Pale Rainbow

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The Dolan family says spinning off Cablevision’s national and regional cable networks, Madison Square Garden, Radio City Music Hall, the New York Knicks, the New York Rangers, Voom and Clearview Cinemas will create an attractive “pure-play” content company.

Skeptical stock analysts, and some cable-industry insiders, don’t see it that way. They are already predicting that this odd assortment of assets — from programming services to real estate to pro-sports teams — will have a difficult time as a standalone public company in the long term.

It’s always risky trying to predict what cable’s mavericks — Cablevision Systems Corp. chairman Charles Dolan and CEO James, his son — will do in the future. But Wall Street is anticipating that once the family takes the company’s cable systems private for $7.9 billion — and spins off Rainbow Media Holdings — it will ultimately sell cable networks such as AMC, WE: Women’s Entertainment, Independent Film Channel and Fuse.

In Wall Street and cable-industry circles, speculation was that Rainbow’s regional sports channel holdings in New England and San Francisco would one day wind up in Comcast Corp.’s portfolio.

UBS analyst Aryeh Bourkoff last week suggested the Dolans might divest some of their programming holdings to raise money toward Cablevision going private. “It’s safe to say that the sports teams and the Garden would stay with Jim Dolan [who will be Rainbow’s CEO and president], but the other businesses eventually could be sold, the proceeds of which could be used to either sweeten the bid on the cable side or to deleverage the balance sheet, because they are going to approach life as a private company with a very leveraged balance sheet for the cable sector,” Bourkoff said.

There’s a whole list of other reasons why some believe the Dolans will sell off one or more of their national networks, or at the very least partner with a bigger player.

Even if the unpredictable Dolans prove everyone wrong and wind up keeping all their channels, Rainbow faces some challenges as a separate stock.

“These assets are, from my standpoint, trophy assets that are not good earnings businesses, such as the sports teams and Madison Square Garden, which are far more valuable to somebody else than to Cablevision as a public company or Rainbow as a public company,” said Richard Greenfield, an analyst at Fulcrum Global Partners.

“On top of that, you’ve got the cable networks, which are very solid assets but would be far a more valuable in the hands of a more powerful diversified media company with other cable networks,” he said. “We always felt that these were assets that should be monetized.”

AMC, WE and IFC are generally valued at $3.6 billion, or 14 times cash flow, with AMC, at 87.6 million subscribers, making up the bulk of that number.

AMC is worth an estimated $6 billion, accounting for about 60% of the three networks’ $256.3 million projected EBITDA [earnings before interest, taxes, depreciation and amortization] this year, according to Bourkoff.

“AMC is the jewel, in terms of the cash-flow generator, whereas the others — WE and IFC — have probably decent growth prospects, but obviously don’t generate meaningful cash flow today,” he said.

Craig Moffett, an analyst at Sanford C. Bernstein & Co., had a similar take. “One of the key issues in terms of valuation is that almost all of the EBITDA from the core Rainbow programming networks comes from AMC,” he said. “So the valuation methodology of simply applying a multiple to the EBITDA is implicitly assigning little or no value to IFC and WE, even though IFC in particular is a very salable property. So there’s potentially some upside for shareholders if they were to sell these assets.”

SMALL SIZE, LEVERAGE

As Wall Streeters pointed out, the reconfigured Rainbow is disadvantaged in that it won’t have the size and leverage of media conglomerates that have multiple cable networks, like News Corp., Time Warner Inc., NBC Universal and Viacom Inc.

By uncoupling Rainbow from Cablevision, Rainbow’s national cable networks and regional sports channels won’t be able to trade distribution on the MSO’s primo New York cable systems in exchange for getting — or continuing — carriage. For example, in the past Cablevision could have agreed to carry a channel owned by Time Warner in exchange for getting wider carriage for IFC or Fuse.

Finally, in the coming year investors will be able to put their money into several companies that are truly “pure play” in the cable-network arena.

Viacom Inc. is splitting off, putting all of its cable networks into one company. And once Time Warner Inc. spins off Time Warner Cable, most of its cable networks will be under one corporate tent.

“Although there are no cable-network stocks now, really, of any real import, there are going to be a lot of them in six to nine months,” said Thomas Eagan, an Oppenheimer & Co. analyst. “Rainbow will be running up against, in terms of competing for investors, a very high-growth stock with MTV and VH1, and then on the Time Warner side, CNN and HBO. So I don’t think it’s going to have the growth profile of either one of those two cable-network stocks.”

And that’s not the only issue, according to Eagan.

“If you couple that with the Rainbow stock including MSG [Network], which after ’06 isn’t going to have the Mets, it just seems to me that the Rainbow stock, as it’s now being contemplated, may need more assets to be viable in the long term,” he said. Major League Baseball’s Mets have plans for a new network beginning with the 2006 season, in which Comcast and Time Warner would hold equity. Rainbow’s MSGN and FSN New York would lose the games.

TAX STATUS IMPACT

Indications are the Rainbow spinoff will be a taxable transaction, which would permit Cablevision to flip its cable networks if it wanted to.

If the deal turned out to be structured as tax-free, there likely would be a holding period where Rainbow assets couldn’t be sold, analysts said.

The Dolans’ announcement last week adds to speculation that heated up several weeks ago, when Liberty Media chairman John Malone stepped down from Cablevision’s board, to avoid “potential concern” about his sitting on that board and on Liberty’s, since both “own programming companies.”

His move had Wall Street expecting that other shoe to drop, with Liberty possibly looking to acquire Rainbow’s networks to combine with its own assets, either with Starz Encore, or with QVC and Liberty’s stake in Discovery Communications Inc. Liberty is taking that stake public.

As Moffett noted, Malone also has equity in News Corp., so maybe it has an interest in acquiring some of the Rainbow networks.

Shortly after Malone left Cablevision’s board, Jim Dolan said that the subsequent speculation that Cablevision was looking to sell Rainbow assets was “wrong.” Dolan added that Cablevision has indicated in the past it would consider “strategic” deals involving Rainbow channels.

Beyond Malone’s departure from Cablevision, Rainbow’s recent pact with the indie-film-making Weinstein brothers (founders of Miramax Films) caught Eagan’s eye as a possible prelude to some kind of merger with Liberty.

The Weinsteins will not only bring new movies to AMC, WE and IFC; they’ll act as the home-video distributor of films and TV programming produced by Rainbow’s networks.

“Over the past month and a half, it just seems as if there was a series of events that were all about changing Rainbow, and the first one with the Weinsteins was creating more asset value, so it’s seemed as if one of the elements was to bulk up the value of Rainbow,” Eagan said. “And certainly more revenue streams, like home video, are going to do that.”

Besides Liberty and possibly News Corp., analysts suggested that Viacom, NBC Universal, The Walt Disney Co. and Time Warner could be potential buyers for Rainbow’s national networks.

SPORTS TO COMCAST?

“Comcast is an obvious potential buyer for what’s left of the regional sports networks,” Moffett said.

Rainbow is a partner with Fox in the regional sports network in San Francisco, a market where Comcast is the dominant cable operator. The Philadelphia-based MSO would probably relish owning FSN Bay Area, according to several analysts.

“Comcast will look hard and long at those assets, and I would put them as a leader to get them,” one cable programmer said.

Not everyone sees the split of Cablevision and Rainbow as having a big effect on the fortunes of either company.

“I see this move not having a major impact in the New York regional-sports network marketplace,” said Ray Hopkins, chief operating officer at Yankees Entertainment & Sports Network. “The greater impact will be MSG losing the Mets and being weakened.”

Others claim Rainbow never had the latitude to use Cablevision’s distribution as a bargaining chip to drive carriage for its networks.

Some even think Rainbow will be boosted by being unlinked from Cablevision. Now Rainbow will be able to do carriage deals with telcos that compete with Cablevision, such as Verizon Communications Inc. and SBC Communications Inc.

Kent Gibbons and R. Thomas Umstead contributed to this report.

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