Rainbow Assets Put on Track

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Cablevision Systems Corp. revealed plans for its much-anticipated Rainbow Media tracking stock last week, creating a new entity that will include national programming assets.

Cablevision has talked about a Rainbow tracker for about a year, and most analysts see it as a way to unlock value stuck in the parent company's stock.

The news helped Cablevision shares to add $2 each Aug. 9, but the gain dissipated Aug. 10, when the price dipped $1.50 to $65.38.

Cablevision will split off some programming assets from Rainbow Media Holdings Inc. into a new tracker called Rainbow Media Group. Included will be networks American Movie Classics, Bravo, The Independent Film Channel, Romance Classics and Much-Music USA, as well as several regional sports channels.

Not involved are the company's New York sports and programming assets, including Madison Square Garden; the New York Knicks, Rangers and Liberty professional-sports teams; Madison Square Garden Network; Radio City Music Hall; News 12 Networks; and MetroChannels.

Although they don't correspond directly to asset ownership, tracking stocks can be popular. 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 popular issues. But more recent efforts have not performed well. The AT & T Wireless Group tracker closed at $25.38 Aug. 10, 38 percent below its $35 May initial-public-offering price.

"The biggest risk right now is the overall market and its receptivity to a deal like this, although I would note that the Rainbow assets are of a premiere nature," UBS Warburg high-yield analyst Aryeh Bourkoff said.

Most analysts see the market reacting favorably to the Rainbow issue, with Donaldson, Lufkin & Jenrette Inc. media analyst Karim Zia placing a $17-per-share value on the tracking stock. Zia likened the Rainbow tracker to that of Liberty, which has been a top media performer.

RMG assets have performed well, with aggregate revenue and adjusted operating cash flow up 20 percent and 32 percent, respectively, at AMC, Bravo and IFC in the second quarter. Overall, Cablevision had a revenue gain of 13 percent to $988 million, with adjusted operating cash flow rising 14 percent to $250.5 million.

Cablevision expects to begin distributing RMG shares in the fourth quarter. Shareholders will receive one share of RMG for every two shares of Cablevision they own. NBC, which owns 26 percent of Rainbow, will be able to transfer that interest over time in exchange for a 34 percent stake in RMG.

Cablevision vice chairman William Bell told analysts on a conference call that a small secondary stock offering and road show could take place next year.

Bourkoff said that given the performance of cable stocks this year-the sector is down about 40 percent-holding off on an IPO may be a good idea.

"I think they want to test the market," he said. "I don't think this is the right time in the market to proceed full-speed ahead."

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