Cablevision’s Changes Add Intrigue

The recently unveiled changes in how Cablevision Systems [NYSE: CVC] plans to spin-off its fledgling Rainbow DBS satellite TV service could become a prelude to future bold moves in the marketplace.

Wall Street analysts are not convinced that Cablevision will retain its cable TV operation in New York over the long term. In addition, Cablevision Chairman Charles Dolan told SATELLITE NEWS during a recent interview that he sees the company as providing “content” over cable and satellite s platforms.

The company announced Oct. 23 revised plans for the spin-off of Rainbow DBS that now will include three of Cablevision’s Rainbow Media entertainment services — the American Movie Classics (AMC), the Independent Film Channel (IFC) and WE: Women’s Entertainment — their subsidiaries, and certain other Rainbow businesses.

After the spin-off, Cablevision will retain valuable assets that include its regional cable and telecommunications businesses; Madison Square Garden and its professional sports teams; Radio City Music Hall; and other businesses that include: Clearview Cinemas, News 12, Metro Channels and Rainbow’s interests in regional sports networks around the country.

The spin-off would allow Cablevision to focus primarily on its core regional cable, telecommunications, sports, and entertainment assets. However, Cablevision will give its spin-off entity the right to offer direct broadcast satellite (DBS) service in the New York area.

The spin-off also will eliminate the $450 million in cash that Cablevision has agreed to provide to Rainbow DBS. Further, Cablevision will retain Clearview Cinemas, despite previously announcing plans to include that business in the spin-off company.

As a result, Cablevision will not provide any investment, nor any guarantees of debt financing, to the spin-off company, once it is separated from the parent. Such a move will avoid saddling Cablevision with any liability for the uncertain prospects of the spin-off.

In addition, Cablevision agreed to pay off all existing Rainbow debt totaling $321 million, plus a $250 million note issued in connection with the repurchase of MGM’s 20 percent interest in Rainbow Media’s national entertainment services.

In related financing arrangements, AMC, IFC and WE: Women’s Entertainment will distribute to Cablevision cash on hand totaling $75 million. At the time of the spin-off, Cablevision also will receive a $350 million payment-in-kind of a preferred security issued by AMC.

Aside from Cablevision’s previous $194 million investment in Rainbow DBS, the parent company will fulfill its commitment to chip in an additional $67 million later this year.

“The amended spin-off plan reflects significantly higher estimates of the funding amounts anticipated due, in part, to a more robust content and delivery strategy for the DBS business,” Cablevision officials said.

Once the spin-off is completed, James Dolan is expected to become chairman of Cablevision, as well as remain CEO position. His father, Charles Dolan, will leave his post as Cablevision chairman to become chairman of the spin-off entity.

Thomas Eagan, a satellite and cable analyst with Oppenheimer, called the new spin-off plan “provocative,” since it raises the risks and rewards. The spin-off of the three cable networks also would facilitate the potential sale of Cablevision’s cable holdings, he added.

The networks make Rainbow DBS more attractive to prospective partners, such as NBC, Eagan wrote in a research note. However, the $2.8 billion value of the three cable networks could become lost in the “larger cloud” of the new spin-off company’s endeavors, he added.

Douglas Shapiro, a satellite and cable analyst with Banc of America Securities, called Cablevision revised spin-off deal unexpected. Although critics may point to Cablevision’s contribution of the three cable networks as a negative for the parent, Shapiro said the development actually was neutral or positive for the long-term.

Shapiro’s reasoning is that the VOOM satellite TV service of Rainbow DBS won’t likely erode the value of the networks, the cable TV operations ultimately may be sold, and the value of the new Cablevision spin-off entity may rise. He also noted that Banc of America Securities is providing certain financial services in connection with Cablevision’s spin- off.

Vijay Jayant, a satellite and cable analyst with Lehman Brothers, said that “high debt leverage, general accounting anomalies and a management track record of digressing from the core cable business continue to complicate the story.”

The amended spin-off reduces pro forma debt and potentially could increase funding for VOOM, Jayant said.

Tom Watts, a satellite analyst with SG Cowen, said he understands that the spin-off business will have a two-tier share structure similar to Cablevision. That ownership structure would give the Dolan family “super-voting” class A shares.

For Cablevision shareholders, the company’s elimination of future financial commitments to the spin-off should be reassuring. The spin-off will create two distinct companies for Cablevision shareholders. Each will have separate funding and management, defined business focuses and clear investment characteristics, Cablevision officials said.

The cash flow from the cable channels should help the spin-off company pursue its business plans, including the development and delivery of its exclusive high-definition TV (HDTV) programming via satellite.

Meanwhile, Cablevision’s move gives increased clarity for shareholders and investors to pursue its strategic focus in the New York market. The spin-off also will enable Cablevision to reduce its debt level and leverage, and increase availability under its bank lines of credit, compared to the prior spin-off plan. Cablevision’s plan is to generate positive free cash flow in 2004, its officials said.

The spin-off will structured as a tax-free transaction to Cablevision’s shareholders. In advance of the spin-off, Cablevision intends to reorganize and operate these businesses as a distinct unit within the company beginning in 2004. At that time, Cablevision further expects that the newly formed unit would be funded based on the cash flow and borrowing capacity of its assets.

Completion of the spin-off is subject to a number of conditions including the refinancing of the existing Rainbow credit facilities, receipt of a tax ruling from the Internal Revenue Service and Securities and Exchange Commission filings.

–Paul Dykewicz

(Charles Schueler, Cablevision Systems, 516/803-1013; Douglas Shapiro, Banc of America, 212847-5676; Vijay Jayant, Lehman Brothers, 212/526-6019; Thomas Eagan, Oppenheimer, 212/668-5769; Tom Watts, SG Cowen, 212/278-4260)