Why not all spinoffs are plated in gold

I love researching and investing in spinoff investments, usually there is a lot of money to be made in spinoffs.  A new management is incentivized to improve performance and usually a company living inside of another company isn't usually operating at it's most efficient.  That said not every spinoff is worth buying, I've noticed a trend on blogs touting every spinoff as a buy.  While an investor can find some good bargains picking through potential spinoffs I believe it always pays to read the filings closely, missing a few small lines can mean the difference between a great company, and a potential train wreck.

I was recently reading the filing for the spinoff that Cablevision is doing of AMC Networks.  The idea initially attracted me, AMC owns rights to shows but doesn't have to own the infrastructure to distribute the shows, rights are not capital intensive, building out cable to thousands of households is not.  So I was reading the filing and the following lines caught my eyes in the section Reasons for Distribution.

Cablevision’s board of directors has determined that separation of our businesses from Cablevision’s other businesses is in the best interests of Cablevision and its stockholders. The potential benefits considered by Cablevision’s board of directors in making the determination to consummate the Distribution included the following:
• to enhance the credit profile of Cablevision by accessing its RMH subsidiary’s additional debt capacity to effectuate a reduction of Cablevision’s indebtedness, thereby providing Cablevision with greater financial and strategic flexibility to pursue acquisitions following the Distribution; and
• to increase the aggregate stock price of Cablevision and the Company relative to the pre-Distribution value of outstanding Cablevision stock, so as to allow each company to (i) issue equity in connection with acquisitions on more favorable terms and (ii) increase the long term attractiveness of equity compensation programs, in both cases with less relative dilution to existing equityholders.

Let me translate this to you, Cablevision wants to load up AMC Networks with debt, so Cablevision can refinance at lower rates.  In addition they also expect to be able to issue more shares as two separate companies, instead of one.

So I have to ask myself, why would I want to own a company where the controlling shareholder wants to increase leverage and issue more shares diluting shareholders.  It appears that spinning off AMC will benefit the Dolans (the majority owners of Cablevision, and soon AMC Networks) but not shareholders who decide to go along for the ride with them.

If you have any thoughts on this spinoff please leave a comment, I'm interested in hearing other investors  opinion on AMC Network.

Talk to Nate about this stock.

1 comment:

  1. I'm planning on writing a detailed post on AMC once the final docs are filed. I really dug into the 10-12B today. There is quite a bit to like about the company- media buyers are saying that AMC can now sell themselves as a "network replacement", Sundance and IFC have good growth opportunities, cash flow is strong, etc. But, the debt is a big problem. According to the preliminary filing, it looks like AMC is going to refinance all their debt plus have another $1.2B in debt issued to Cablevision so they can pay off/refinance some of their debt.
    While AMC's cash flows might be able to support its debt, my concern is the debt payments are going to hurt the network's strategy of developing more original programming.