Offshoot to help fund satellite biz

NEW YORK — Cablevision Systems Corp. threw its shareholders for a loop late Thursday, announcing a wholesale restructuring that will be followed by a spinoff of the company’s just-launched Voom satellite-programming division along with its prime basic cable networks AMC, IFC: Independent Film Channel and WE: Women’s Entertainment.

Originally, the company planned to combine Voom with its money-losing Clearview Cinemas movie chain. But highly valued assets like AMC in the new spinoff company will provide greater cash flow to fund the satellite operation while Cablevision will be able to pay down its own debt with a $75 million cash transfer from the cable nets and another $350 million in other assets. In addition, Cablevision said it will not make the previously announced cash contribution of $450 million to the satellite venture.

AMC, IFC, WE and Voom will fall under Cablevision’s Rainbow Media banner. What remains within Cablevision Systems are its regional cable and telecoms businesses along with Clearview Cinemas, Madison Square Garden, the N.Y. Knicks, the N.Y. Rangers, Radio City Music Hall and a platter of smaller programming businesses like Fuse, Fox Sports Net and News 24 Networks.

Following the spinoff, CEO James Dolan will become chairman of Cablevision while his father Chuck Dolan will take on the chairmanship of the new entity. The announcement was accompanied by a resounding vote of no confidence after the market closed by Steve Rattner’s Quadrangle Capital Partners. The investment group will cash out of its preferred stake in Cablevision, purchased last year for $75 million, which will cost the cabler around $114 million.

Eye on Peacock

Tom Eagan, a cable analyst with Oppenheimer & Co., said the Dolans could be preparing the way for the sale of an equity stake of 20% to 25% in the spinoff company to NBC, which would bring potential clones of the cable networks USA, Sci Fi Channel and Bravo to fill out the satellite-network offerings of Voom. NBC will soon take over USA and Sci Fi as part of its merger with Vivendi Universal, which also owns one of the largest movie libraries, a natural source of high-definition programming for Voom.

While Rainbow Media tries to enhance its spinoff resources with a partner like NBC, the restructuring may also have made it easier for Cablevision to sell its New York-based cable systems — reaching about 3 million subscribers — to Time Warner within the next year or so. That deal won’t happen right away: Time Warner’s stock is still languishing, at least in part because the company is facing governmental investigation of its business practices.

Who benefits

The spinoff, slated for early 2004, is intended to finance the recently launched satellite business, and comes just over a year after Cablevision re-acquired its Rainbow Media tracking stock. But analysts were left scratching their heads trying to determine exactly whether this is a good deal for Cablevision shareholders. By parking the cable networks in the satellite spinoff, Cablevision is losing some $150 million in cash flow per year that will now presumably go toward funding Chuck Dolan’s weeks-old Voom high definition platform.

Based on current demand for high performing cable nets, the three Rainbow channels are worth an estimated $2.5 billion-$3 billion, with AMC on its own worth roughly $2 billion.

Costs grow

The decision to include the core Rainbow businesses in the spinoff certainly boosts the likely value of the new entity, which is essential, since Cablevision also disclosed that funding requirements for Voom will be higher than anticipated due to its “more robust content and delivery strategy.” Voom expects to offer 88 standard definition and 39 premium high def channels by February 2004.

“The spinoff will create two distinct companies for Cablevision shareholders, each with separate funding and management, defined business focuses, and clear investment characteristics,” Chuck and James Dolan said in a statement.

“Rainbow’s national movie services and its developmental capabilities provide both content and financial resources for the spun-off company and, given the established financial strength of Rainbow’s national services, the new entity will be able to pursue its business plans, including the development and delivery of its exclusive HD programming via satellite to the nation,” the statement continued.

Investors fret

But what’s good for the new satellite stock may not be as good for the original Cablevision business, said some nervous investors.

Voom has been highly controversial ever since Chuck Dolan first proposed the idea of a third national DBS platform. The spinoff was intended to partially shield Cablevision shareholders from direct exposure to the heavy cash demands, and likely losses, from such a start up business. While the Dolans insist the new financial structure will provide “increased clarity” at Cablevision, enabling it to “pursue aggressively its strategic focus in the New York market,” some fund managers voiced concern that there will now be more co-mingling of funds. “Cablevision shareholders are effectively paying a lot more to avoid those losses,” said one analyst.

Debt reduction seen

Cablevision said the spinoff would enable Cablevision to reduce its debt level and increase its bank credit lines. Company maintains it will still reach positive free cash flow in 2004.

In preparation for the spinoff, AMC, IFC and WE will refinance all of its existing debt as well as a $250 million note issued to MGM in connection with the repurchase of the Lion’s stake in Rainbow earlier this year.

Prior to Jan. 1, 2004, the three channels will distribute to Cablevision some $75 million in cash on hand, at the time of the spinoff, a $350 million payment-in-kind preferred security issued by AMC. Cablevision also said it will likely increase its $194 million investment in Rainbow DBS by another $67 million.

Rainbow DBS would also include the video-on-demand service Mag Rack and a national ad sales company.

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