WASHINGTON — Cablevision Systems Corp.’s surprise decision to spinoff its direct-broadcast satellite operations into a separate company could prove to be a double-edged sword for the U.S. cable TV company, financial analysts said.
While the spinoff plan announced June 2 would allow Cablevision to ultimately remove the costly satellite television venture from its books, the company intends first to plow hundreds of millions of dollars into the new company to give it a running start.
Those expenses are likely to put pressure on Cablevision’s overall financial picture during 2003, degrading its overall creditworthiness and raising the prospect that the firm could find it more costly to borrow money, according to a June 2 advisory from debt-rating agency Standard & Poor’s of New York.
Cablevision of Bethpage, N.Y., announced June 2 that it would spinoff its direct-broadcast satellite business by the end of the year, pending regulatory and final company board approval, and invest a total of up to $564 million in the venture by the end of 2003. The new, publicly traded company also will include Cablevision’s Clearview Cinemas movie theater chain.
Shares in the spinoff will be distributed to Cablevision’s shareholders. The only Cablevision official with a role in the new firm will be Chairman Charles Dolan, who will have the same title at the spinoff, according to a Cablevision statement.
Cablevision plans to give the new company about $450 million in cash when it begins operations. Cablevision also said it plans to spend another $114 million on developing its satellite TV operations during 2003, a figure that does not include the $80 million Cablevision said in a recent regulatory filing it expects to spend on satellite launch costs this year.
These amounts are in addition to about $321 million Cablevision has dedicated to the satellite TV venture since the beginning of 2001, an industry source said.
When all the investments are complete, Cablevision will have spent about $900 million on the satellite TV venture, according to New York-based Moody’s Investors Service, another corporate credit agency.
Kim Kerns, a Cablevision spokeswoman, declined to discuss the spinoff or its implications for Cablevision, beyond what is contained in the June 2 press release the company issued announcing the spin-off plan.
According to that statement, all of the funds Cablevision plans to dedicate to the satellite business and creating the spinoff will be funded in 2003. In addition, Cablevision’s previously stated goal of achieving a free cash-flow position in 2004 will not be affected by the spinoff plan, the statement said.
Catherine Cosentino, rating analyst for Standard & Poor’s, said her firm has long viewed Cablevision’s foray into the satellite business as a drag on the company. Given that the agency now has to factor in the $564 million in investments Cablevision disclosed in announcing the spinoff, Standard & Poor’s is maintaining its negative credit rating for the company, Cosentino said in an interview.
"This is a trade-off in our view, because their financial profile is weakened because of the new requirements, but Cablevision’s long-term business profile is improved," she said.
Moody’s issued a statement June 3 that said Cablevision has taken steps to spend more money on its satellite business in 2003 despite saying previously that it had no such intentions. Moreover, Cablevision had directly indicated to Moody’s that it would not further tie up its balance sheet to pay for the satellite venture, yet now has decided to add the latest investments in the satellite business to its books, the statement said.
"While the spinoff indeed takes high-risk assets off-balance sheet, the significant incremental on-balance sheet investment had not previously been factored into our ratings," Moody’s said. "Moody’s also believes that the spinoff demonstrates at least a partial reversal of [Cablevision’s strategy], and a seemingly renewed willingness to use financial flexibility created by Cablevision’s core cable business for non-core investments which require capital and provide little prospect for positive near-term returns."
Nevertheless, Moody’s said that, overall, Cablevison’s financial outlook remains relatively strong because its core operations are stable and officials have moved to eliminate non-core or money-losing businesses.
Even as Cablevision brings some level of certainty to the total cost of its satellite TV business and lays out details about how it will fund the investment in the months to come, the planned satellite services remains largely a mystery.
Cablevision officials have said little about their plans for the direct-broadcast satellite venture and still are not ready to discuss details of the business, said Kerns, the Cablevision spokeswoman.
According to the June 2 statement announcing the spinoff, the company’s as-yet unlaunched satellite is expected to carry about 100 high- and standard-definition TV channels to viewers across most of the United States.
Cablevision plans to launch its first satellite, the Lockheed Martin-built Rainbow-1, in July on an Atlas 5 rocket and remains committed to meeting a mandate from the U.S. Federal Communications Commission that service begin by the end of the year, Kerns said in an interview.
Cablevision’s satellite business will have to contend with DirecTV Inc. of El Segundo, Calif., and EchoStar Communications Corp. of Littleton, Colo., which have more than 20 million satellite TV subscribers between them.
