How's this for convergence: Cablevision Systems Corp.
may soon own a chain of stores where it can sell cable modems, high-definition television
sets -- and satellite dishes.
Cablevision last week agreed to buy the assets of Nobody
Beats the Wiz Inc., a bankrupt consumer-electronics chain with stores located mostly in
the New York metropolitan area, for about $100 million.
Like its December deal to buy the Radio City Music Hall
management company, the surprising Wiz move is another effort by Cablevision chairman
Charles Dolan and CEO James Dolan to leverage their growing New York-area cable assets.
Woodbury, N.Y.-based Cablevision added to its system
cluster last week, trading stock and a Kalamazoo, Mich., cable system to
Tele-Communications Inc. for several systems in Connecticut in a deal valued at $380
million. Cablevision will add 250,000 Connecticut subscribers in Hartford, Vernon,
Branford and Lakeville to its existing 202,000 in the state when the deal closes. It also
picks up about $110 million in TCI debt. TCI will ratchet up its stake in Cablevision to
36 percent, including the one-third of the company that will be handed over as part of a
system sale last year.
Unlike the Radio City move, which was seen as a sensible
extension of the MSO's earlier deals to take over New York's Madison Square
Garden, the Wiz purchase didn't find many fans on Wall Street. Cablevision's
stock price dropped by more than $2 per share last Wednesday before rebounding with a
$1.81 gain the next day.
The MSO will be treading into an intensely competitive
business that is largely unknown to its executives. Although the Telecommunications Act of
1996 requires retail distribution of set-top boxes, digital boxes and cable modems
aren't close to being big retail products yet.
'I don't think that anybody thinks that it's
a positive,' said one Wall Street cable analyst, who asked not to be identified.
'It's,'How much does it annoy you?''
Cablevision executives defended the move as a low-risk
effort to showcase new products and services that benefit from hands-on demonstrations,
including high-speed-data service and HDTV. They saw numerous synergies with Cablevision
services. When Wiz salesmen pitch personal computers, they can also pitch Optimum Online
using cable modems. Wiz stores could include ticket outlets for events at
Cablevision-owned Madison Square Garden and Radio City Music Hall.
A senior executive at another big MSO agreed with CEO James
Dolan's thinking on the Wiz, saying, 'He's not trying to get into the
retailing business: He's trying to extend his cable business in the one market that
can tolerate it.'
Cablevision vice chairman Marc Lustgarten predicted that
the chain would deliver profits to Cablevision. He said the MSO would shutter money-losing
locations in the 36-store chain in New York, Connecticut, New Jersey and Massachusetts:
Plans were already in the works to close 17 stores. And Cablevision can promote the Wiz on
sports programming, which represented a big chunk of the Wiz's advertising spending.
Cablevision, in fact, is a Wiz creditor because of ad purchases. Company officials said
Cablevision won't be assuming the Wiz's unsecured debt.
The deal calls for Cablevision to pick up the chain's
inventory for about 80 percent of its value, or roughly $94 million, and to pay around $10
million for administrative fees, Lustgarten said. But he added that Cablevision will also
pick up leases at below-market values, which represents about a $10 million gain. And he
said Cablevision would have to spend some $40 million to keep the stores running over the
next year.
The purchase still must be approved in bankruptcy court,
where Carteret, N.J.-based Nobody Beats the Wiz sought shelter from creditors under
Chapter 11 of the U.S. Bankruptcy Code in December. A hearing on the agreement is
scheduled for this Thursday (Feb. 5). Cablevision said it won't respond to some
questions -- such as possible changes to Wiz management or merchandise -- until after the
deal is approved.
There is some precedent for cable operators securing retail
space to show off their wares. Comcast Corp., for example, has a mall store in suburban
Philadelphia, where it flogs cellular phones, PrimeStar Partners L.P. satellite
subscriptions and tickets to National Hockey League games featuring the Comcast-owned
Philadelphia Flyers.
Several cable programmers have retail outlets. Discovery
Communications Inc. may provide the closest parallel, having bought more than 101 retail
stores from The Nature Co.'s bankrupt parent company two years ago, for $40 million.
DCI president Greg Moyer -- who, coincidentally, was in New
York last week to brief reporters on the March opening of a Discovery Channel Destination
Store flagship outlet in Washington, D.C. -- said he is convinced that DCI has hit on the
right formula after tinkering a bit.
Same-store sales were up in the fourth quarter, following a
down third quarter, after Discovery added some new products, such as science kits and
model airplanes. DCI will start renaming existing Nature Co. stores soon, targeting 15 to
30 this year, Moyer said. He thinks that the stores will begin generating a profit this
year, although not a big one.
Moyer said Cablevision's move was consistent with
Discovery's belief that HDTV will be a hit.
Cablevision plans to build HDTV-transmission studios in
Radio City Music Hall, he noted. 'Chuck Dolan seems to truly believe, as many of us
do, that high-definition television is going to be a very powerful consumer-electronics
option for the future,' Moyer said. When HDTV broadcasts begin, consumers will need
new TV sets, or at least new decoding equipment.
'Maybe he's saying,'If there was ever a
time to be in the television set-selling business, this is it,'' Moyer said.
Of course, consumer-electronics stores sell more than TV
sets. Many, including Nobody Beats the Wiz, sell direct-broadcast satellite systems.
Cablevision executives said last week that they expect to keep selling PrimeStar
subscriptions and Digital Satellite System gear alongside Cablevision products.
