Why Cablevision going private may sound right

Let’s get the facts straight first because this deal about taking Cablevision private has lots of interesting aspects. Cablevision Systems Corp.'s founding family has convinced the cable company's board to accept its $10.6 billion privatization offer, but first has to convince a majority of the non-family investors that their latest offer of $36.26 a share fairly values the company. Some investors already are saying they plan to vote against the deal. Of course, the valuation dispute comes at a time when Wall Street is becoming increasingly bullish on cable companies, which have been pulling ahead of competitors by selling bundles of phone, TV and high speed Internet services.

Now, let’s try to see the strategy behind the deal. Why the Dolan’s family would put $2Billion of their own money and raise more than $8Billion in debt to buyout their own company? There has to be a compelling reason and undoubtedly there is one. From a financial perspective the answer is free cash flow. Even though cable providers face new competition as phone companies roll out TV services and video migrates to the Internet, much of the heavy investment of the past decade, used to launch networks with new products such as high-speed Internet hookups, is coming to an end.

In the past, investors wanted operators to generate cash flow that could be used to buy back shares or pay dividends. But now, the decline in its capital spending has turned Cablevision into a cash-generating machine capable of throwing off hundreds of millions of dollars a year. Cablevision’s network is way ahead of Comcast and Time Warner Inc and is already prepared to offer all its customers a bundled package of services, including digital TV, phone and high-speed Internet. That means they will start generating free cash flow long before their competitors and that is what investors, both public and private, want to see. But that ability to generate huge amounts of cash will also make them desirable targets unless their stock prices become really expensive. We’ve already seen some examples, such the other two big cable companies, Cox Communications Inc. and Insight Communications, which recently have gone private following the same rationale.

Of course, there is the flip side of the coin. Even though Cablevision is very well positioned moving into the coming years, it is also one of the most vulnerable to increased competition. However, this potential lost revenue should not affect Cablevision as savings from reduced capital expenses would be really important. On the other hand, there is no certainty that cable networks and their infrastructure will remain updated for ever. In reality, it is the opposite. With the amount of development and evolution that Video on demand and IPTV will generate, cable operators would have to continue to heavily invest in capital expenditures, but that is another round of discussions. More to come on this for sure.