Cable Operators

Is Voom Out of Room?

1/02/2005 7:00 PM Eastern

After several delays and fending off months of criticism, Cablevision Systems Corp. has pulled the plug on its planned spinoff of Rainbow Media Enterprises and could pursue a sale of its troubled Rainbow DBS satellite-television unit.

In a tersely worded statement filed Dec. 21 with the Securities and Exchange Commission, Cablevision said its board of directors has decided to suspend the spinoff of RME, “and instead to pursue strategic alternatives for its Rainbow DBS business.” Rainbow DBS markets its service under the brand name Voom.

The news was cheered by analysts and investors, who drove the stock up 13% ($2.95 each) on Dec. 21, to $25.07 per share. Cablevision shares fell slightly in subsequent trading, closing at $24.73 each on Dec. 22.

“We think the bull case that Voom is shut down and the assets are sold is likely playing out,” Sanford Bernstein & Co. cable analyst Craig Moffett wrote in a research note, adding that a sale is “the appropriate step for Cablevision shareholders, which were facing the prospect of funding a 'black hole.’ ”

Cablevision first announced the RME spinoff in October 2003. Besides the Rainbow DBS business, the unit would have included its national programming networks (AMC, Independent Film Channel and WE: Women’s Entertainment) and its video-on-demand services.

Earlier this month, Cablevision said the spin-off — previously delayed from the third quarter to the fourth quarter — would not occur in 2004.

Just what Cablevision plans to do with the Rainbow networks is unclear.

But most analysts believe they will remain within the Cablevision fold.

That, too, could prove to be a positive for the stock.

Cablevision spokesman Charlie Schueler said the company would have no comment beyond what was filed in the SEC document.

While the Rainbow networks were included in the spin mainly to help fund Rainbow DBS, placing them outside the cable-system structure reduced Cablevision’s leverage with distributors who could either drop or lower the fees paid to the MSO’s networks.

“By keeping the networks within Cablevision, it gains the leverage of other distributors needing access to Cablevision’s cable subscriber base,” Fulcrum Global Partners analyst Richard Greenfield wrote in a note.

Cablevision initially had high hopes for the Voom service — it focused on proprietary HDTV programming, filling a perceived demand from consumers with HD sets, and was initially targeted at more-affluent TV viewers.

But the service has struggled from the start.

Voom lost nearly 3,000 subscribers in the third quarter, falling from 28,700 in August to 26,000 customers in September. Churn has been unusually high at the service — it was 39% year-to-date, according to Cablevision’s third quarter financial report.

VOOM BURNING CASH

Rainbow DBS also has burned through about $400 million in funding from Cablevision and could require another $1.5 billion to $2 billion over the next several years to fund satellite construction and launches.

While Voom has struggled as a consumer service, it has valuable satellite slots that could be snapped up by existing DBS carriers, most likely EchoStar Communications Corp. EchoStar has the greatest need for additional capacity, mainly for HDTV service, and already has a satellite at the 61.5 degree slot, where Rainbow currently has a satellite in orbit.

In a research note, Citigroup Smith Barney analyst Niraj Gupta valued Voom’s satellite assets at about $200 million.

But as the most logical buyer of the Voom assets, EchoStar could get them cheaply. In a research report, Greenfield estimated that even if Cablevision were to sell Voom for $1, it would increase the target value of Cablevision stock by more than $5 per share.

Cablevision announced the RME spin-off in October 2003, a move that was to cleave the MSO into two separate companies: Cablevision Systems, headed by chairman and CEO James Dolan and including its New York metropolitan area cable systems with 3 million subscribers, its New York programming assets, its professional sports teams and the Madison Square Garden arena and Radio City Music Hall; and RME, headed by chairman and CEO Charles Dolan and including Rainbow DBS, the national programming assets and Clearview Cinemas.

September
October