Cablevision Systems Corp., the Bethpage, N.Y.-based MSO,
has moved a step closer in winning Internal Revenue Service approval to split off its
Rainbow Media Holdings Inc. programming unit, possibly into a separate tracking stock.
Analysts who participated in a Cablevision conference call
regarding its second-quarter earnings said the company confirmed that it has passed the
first technical level in obtaining IRS approval for a Rainbow spinoff, and that it expects
to clear the next hurdle within 30 days.
That second technical level, analysts said, involves
clarifying the relationship between Cablevision's Bravo cable network and Rainbow.
Cablevision has been weighing its options regarding a
Rainbow tracking stock for almost two years -- that's when the company first asked
the IRS for a ruling on a tax-free transfer of debt away from its "restricted"
group, which includes Rainbow.
"They said they have passed level 1 to get [IRS]
approval, and they have one more level to go," an analyst who participated in the
conference call said. "They said their preference is to do a tracking stock."
Cablevision declined to comment.
Although analysts said there is still a possibility that
Rainbow will not be separated, the signs are pointing to the unit being spun off.
"I would say that at this point, it is beyond the
point of being a distinct possibility," one analyst said. "If things fall into
place, it is likely to happen."
Wall Street has long favored a tracking stock for Rainbow
-- which includes American Movie Classics, Romance Classics, Bravo, The Independent Film
Channel and regional sports networks -- because it would highlight the value of the
But as Cablevision awaits word from the IRS, its
cable-operations and telephony units continue to turn in improved results.
Cablevision's pro forma revenue and adjusted operating
cash flow were up 15 percent and 12 percent, respectively, during the second quarter ended
Net revenue for the three-month period was $941.3 million
and adjusted operating cash flow was $254 million. For the six-month period, pro forma net
revenue was $1.9 billion, a 17 percent increase, and adjusted operating cash flow was $480
million, up 12 percent pro forma.
In a press release, Cablevision attributed the increases to
strong revenue performance from its cable networks and its Lightpath telephony subsidiary,
as well as strong cash-flow growth at AMC, Bravo and Madison Square Garden.
Revenue at Rainbow was up 20 percent in the quarter to
$289.1 million, and it increased 17 percent to $587.7 million in the first half. Adjusted
operating cash flow at the unit rose 38.2 percent in the quarter to $46.6 million and 21.8
percent to $74.8 million in the six-month period.
However, the company's net losses widened during the
quarter to $167.8 million, or $1.10 per share, from $122.9 million (82 cents) in the same
period last year. Losses in the six-month period were $406.4 million, or $2.68 per share,
compared with $150.2 million ($1.13) last year.
The cable operations and Lightpath reported combined pro
forma adjusted operating cash flow of $225.7 million, an 11 percent increase from 1998.
Pro forma net revenue for the two operations was $512 million, a 9 percent increase.
Basic-cable subscribers for the period totaled 3.4 million,
up 2.7 percent. Cablevision also ended the quarter with 22,300 cable-modem subscribers, an
increase of 5,200.