UPDATE: Cablevision's Deal Interest Revives 'Dolan Discount'

Cablevision Systems Corp.'s (CVC) interest in a possible billion-dollar deal to buy Bresnan Communications, a privately held cable operator in the Rocky Mountain region, has investors worrying that the "Dolan Discount" has returned.

Though shares of Cablevision were recently up 2.9% to $22.80 in early Thursday trading amid a broader market rally, they dropped 5.6% on Wednesday as news of the company's bid for Bresnan emerged.

That decline could be a resurgence of a drag on Cablevision's stock price known as the "Dolan Discount," which stems from the reputation of its controlling shareholders, the family of Chief Executive Jim Dolan, using the company's strong cash flows for acquisitions that don't benefit shareholders.

"Shareholders are concerned that [Cablevision] is about to expand its cable presence beyond its core" markets in the tri-state New York area, BTIG analyst Richard Greenfield said in a blog post.

Acquisitions have a bad name in media and entertainment, where observers have drawn connections between the sector's subpar investment returns over the years and the industry's penchant for big deals that get hyped as transformational only to result in costly write-downs.

Shareholders in media have become more demanding of direct returns of cash through measures such as dividends and share buybacks, and companies like Comcast Corp. (CMCSA), Cablevision, Time Warner Cable Inc. (TWC), Time Warner Inc. (TWX), Viacom Inc. (VIA), Thomson Reuters Corp. (TRI) and News Corp. (NWS, NWSA), have recently increased their shareholder payouts.

Comcast, another family-controlled cable operator, has seen its shares trade at a discount due to acquisition concerns, but that didn't stop from it from signing on last year to a landmark deal to buy a majority stake in media conglomerate NBC Universal. Meanwhile, Time Warner Cable--the only major publicly traded cable operator without a controlling shareholder--has eschewed large acquisitions. Its chief executive, Glenn Britt, said at a recent investor conference that he is "not particularly interested in building a bigger empire or feathering my own nest or whatever."

For its part, Cablevision has a checkered history in its relations with shareholders when it comes to acquisitions. In 2008, it bought Newsday, the money-losing Long Island tabloid, in a move that some interpreted as a swipe at public shareholders after they twice rejected buyout offers from the Dolans. The company later wrote off most of its investment in the newspaper as a loss.

Since then, Cablevision has taken a series of steps--such as spinning off its Madison Square Garden unit and paying dividends--that appeared to restore investor confidence in the company. Then in May, Dolan raised the prospect that Cablevision would once again seek acquisitions, telling trade magazine Multichannel News he was interested in pursuing cable opportunities outside New York.

"One of the worst things for an equity holder is when the narrative for a stock changes rather abruptly," Citigroup analyst Jason Bazinet said. "Until today, the central narrative for Cablevision was pretty simple. The firm was now fully committed to returning capital to shareholders. Dividends and buybacks--those were in. [Acquisitions like Newsday]--those were out."

Cablevision has now placed a bid for Bresnan in the final round of an auction that included seven competing bids, according to people familiar with the matter. The bids, which ranged between $1.1 billion and $1.4 billion, were due Tuesday, the people said, and a buyer could be selected as early as next week.

Kim Kerns, a spokeswoman for Cablevision, declined to comment.

Some Cablevision shareholders support the move. Mario Gabelli, whose Gamco Investors Inc. (GBL) owns a 7.1% stake in Cablevision, said William Bresnan was one of the pioneers of the cable industry and everyone in the industry is looking at his assets after his death in November.

"We're delighted that Cablevision is exploring what's out there," said Gabelli, who has been critical of the company in the past.

BTIG's Greenfield, who believes shares of Cablevision are well-undervalued, said he would prefer to see the company repurchase shares instead of acquire new cable systems, but he said a Bresnan acquisition would likely add to the company's cash flow and wouldn't prevent it from undertaking a large stock buyback.

"Everyone we speak to indicates that Bresnan is quite well-run, with well-upgraded systems that have been aggressively rolling out advanced services," Greenfield said, adding that he doesn't think Cablevision's interest in Bresnan signals a more aggressive acquisitions strategy from the company.

"The Dolans have simply worked too hard to rebuild their credibility and drive the company's free cash flow to destroy their prospects with dilutive free cash flow deals that harm the balance sheet," Greenfield said. "Unless our math is substantially wrong or this is part of a major buying binge, we believe the weakness that we have seen in Cablevision shares presents an attractive buying opportunity."

-By Nat Worden, Dow Jones Newswires; 212-416-2472; nat.worden@dowjones.com

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