26/2002 10:16 AM EDT
thestreet.com
It's a wonder that some large companies have any public shareholders at all anymore.
It isn't only the walking dead, like Nortel Networks (NT:NYSE - news - commentary - research - analysis) and Lucent Technologies (LU:NYSE - news - commentary - research - analysis), whose penny stocks are bound for the graveyard of tech history. Ticking debt bombs, such as Cablevision Systems (CVC:NYSE - news - commentary - research - analysis), which appear on the surface to own thriving businesses, could instead be poster children 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. This 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 NBA's New York Knicks and the NHL's New York Rangers. Also include 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. They began collapsing under the crushing weight of billions in long-term debt. Shares fell all the way to $4.80 in August amid the shameful collapse of another cable-industry jackdaw, Adelphia Communications.
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 company's 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:NYSE - news - commentary - research - analysis) 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.
Let's 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 nonoperating items and aggressive accounting.
After adjusting for gains from those nonoperating 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 nonoperating 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 (T:NYSE - news - commentary - research - analysis) for cable television systems in northern New York suburbs plus 44.2 million shares of AT&T stock valued at $893 million and $290 million cash.
Odd Swap
The concern: Not only did the swap represent nonrecurring 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. It's 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 company's 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. That's 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 company's 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 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 isn't the board of directors raising a stink about the company's lousy performance? Probably because it is in management's 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 it's 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; William Bell, 62, director since 1985; Robert Lemle, 49, director since 1988; Sheila Mahony, 60, director since 1988; and John Tatta, 82, director since 1985. That's not a board, it's a family funeral cortege.
In summary, Cablevision basically lost money every year of its existence, is staggering under a colossal debt load, has a negative net worth, a mountain of intangibles likely to be written down, negative and deteriorating cash flow, and a board that's a showcase for the evils of crony capitalism.
While one brokerage analyst estimates the company's breakup 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. |
