Cablevision -- Time to Buy?

Well, those crazy Dolans are at it again -- after months of negotiations, they today withdrew their offer to take Cablevision (CVC) private, the media company in which the Dolan family still holds a 20% equity stake/71% of voting shares. The stock promptly proceeded to drop as much as 14% earlier today, and is still down at around $24.25. Considering that, a few months ago, most analysts valued the company at $34-$35 and the Dolans themselves were negotiating about an offer of about $2-$3 below that, CVC might look like a tasty morsel at these levels. The company was valued as a stand-alone entity at $26, even before the Dolans bid for it, and that is probably already including a decent 10%-15% discount for the disproportionate shareholder power that the Dolan family wields with this stock.

Just because an offer is withdrawn and the shares fall, doesn't mean that there won't be another offer. The assets of this media company are definitely worth north of $30 (in fact, the bond market seems to be even more bullish than the equity market about those); how much north of $30 is open to debate and would depend on how deep the buyer's pockets are. Investors who didn't get on the gravy train back in June might consider this to be a longer-term buying opportunity at knock-down prices. I would certainly look to buy a few shares down here around the $24 level, the downside risk is minimum, despite the dreadful performance of the cable operators in the last few months. People who are selling CVC today are people who bought into the Dolan bid 4-5 months ago and are stopping themselves out -- obviously disappointed!! Value investors who don't own the stock might well be looking to load up at these levels. The company has a dominant position in the NYC market where people on average pay about $100 for cable services. CVC has some very juicy assets, which cannot remain undervalued for long. The Dolans might be back in a few months, who knows, if the stock remains depressed.

For investors with a greater appetite for risk, I would also recommend buying some CVC Jun06 27.5 calls @ 1.40 vs. stock @ $ 24.25 [around 30 vol]. While the volatility of this option may look expensive, especially if the stock quiets down now that the Dolans have withdrawn, -- as I pointed out, the saga might be far from over and another decent bid might soon materialize. The option that I described is a good way to lever returns for a potential bid in the high $20s to low $30s. I don't think the special dividend, proposed by the Dolans as an alternative to their offer, is going to fly, since the company would need to borrow money to put that cash into the Dolans' pockets -- something which the rest of the shareholder base might be strongly averse to.

Hence, my recommendation is to either buy a few CVC shares outright, right here @ $24.25, and look to add some more below $24, or lever up using calls with 9-months maturity, plenty of time for the continuation of the CVC saga to unfold. Last but not least, given the awful performance of the cable operators in the last few months (part and parsel of the consumer discretionary sector having a miserable few weeks), I would expect those media stocks to rally into 2005 year end and early next year, since they are starting to look cheap on a variety of fundamental and technical metrics. Comcast (CMCSK), boring as it is, might be a good buy at around $27.50. CVC is obviously a lot more risky of an investment, but the potential payoff for it could also be a lot greater, given that the company remains a takeover target -- its knock-down price of $24 today might not remain at this level for long.