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Ugly at Cablevision

The abrupt and unexpected resignation of Cablevision (CVC) COO Tom Rutledge is one of the more shocking developments in recent years in the media space.  Rutledge is arguably the most highly regarded executive in the cable industry.  Until the last few quarters, CVC’s results clearly supported Rutledge’s superior management skills.  Coming on the heels of the departure of the #2 executive at CVC, this news has led to across the board downgrades of CVC today inlcuding a sale recommendation from Bank of America Merrill Lynch analyst Jessica Reif Cohen, who lowered her target to $10.

CVC trades at a slight premium EBITDA mulitple to other cable stocks.  This has been due in part to Mr. Rutledge but also to the high premium CVC’s assets would get if the Dolan family ever decided to put the cable assets up for sale.  The press is already speculating that the Rutledge departure could lead to the sale of the company.  Analysts acknowledge the value but feel a sale is not in the cards in the near-term.  Sale rumors have been ongoing at CVC for many years.

CVC trades at about 6 times EBITDA vs. 5 times for most of its peers.  As a highly leveraged entity (debt to EBITA about 4.5 times), shares of CVC are very sensitive to changes in the EBITDA multiple.  If CVC were to go to a discount to the peer group the stock could easily trade under $10.  However, at that price, the stock would be 50-100% undervalued in a takeover.  As a result I think $10 is the floor assuming the company stabilizes its results and 2012 comes in flattish for subscribers and EBITDA.

The big risk is that the recent subscriber losses and EBITDA declines are the start of a trend as the company faces aggressive competition from Verizon (VZ) in a mature business.  For the short-term, investors will be focused on this possibility as the company is leaderless.  Under Rutledge, CVC had done a remakable job of holding off VZ and sustaining a growth path.  Before his resignation, the street would have given the company the benefit of the doubt that recent weak operating results would be reversed.  This is no longer going to be the case.

Longs should only stick around if they a very strong stomach.  I am long CVC but fortunately it is a less than a 1% position heading into today.  The shares are at a large capital gain so I will hold until January and reassess but I am expecting the stock to drift lower than the pre-market level of $12.50 in the next few weeks.

Disclosure:  CVC is a net long position in the Entermedia Funds.  The Entermedia Funds are long/short equity hedge funds focused on media, entertainment, communications, and related technologies. Steve is co-portfolio manager of Entermedia, owns a stake in Entermedia’s investment management company, and has personal monies invested in the Funds.


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