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Rainbow’s gravity

Spinoff of DBS Voom lowers boom on stock

NEW YORK — Investors holding out for the pot of gold at the end of Chuck Dolan’s Rainbow may have a long wait.

Shares in the Dolan clan’s family-run but publicly owned media group dropped like a rock Friday as Wall Street digested the Cablevision patriarch’s decision essentially to mortgage its valuable cable nets in order to pay for his prized Voom high-definition (and high-risk) venture.

Company on Friday announced plans to spin off the just-launched Voom direct-broadcast satellite platform along with highly valued Rainbow Media cable nets AMC, IFC and WE.

Widespread displeasure

The verdict from investors was swift. By Friday, at least four major investment banks downgraded their ratings on Cablevision stock, including Prudential, Smith Barney, Lazard Freres and CSFB, calling the spinoff plan value destructive for company shareholders. Ratings agency Standard & Poor’s joined the chorus, saying it was keeping the cabler on credit watch with “negative implications.”

Much of the negative reaction was in light of the announcement from Steve Rattner’s Quandrangle that it was exercising its right to cash out of its estimated $115 million position in the company. Though Rattner will remain on Cablevision’s board, his decision to bail out speaks volumes about the efficacy of the pending transaction.

Prudential and Lazard Freres cut their valuations on Cablevision, Lazard by just over $3 a share ($1 billion), and Prudential by a hefty $6 per share. Both cited shareholders’ increased exposure to the risky and potentially expensive DBS project.

“The fact that management is willing to destroy Cablevision shareholder value in order to meet its own strategic and financial goals suggests that the stock will continue to receive a hefty discount to its fair market value,” Pru analyst Katherine Styponias said Friday.

Going off-track

Investment research shop Stifel, Nicolaus agreed, noting Friday that the spinoff plan is a “severe left turn” from management’s previous commitment to cap its investment in Voom. “Now the company is exposing good, cash-flowing assets (the networks) to fund a very speculative business. In summary, we don’t like this.”

“Essentially the Rainbow (programming) assets are being used to fund the DBS platform instead of venture capital,” noted Bear Stearns’ high-yield research team.

One potential upside is that with the cable system assets isolated at parent Cablevision, there’s a greater likelihood that they will be sold, which puts a slight premium on the stock.

Cablevision shares fell 9.5% on Friday to close at $18.70.

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