Cablevision: Rainbow Spin Will Unlock Value

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The planned spin of Rainbow Media will not only unlock the inherent value of its cable networks but could free Cablevision Systems to expand its distribution footprint, executives told an industry conference Tuesday.
Cablevision first announced its intention to spin Rainbow in November. The programming unit includes cable networks AMC, WE tv, IFC, Sundance Channel and Wedding Central.
At the Morgan Stanley Technology, Media & Telecom conference in San Francisco Tuesday, Cablevision executive vice president Gregg Seibert said that the decision to spin out Rainbow came after looking that the success of an earlier spin - Madison Square Garden. Seibert said that Cablevision had received little or no credit for MSG when it was part of the larger company - he pointed to how Cablevision's stock dropped more than $1 per share when MSG revealed a small accretive acquisition of the Chicago Theater in 2008 as an example.
"There was a disconnect in terms of what investors were looking for," Seibert said. "...The mismatch of cash flow objectives gave us an opportunity to highlight the value of MSG with our investor base."
While the disconnect with Rainbow was not quite as dramatic, Seibert said that the programming unit was being valued on par with the cable operation, despite being part of a faster growing segment.
Seibert said the company sees the spin as an opportunity not only to grow the valuation multiples for Rainbow, but also free the cable operation to expand.
"We have three distinct assets," Seibert said. "Having them in three distinct public companies makes all the sense in the world. And in addition the Rainbow spinoff will give us additional financial flexibility at Cablevision to either make more acquisitions, invest in the business or continue to return capital to shareholders and probably some combination of all of those."
Cablevision closed on its purchase of Bresnan Communications in December and already the company has made moves to put its own stamp on the business. Cablevision chief operating officer Tom Rutledge said that contrary to popular belief, the home densities in the Bresnan systems are similar to Cablevision's existing suburban footprint. And though Bresnan has higher satellite penetration than Cablevision and its cash flow per customer metrics lag the larger operator (under $250 per year vs. more than $400 per year for Cablevision), Rutledge believes the operator can drive growth.
"We're going to use telephony to drive data penetration, we're going to use data to drive video penetration," Rutledge said. "One of the things we immediately set about doing was upgrading all the video products so that we have a better product than satellite, more HD, more video on demand, higher data speeds so that we would be more competitive against DSL and a voice product that can't be beat by anyone in the marketplace and using all of that combination to drive deeper into the marketplace."
Cablevision has been the top performing MSO for years, but in the fourth quarter showed some signs of weakness when it reported a loss of 35,000 basic video customers, its biggest quarterly loss in years. While those losses were mainly due to a retransmission consent fight the operator had with Fox broadcasting in October, Rutledge said the battle was worth it.
Rutledge estimated that Cablevision saved $100 million in programming costs over Fox's original "take-it-or-leave-it" offer.
Rutledge called the 35,000 basic losses temporary, adding that despite some Wall Street concerns, there is still plenty of growth in the residential market.
" We think the basic residential business is still a business that will grow for us growing forward, that we're not maxed out in penetration by any means," Rutledge said.