Saturday, January 13, 2007

more on the empire of debt

Cablevision Buyout Bid Is Raised - New York Times--The NYT now gives us a permalink to articles that will not expire when the article goes to the NYT archives. This article is about the Dolan family, which has a local presence. Here are some of the numbers from the article:

The Dolan family, the controlling shareholders of the Cablevision Systems Corporation, yesterday increased their bid for the company by about $1 billion, to $8.9 billion, from their October offer.

James L. Dolan, the chief executive of Cablevision, and his family want to take the company private.

The family, which owns 20 percent of Cablevision equity and controls 70.4 percent of the vote, said in a letter to the special transaction committee of the board, that this was the family’s final offer and it was good until Wednesday.

The company, which owns cable systems as well as several cable programming networks, issued a statement saying it had no comment on the offer.

The family, led by
Charles F. Dolan and his son James, also said it would not resell the company if its bid for Cablevision was successful. That effort is a type of insurance that aims to protect shareholders from a buyer flipping the asset at a higher price. The family said it would be willing to discuss a contractual agreement on the issue.

It also said that it would respect the vote on the decision by a majority of the minority shareholders and that it would not sell its control position if the company stayed public...

...As it stands now, the equity portion of the bid has risen 11 percent, to $30 a share.
But at that level, the company may be beginning to bump up against its debt covenants, analysts said yesterday. The company currently has $11.2 billion in debt.

The newest offer would require the Dolans to pay an additional $6.8 billion to buy out the 228 million public shares. That would bring the total debt level to about $18 billion, and the average annualized 2007 cash flow is expected to be about $2 billion. That puts the debt-to-cash-flow ratio at a multiple of nine times, which is the limit on the debt covenants, said Chris Marangi, who follows cable at Gabelli & Company. Gabelli’s parent company, Gamco Investors Inc., owns 20 million shares of Cablevision stock.

Analysts also said that the Dolans told the company that their advisers, Merrill Lynch and Bear Stearns, would provide preferred equity financing for the deal, although the family did not say how much of the financing would be preferred equity.

Although preferred equity, which carries a higher interest rate than debt, does not count in debt-to-cash-flow ratios, the family said only that they did not do this because of debt covenants but because the capital structure made the most sense.

What I can't see--and I'm probably just naive--is how you can pay $8.9 billion to buy out the 80% of the company you don't own and then be $18 billion in debt? (8.9 divided by .80 = 11.125 billion, encumbered with 18 billion of debt?) What am I missing here?

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