Cablevision zooms on VOOM's doom; Toys "R" Us tumbles

By Paul Deckelman and Paul A. Harris

New York, April 8 - Cablevision Systems Corp.'s bonds were seen higher Friday, propelled upward by a one-two dose of good news, at least from a bondholder perspective - the Bethpage, N.Y. -based cable operator's decision to go ahead with the planned shutdown of its money-losing VOOM satellite TV service, and its apparent freeze-out by Adelphia Communications Corp., which was reported to have entered into a preliminary agreement with Time Warner Cable and Comcast Corp., which would acquire the bankrupt cabler for about $18 billion in cash and stock. The first development will remove a serious drag from Cablevision's financial performance and future risk going forward, while the second means that the company will not have to raise and spend the $16.5 billion it had offered for Adelphia.

In the retailing sector, Toys "R" Us bonds were getting whacked around after the Wayne, N.J.-based toy retailer revealed financing details of its upcoming leveraged buyout by a Kohlberg Kravis Roberts & Co.-led syndicate; as bondholders had feared, the new secured financing to be used for the acquisition will be senior to the existing bonds - and there seem to be no plans to tender for any bonds other than the $402.5 million of 6¼% senior notes due 2007 underlying the equity security units announced earlier in the week.

In the primary market, things remained subdued, with no pricings seen. Roadshow details emerged, however, on the upcoming bond offerings by Brown Shoe Co. Inc. and Central European Media Enterprises Ltd.

Cablevision bonds "were up about two or three points on the short end," said a trader who saw the company's 7 5/8% notes due 2007 firming to 104 bid, 105 offered from 102 bid, 104 offered going home on Thursday. He also saw its 8½% notes due 2012 up several points at 101.5 bid, 102.5 offered.

A market source at another shop pegged Cablevision's 7¼% notes due 2008 a point better at 103 bid, while its 8 1/8% notes due 2009 improved to 106 bid from 104.5, and its 7 5/8% notes due 2018 jumped four points to 106.5. However, he saw no movement in the bonds of Cablevision's subsidiary, Rainbow National Services LLC, whose 8¾% notes due 2012, he said, were steady at 109.5.

But another source saw Rainbow's 10 3/8% notes due 2014 a point better at 115, while Cablevision's CSC Holdings Inc. 7 5/8% notes due 2011 were up 1½ points to 105. CSC Holdings' 8 1/8% notes due 2009 gained nearly a point to 106.5 bid.

Cablevision established VOOM several years ago, envisioning it as a high-definition TV alternative to the existing satellite broadcasters, DirecTV Group Inc. and EchoStar Communications Corp. But although it managed to put a satellite in orbit, VOOM never really got off the ground as a competitor to DirecTV and EchoStar's DISH Network, and board members led by company president James Dolan grew restive at the diversion of company resources into what they saw as a celestial white elephant. That brought Dolan into bitter conflict with his father, company founder and chairman Charles F. Dolan, who championed the satellite service and saw it as the wave of the future.

The board last year finally sided with the younger Dolan, and said that it would explore the sale of VOOM, and it subsequently reached an agreement to sell the satellite to EchoStar for $200 million. In early March, the elder Dolan said that he was interested in personally buying the remaining VOOM assets, and the board agreed to delay a planned shutdown of the service until March 31, to give him time to line up the estimated $400 million of funding - but that deadline came and went, without any activity, or any word from the company. Along the way, there was a bizarre development, as Dolan senior unsuccessfully sought intervention by the Federal Communications Commission to block the sale of the VOOM satellite to EchoStar, contending that it would hurt competition in the satellite broadcasting business he hoped to enter.

In an 8-K filing Friday with the Securities and Exchange Commission, Cablevision said that it will close its Rainbow DBS unit, VOOM's official operating entity, and that the satellite TV service will no longer be available to customers after April 30. It further said that the board had instructed management to "continue to analyze" whether VOOM's 21 channels can be marketed to other satellite and cable providers as part of the company's Rainbow [National Services] programming operations.

UBS Investment Bank cable and satellite analyst Aryeh Bourkoff said that, alternatively, VOOM could "end up being a content entity within Rainbow, as indicated by the 8-K, which actually is a much more feasible strategy, with less capital intensity" for the company.

He called the board's decision "an indication that the board has developed a uniform opinion for the first time about a key strategic imperative, which is shutting down the VOOM distribution platform, which should avoid a tremendous amount of potential costs for the Dolan family and for Cablevision."

Had Cablevision decided to keep VOOM going, it could have been a heavy potential drag on its finances, in terms of needed extra investment with not much profit to show for it and the opportunity costs of not being able to devote that capital to the company's core cable business. Bourkoff estimates these costs might have totaled as much as "a few billion dollars" over time - although he said that Cablevision had already pretty much pulled the plug on its troublesome stepchild.

"We already had a sense that . . . there was a mechanism in place to fund VOOM off-balance sheet, to Chuck Dolan. So for the actual company, it does eliminate some risk. But there was not a mechanism any more for VOOM to be funded by Cablevision as much as by Chuck Dolan. So this does benefit Cablevision by eliminating a risk factor - but financially, we'd already taken VOOM out of our model."

Dolan pere's last-ditch effort to save his baby clearly foundered on his inability to find financial backers, Bourkoff agreed. "I think that VOOM could still exist in a different capacity, in terms of being much more content-focused than distribution-focused. For Chuck [Dolan] to fund a distribution business on his own would take up a big chunk of his existing equity."

The coming shutdown of VOOM is clearly a victory for the younger Dolan in his boardroom family feud with his father and his brother Thomas, also a director of the company, who sided with Dad. The board vote, he said, "is definitely an indication that the conflict is alleviated somewhat. But it's unclear whether it's over."

While the news about VOOM clearly heartened bond investors who agreed with the younger Dolan that the satellite business was a money-burning luxury the company could not afford, they may have been equally relieved to read in Friday's editions of The Wall Street Journal and The New York Times that Adelphia Communications had opted for a cash-and-stock acquisition offer from the Time Warner/Comcast team rather than the $16.5 billion all-cash offer that Cablevision stepped forward with earlier in the week, in a surprising last-minute effort to grab the bankrupt Greenwood Village, Colo.-based cabler for itself.

Analysts had wondered aloud what kind of sense such an acquisition would make for Cablevision, since unlike TimeWarner and Comcast - nationwide cable players who would likely find many geographic synergies with Cablevision's 28-state system - Cablevision's subscribers are concentrated in metropolitan New York City - with the nearest Adelphia clusters in neighboring Connecticut, or around Buffalo, Syracuse and other towns way upstate.

It now appears that such speculation is moot. Although spokesmen for Time Warner, Comcast and Adelphia all declined to comment on the reported deal, news reports said that they had reached agreement late Thursday on the preliminary framework for the acquisition. The Times reported that the two cable giants will pay about $13.5 billion in cash and about $4.5 billion in warrants for stock in a new company to be formed by combining Time Warner's cable business and Adelphia.

A trader reported Adelphia's 10¼% notes due 2006 as having firmed 90 bid, 92 offered, from prior levels at 88 bid, 90 offered, and saw its 10¼% notes due 2011 likewise up two points at 96 bid, 98 offered.

However, he noted that since the reported deal has not been confirmed yet, and in any event is still just a preliminary agreement, and with Cablevision still lurking around the perimeter - and having apparently gotten rid of the VOOM albatross around its neck, should it wish to seek funding to boost its bid and upset the apple cart before the acquisition is finalized, for now, it's anything but a done deal.

"It ain't over till it's over," he said, invoking baseball great Yogi Berra's well-known quip.

Another source, however indicated that Adelphia bondholders are pretty well convinced this is the real thing - from where he sat, they took the 2006 101/4s up to 92 bid from 89 and the 2011 101/4s up to 96 from 94.25, while likewise lifting its 10 7/8% notes due 2010 to 92.75 bid from 91.25.

He also pegged the bonds of Century Communications Corp., an Adelphia subsidiary, higher, with its 9½% notes coming due later this year up half a point at 106, and its 8 7/8% notes due 2007 at 104.75 bid, up from 103.5.

Paxson higher on bid news

Also in the television sector, Paxson Communications Corp. shares and bonds were up on news reports that The Firm - a Hollywood talent agency - backed by Bank of America is in talks to acquire the financially challenged West Palm Beach, Fla.-based TV station group owner.

Paxson's 13¼% notes due 2006 jumped to 75 bid from 72.5, a market source said, and its 10¾% notes due 2008 were a point better at 102.

The company's American Stock Exchange-traded shares were up 23 cents (20%) to $1.38 on volume of 4.4 million shares, more than 12 times the norm.

The Firm - whose investors also include buyout specialists Thomas H. Lee Partners and Bain Capital - is the second potential suitor to emerge during the week for Paxson - which, ironically, had been trying unsuccessfully to sell itself for nearly two years before officially announcing last month that it would end such efforts and instead focus its energies on improving its core business.

Earlier in the week, a TV trade paper reported that 1980s television star Byron Allen was interested in buying the company for around $2.2 billion and converting its family-programming oriented PAX network into an African-American themed operation.

Cenveo higher on CEO bid

Also on the upside, Cenveo Inc.'s bonds and shares boomed, apparently spurred on by the news that a stockholder, Robert Burton, has accumulated nearly 10% of the company's shares - and is looking to become chairman and chief executive officer, replacing the departing CEO, Paul Reilly.

Cenveo's 7 7/8% notes due 2013 jumped to 97 bid from 94.5, while its 9 5/8% notes due 2012 moved up to 109.5 bid from 108.75.

The New York Stock Exchange-traded shares of the Denver-based commercial printing company - formerly known as Mail-Well Inc. - leapt $2.16 (34.39%) to $8.44 on volume of 6.6 million, over 25 times the average daily turnover.

Burton said in an SEC filing that should the company not wish to negotiate terms with him he could wage a proxy battle.

Burton is critical of current management, saying in a letter addressed to the shareholders that the company's stock in undervalued due to current management's inability to effectively cut costs and create shareholder value. He recounted his earlier proposals to acquire the company, including a $7 per share offer last July, which was rebuffed.

Cenveo late Friday issued a response to Burton's screed, challenging "virtually all of the assertions" in his letter.

Toys plunges

On the downside, Toys 'R" Us bonds "really got hit," one market source said, estimating its 7 5/8% notes due 2011 as having fallen to 92.5 bid from 97, and its 7 3/8% notes due 2013 as having dropped to 88.75 from 91.5. Its 7 3/8% notes due 2018 lost three points to 82.

Another trader characterized the bonds as "pretty much three points off, across the board, although he did see the 7 5/8s off four points at 91 bid, 93 offered.

The company's filing, he said, "indicates that they're going to put a ton of [secured] debt ahead of what's already there, which is the unsecured notes. The filing also contained no indication that any more of the company's bonds will be tendered for, other than the 6¼% notes already announced. Speculation that bonds would be taken out via a tender as part of the company's buyout had previously boosted the bonds, although they later fell back.

J.C. Penney higher, then down

J.C. Penney & Co. Inc. bonds "popped up" after the Plano, Tex.-based department store operator completed a new credit facility and Moody's Investors Service raised its ratings a notch to Ba1. But then, he said, "they gave it all back," to end essentially unchanged.

For instance, he said, Penney's 7.40% notes due 2037, which had ended Thursday at 95.25 bid, 96.25 offered, got as good as 99 bid, 101 offered, "but then came off a touch," and gradually backed down to about where it had started, closing at 95 bid, 97 offered.

Market better but primary quiet

Although sources maintained that the high-yield market felt better through the week of April 4, Friday came and went with no new issues pricing and the market off a touch.

As the dust was settling Friday the week of April 4 had seen just under $300 million price in two tranches; not much but it does trump the previous week's puny $155 million, also in two tranches.

Year-to-date the new issue market has seen $31.7 billion price in 123 dollar-denominated tranches as 2005 continues to trail further and further behind 2004 in year-over-year totals. At the same point in 2004 the market had seen $49 billion price in 196 dollar-denominated tranches.

Market feels better

A sell-side official who spoke late on Friday said that in spite of a fortnight of near-dormancy in the primary, the high-yield market presently feels better.

"Secondary levels seem to have stabilized," the official said. "Things are not falling off of the cliff any more. Returns are positive across the board, on a week-on-week basis, which we have not seen for a long time.

"Spreads have stabilized and are in one or two basis points.

"If you look at the 10-year Treasury it's pretty much where it was last Friday - absolutely flat.

"Default rates came out a little better.

"And if you look at the calendar it seems like both the banks and the companies think the time is right to come back to the market. That could only be because there is a notion out there that volatility in the market is a little reduced now.

"We have a $4.5 billion to $5 billion calendar right now. If you have that kind of buildup it's a signal that the banks believe that the volatility is behind them."

Still liquid despite outflows

Despite the continuing drain of cash from high-yield mutual funds, the sell-sider said that the high-yield asset class apparently remains notably liquid.

AMG Data Services has reported eight consecutive weeks of outflows from high-yield mutual funds, including two back-to-back $1 billion-plus outflows during the fortnight that ended March 30 - the biggest two week drain in almost a year - and the most recent $327 million outflow for the week to April 6.

But the source commented: "We've heard from four or five buy-side sources that besides the deals in the market right now there is a calendar in the works of between $8 billion to $12 billion over the next six to eight weeks.

"So people are lining up again."

Hedge funds still interested

Although other sources have recently reported during conversations with Prospect News that junk activity on the part of hedge funds seemed to have slowed during the recent sell-off, this sell-sider said that hedge funds do in fact seem to be sticking around.

"Hedge funds keep coming back, which you can tell by looking at certain situations," the source said.

One situation that the sell-sider mentioned was the possible takeover of the Paxson Communications Corp., which has recently made headline news.

"The story is that two or three people put out an unsolicited bid, appearing intent on taking over the company," the source said. "They put out a valuation on the company.

"Pretty much in a matter of minutes the bonds rallied between three to five points.

"When something like that happens it brings the hedge funds back into the market no matter what.

"As long as you have events like that driving credits, the hedge funds will always be around.

"They have become a pretty significant player in the high-yield market."

The line forms

As to those companies lining up to tap the market, three more came forward during Friday's session.

St. Louis-based Brown Shoe Co., Inc. will begin a roadshow on Monday for its $150 million offering of seven-year non-call-four senior notes, in an acquisition financing via Banc of America Securities.

Elsewhere Hong Kong-based Mandra Forestry Finance will begin a roadshow on Tuesday for its $235 million offering of 10-year bullets (B1/B). The acquisition deal will be led by Morgan Stanley.

And Central European Media Enterprises Ltd. will begin a roadshow during the April 18 week for €350 million of seven-year notes in two tranches.

The company plans to sell €200 million of senior fixed-rate notes and €150 million of senior floating-rate notes.

JP Morgan, Lehman Brothers and ING have the books for the acquisition deal.

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