News

Rainbow Deal May Hinge on Debt

1/07/2001 7:00 PM Eastern

After months of negotiations, $1 billion in debt may be all that separates USA Networks Inc. chairman Barry Diller from a coveted prize: Rainbow Media Group.

According to sources familiar with the negotiations, Diller has offered a mix of cash, stock and assumed debt worth $4.2 billion for the Rainbow properties. However, Rainbow parent Cablevision Systems Corp. is holding out in hopes that USA will take on some of the MSO's debt within that mix.

Rainbow Media-which includes cable networks American Movie Classics, Bravo, Independent Film Channel, WE: Women's Entertainment (formerly Romance Classics) and MuchMusic USA-currently has about $700 million of debt on its books. According to sources, Cablevision is asking that USA assume at least another $1 billion of Cablevision debt on top of that, in an effort to pare down the MSO's own leverage.

"I think the goals financially are to deleverage," said one source close to the negotiations. "If they can find a way to move their debt over to Diller, they would like to do that. But it is not easily done; there are creditors that would have to approve."

Were USA to assume $1 billion of Cablevision debt, it would pare the MSOs debt-to-cash flow ratio from 6 times to about 5 times. The source said that the $1 billion figure is not set in stone.

"They [Cablevision] would like to get lower, but five times is better than six times," the source said.

Rainbow and other programmers figure they can benefit from Viacom Inc.'s $3 billion acquisition of Black Entertainment Television in November. Given the hefty price Viacom paid-about 24 times BET's 2001 cash flow-several other networks are testing the deal waters.

Last month, Fox Family Worldwide Inc. chairman Haim Saban announced he would exercise his contractual right to force News Corp. to buy out his 49 percent interest in the network, which he values at around $2 billion.

Last week,
The Los Angeles Times
reported Discovery Communications Inc. chairman John Hendricks obtained the green light from its largest shareholder, John Malone's Liberty Media Group Inc., to seek a buyer.

But a Discovery executive denied the company was on the block.

"There are no plans to sell the company," the executive, who asked not to be named, said last week. "We remain very aggressive for 2001 to grow our business domestically and internationally. We have very robust growth targets both in our cable and other new media assets."

Liberty owns 49 percent of Discovery Communications Inc., which also includes widely distributed Animal Planet, The Learning Channel, Travel Channel and a host of digital networks and international channels.

The rest of DCI is owned by Cox Communications Inc. (24.6 percent), Advance/Newhouse Communications (24.8 percent) and founder Hendricks (1.6 percent).

Discovery's assets could command a hefty price. Some have estimated a value of $12 billion to $15 billion. Discovery spokesman David Leavy said Credit Suisse First Boston Corp. valued Discovery at $12 billion one year ago. The firm, which calculates valuations for Discovery each year, will soon release a current valuation, he added.

Cablevision's kingpins, chairman Charles Dolan and CEO James Dolan, originally planned to issue a tracking stock for Rainbow Media Group. But as big numbers were tossed around for programming assets, they opted to consider a sale instead and started entertaining bids in November.

The MSO has postponed special shareholders' meetings for the tracker three times, with the latest tabling the meeting date from Jan. 5 to Feb. 2.

"Prior to the special stockholders meeting, the company will continue to evaluate all of its options and alternatives related to the assets that would comprise Rainbow Media Group," Cablevision said in a prepared statement. The company had no further comment.

According to sources, Cablevision has retained New York investment bankers Bear shareholders' meetingshareholders' meeting & Co. and Merrill Lynch & Co. to handle the sale.

Sources and published reports said Cablevision imposed a Jan. 16 bid deadline.

Cablevision apparently wants a mix of debt, cash and stock, but not too much cash. Rainbow Media has about $700 million in net operating losses that can be carried forward, which would allow the MSO to avoid paying taxes on that amount of cash included in a deal.

Bidders for Rainbow were numerous at the outset. They included Viacom, Metro-Goldwyn-Mayer Inc., Comcast Corp., General Electric Corp.'s NBC and USA.

But according to one source familiar with the deal talks, USA is the only serious bidder still in the hunt.

Officials at Comcast and Viacom declined comment.

Comcast, the source said, was interested only in AMC and offered to swap some of its cable systems in Northern New Jersey for it. But Cablevision wants to sell all the assets in one package.

Viacom, NBC and MGM dropped out after failing to agree on a price, the source said. That leaves Diller, who has coveted the Rainbow assets-especially the Bravo network-for years.

Rainbow would be a good fit for USA, which needs additional programming to help fill the void from its loss of World Wrestling Federation Entertainment Inc. programming to Viacom last year.

In Rainbow, USA would gain five specialty niche networks with a total reach of more than 200 million homes. Bravo, which reaches 50 million homes alone, would fit nicely with a recent USA acquisition, Canadian arts channel Trio.

What might not fit are Rainbow Media's interests in eight regional sports networks, which could be flipped to News Corp.-the other partner in those ventures-in exchange for News Corp.'s interest in Cablevision's New York sports properties.

Steve Donohue contributed to this report

Want to read more stories like this?
Get our Free Newsletter Here!