Cablevision Systems (CVC): Is a Possible Clearview Divestiture Now Material?

On Sunday May 20, 2012, AMC Entertainment, a privately-held chain of 346 movie theaters announced that it was being acquired by Wanda Group, a Chinese conglomerate, for $2.6 billion.  The deal comes just two weeks after CVC quietly indicated on its Q1 earnings call that it would explore strategic alternatives for its 47-theater, 243-screen chain, Clearview Cinemas.  

We have an interest in CVC only since late last week when its market cap fell below $3 billion briefly. While Twinleaf client portfolios are roughly 80% comprised of companies with sub-$1 billion market cap and 95% in the sub-$2 billion range, we do have the flexibility to go up to $3 billion.  So when I noticed that CVC had dropped 25% in three weeks and breached the $3 billion level at $11.21 per share, I bought shares between $11.03 and $11.21.  

Despite the excellent customer demographics underlying its portfolio of cable systems that deliver the highest per-subscriber revenue and cash flow numbers in the industry, CVC has always traded at a discount to its cable peers. The reasons are twofold:  the company is highly levered with debt of 4.7x my estimate of $2.122 billion of 2012 cash flow and the mercurial Dolan family controls the company via supervoting shares.  

Before buying CVC shares on Thursday and Friday, while taking a close look at the CVC balance sheet and modeling the cable cash flow and leverage ratio, I figured that any Clearview divestiture, should it take place, could result in perhaps $1m per theater or about $50m in proceeds to CVC.  Since CVC receives zero value for its Clearview holding, investors would obviously welcome $50 million as value uncovered. While $50 million is certainly welcome and could retire some 4+ million shares (of 267 million outstanding) in CVC's aggressive share repurchase plan, I didn't find it material enough (or any sale certain enough) to include it in my analysis.

But I do now following the AMC-Wanda announcement. While there may not be another deep-pocketed cinema buyer out there given the recent decline in movie-going audience, it's likely theater valuations just took a significant step up. Putting the $515,000 per-screen AMC valuation on Clearview yields $125 million to CVC.  AMC says it has 23 of the top 50 highest-grossing theaters in the country and CVC discloses little about Clearview's performance.  But given Clearview's regional cluster around New York City, including three theaters in Manhattan, it seems likely that Clearview's financial performance is on par with AMC's. We're still only talking about 50 cents per CVC share at a possible $125 million of Clearview proceeds but it is entirely undiscovered.  

Now if Clearview owns the real estate under its theaters...