Ending months of speculation, Cablevision Systems Corp.
said its board of directors has approved issuing a tracking stock for its Rainbow Media
Holdings Inc. programming subsidiary.
Issuance of the tracking stock has been rumored for months,
and it was given added fuel after the company received permission from the Internal
Revenue Service last month to separate its Rainbow assets in a tax-free manner.
Although they don't correspond directly to asset
ownership, tracking stocks have proven popular with investors. For companies, they offer
the ability to unlock value from high-performing but undervalued assets.
Liberty Media Group, AT&T Corp.'s programming
subsidiary, and General Motors Corp.'s Hughes Electronics Corp. tracking stocks are
among the popular issues. Excite@Home Corp. and AT&T both got lifts on Wall Street
after disclosing plans to issue new tracking stocks.
SG Cowen Securities Corp. analyst Gary Farber said the
tracking stock is a good move for Cablevision, and he expects the company to be on the
hunt for programming and Internet acquisitions after the shares are issued.
"This is one of the situations where people are going
to find that the sum of the parts is truly greater than the whole," Farber said.
"Part of the reason for doing this is a valuation exercise, the other is as a [deal]
currency. This will give people a choice."
Farber estimated that Rainbow, which is 25 percent-owned by
NBC, is valued at well above $4 billion.
Cablevision's stock was up $1.69 per share Dec. 22,
the day of the announcement, closing at $77.25. It rose another $1 to $78.25 Dec. 23. Most
of those gains were lost on the next trading day, Dec. 27, when the stock closed at $76
per share, down $2.25. But the stock was up from $64.75 Nov. 26 -- the last trading day
before the company disclosed the IRS go-ahead.
Formed in 1980, Rainbow properties include national and
local programming networks such as American Movie Classics, Bravo, the News 12
local news channels and Madison Square Garden Network. In addition, the subsidiary
oversees Madison Square Garden, several professional New York sports teams and Radio City
Cablevision said it expects to issue the tracking stock in
two new classes, mirroring its current class-A and class-B stocks, sometime in mid-2000.
"We continue to believe that Cablevision's
programming and entertainment assets have value that is not fully recognized by the
marketplace," Cablevision CEO James Dolan said in a press release. "Our
programming and entertainment businesses continue to achieve strong revenue and cash-flow
growth, and we believe the tracking stock could provide an attractive new currency to
generate continued growth."
The tracking stock could also fuel speculation around a
possible sell-off of the company's cable systems. It has been rumored for months that
Cablevision chairman Charles Dolan would prefer to run the programming assets, including
the sports teams, and leave the grind of running the cable properties to someone else.
Selling off the systems could also bring some needed cash
for sports-franchise acquisitions. Cablevision is said to be the front-runner in the
bidding for the New York Jets National Football League franchise, offering as much as $650
million for the club. The company is also said to be interested in buying the New York
Mets Major League Baseball team.
Cablevision has already begun to sell off some of its cable
properties. It sold its Cleveland system to Adelphia Communications Corp. in December for
$1.5 billion, and it is in the process of selling its Boston and Kalamazoo, Mich.,
However, Farber said, it is premature to speculate on the
future of the cable systems.
"It's always a possibility, but at this point,
it's kind of premature," he added. "They are two different, somewhat
disparate [assets]. Both focus on the same region, but one is already being scaled back,
and the other one is going to be scaled up."