Will Time Warner Buy Cablevision?

The New York Post claims that Time Warner Inc. (NYSE: TWX) is considering buying Cablevision. Of course the Dolan family that controls the big cable company wants it as well, and is trying to take the company private. The Dolan clan is willing to shell out $7.9 billion. There are about $3 billion in credit facilities that would also have to be picked up.

Time Warner may not be interested, but has not made an official comment about the rumor.

Cablevision's market cap, at $8 billion is a little bit more than 10% of TWX's. But CVC had revenue of 5.2 billion last year and operating income of over $500 million. Cash from operations for the period was $926 million. Long-term debt now stands at $12 billion.

The question that plagues Time Warner in the stock market is why it stays in so many businesses. Cable is the one shining jewel in the TWX operations. And, Cablevision is a very attractive asset. According to Morningstar, its yield for "triple play" customers who take voice-over -IP, TV, and broadband should be about $90 a month. The company has 3 million TV customers and 1.8 million broadband users. A move further into the cable industry would make sense. Time Warner Cable contributed $600 million of the company's $2.6 billion in operating income in the last reported quarter. It has about 14 million TV subscribers with the addition of what it got from its Adelphia asset purchase.

Cablevision's debt is an issue. So is the Dolan family control. But if the Dolan's have, in effect, put the company on the block by making their own offer, the company's independent directors would have to look at another legitimate bid.

Cablevision is not the only large cable company Time Warner could buy, but it is one of the few. If the TWX board is considering focusing the company on two or three businesses instead of five, there will have to be more M&A work to build that cable franchise.

Douglas McIntyre is a partner at 24/7 Wall St.