Rainbow seeks green via Wall St.

MGM involvement is puzzling

NEW YORK — Several cable networks are about to hit the market — the stock market.

Shares of Rainbow Media, parent of Bravo, AMC, Independent Film Channel, Woman’s Entertainment and owner of stakes in other programming assets, begin trading on the NYSE today. In fact, Rainbow CEO Josh Sapan will ring the opening bell with Willy Mays and Shirley Jones in tow.

Rainbow is a so-called tracking stock of Cablevision Systems, which has separated the national networks from the company’s local New York cable systems, venues like Madison Square Garden and Radio City Music Hall, sports teams and movie theaters. Cablevision stockholders will get one share of Rainbow for every two shares of Cablevision they own.

Puzzling partnership

Meanwhile, Wall Streeters are wondering if the networks will be able to boost revenue as fast and as furiously as promised. And they’re still scratching their heads over just what Rainbow and MGM are doing in bed together after MGM agreed recently to fork over more than $800 million in cash for a 20%, noncontrolling stake in the four networks. The surprise deal carried no public promise of distribution or anything else.

“I don’t really understand what MGM got for their money. They won’t control Rainbow in any way. How can they possibly justify the transaction?” asked one portfolio manager. The new partners have kept things vague, talking of working together on shared projects and enhancing value on both sides.

And they remained hazy during investor presentations in Gotham this week by Sapan and other Rainbow execs, including Katie McEnroe and Kathleen Dore.

Dore, president of Bravo Networks, noted that IFC has cable rights to televise the opening and closing ceremonies of the Cannes Film Festival in May and hopes to interweave footage from MGM product, premieres or parties into its coverage.

A lack of specifics is due in part to the fact that MGM faced a bidding war for Rainbow, said one MGM insider. “The point was to stop the competition from creeping in,” the insider said.

Barry Diller’s USA Networks, Viacom and NBC were interested.

Other Wall Streeters figure wily MGM owner Kirk Kerkorian and Cablevision chairman Charles Dolan must have hashed out some specifics they just didn’t want to share.

“I’m sure (MGM) got some promises. You don’t put up $800 million for nothing. Maybe it’s a handshake about forming a new channel, but you want to get your ducks in a row, negotiate with other people first,” said one analyst.

Rapid growth

A few shares of Rainbow have been issued already and are trading at about $25. Goldman Sachs analyst Richard Greenfield said that works out to a multiple of about 19 times his estimated $142 million in cash flow for Rainbow this year — on the high end valuation-wise of the major media companies he follows. He thinks the price is justified, however, given the nets’ potential to expand their subscriber base and ad revenue. Some of the networks haven’t ever taken advertising, others just started. That could mean rapid growth at Rainbow even in a sluggish ad market.

But one investor worried that AMC, for instance, could alienate viewers when it starts breaking into pics at halftime with ads for the first time. “The story hinges on how much advertising they can sell on the channels without ruining the channels,” he said.

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