A New Cable Vision: Buyout Would Take Systems Private, Keep Rainbow Public

by Wayne Friedman, Jun 21, 2005, 7:30 AM

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Cablevision Systems Corp.'s $7.9 billion intended buyout to take the company private has little to do with any advertising revenue play--but the remaining public part of the company will. The Dolan Family perceives its core business--that of its cable systems, and big subscriber fees--as undervalued by the stock market. And so in recognizing a deal, the family intends to buy back the 80% of the stock it doesn't already own. The market sensed this is good news--as Cablevision's stock jumped more than 16% on the day, closing at $32.

The remaining part of Cablevision's business that will remain public--Rainbow Holdings--will be a company that gets a higher percentage of its revenues from advertising than Cablevision Systems Corp. did as a company. Rainbow houses all the company's television programming and content assets--AMC, WE, IFC, Fuse, and regional channels, as well as Madison Square Garden, The New York Knicks, and New York Rangers.

The Dolan Family is offering $21 a share in cash and what amounts to $12.50 in Rainbow Holding stock--all of which brings the deal to $33.50.

Some industry analysts don't feel the Rainbow part of the deal is a good value right now. Rainbow pulled in weak $4.7 million net profits on $111.7 million in annual revenues. And in its recent reporting quarter, earnings and revenues were down. This compares poorly against other cable programming groups, such as MTV Networks--to be spun off as Viacom Inc. in early 2006--that are on a faster track. Is there an advertising growth financial factor for remaining part of Cablevision Systems? Local cable advertising sales are definitely growing, but subscriber fees still make the company's financials run strong.

"[Advertising revenues] definitely get discussed. It's good," said Leland Westerfield, senior research analyst for Harris Nesbitt, who covers Cablevision. "But it can't really ramp up the value of the company."

Cablevision's key driver is its strong position in the number one media market, New York City, and suburban areas, for its 3 million subscribers. As one of the smaller--but stronger MSO players--Cablevision has been eyed by the other New York area-MSO player, Time Warner, for acquisition. Cablevision's value is still solid because of its subscriber revenue potential, said Westerfield--especially in the growing area of digital services, where it has been lagging the rest of the industry. "It's the future half glass full [scenario]," said Westerfield. "They haven't gone that far with digital service penetration; they are much further along with voice and telephony services."

Despite recent family squabbles over Voom--its high-definition programming service--or its battles to keep the New York Jets from building a competing stadium near its Madison Square Garden, Cablevision's stock--because of buyout talk--has been already in gear, climbing 40% since last August.

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