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Division at Cablevision

Dolans' plan to spin off company into public, private entities has analysts salivating at combos

With Father’s Day just behind us, what could be more heartwarming than the reconciliation between estranged family members, with Daddy giving Sonny his own operation?

At Cablevision, Chuck Dolan has begun the process of spinning off his cable networks into a separate, publicly traded company. Chuck takes charge of the cable systems, the linchpin of the company, which he plans to take private. Son James gets everything else, led by four nationally distributed cable networks: AMC, WE: Women’s Entertainment, IFC and the music network Fuse.

It seems like a happy Hollywood ending. But Hollywood loves a sequel, and most onlookers are waiting for the next chapter in this family saga. The question is whether the proposed spinoff (whose name, Rainbow Media Holdings, won’t change) will get swallowed up in a merger — or will begin doing its own devouring of other properties.

The fate of Rainbow will continue to reside in the hands of the Dolans, who propose to own 20% of the new public company, selling the remaining 80% to Cablevision shareholders. The Rainbow portfolio also includes Madison Square Garden and its sports teams (the N.Y. Knicks, Rangers and Liberty), regional cable networks (led by MSG), Radio City Music Hall and Clearview Cinemas.

In a reversal of the Rainbow strategy, the Dolan family is offering to buy the outstanding shares of Cablevision — a cable operator that serves 3 million customers in the New York metropolitan area — in order to take it private.

Homing in on Rainbow, analysts are salivating at the prospect of mergers and the possible combinations.

Buyers’ attention will zero in on AMC, the most valuable cable-network property by far in the Rainbow collection. Craig E. Moffett, cable analyst for Bernstein Research, speaks for a number of Wall Street mavens when he writes that “potential bidders” of the Rainbow portfolio include Viacom, Walt Disney, Time Warner, Comcast and John Malone’s Liberty Media.

There’s no question that AMC has become one of Wall Street’s cable-network darlings. The network’s dual revenue streams are flowing with dollars. AMC’s advertising revenues are expected to grow by 10% this year, to $116.2 million, and the dollars it pockets from cable operators are pegged to rise by 5%, to $236.8 million, according to Kagan Research.

AMC added 1.1 million more subscribers (at 22¢ a month each) in the past year, swelling its total to 86.7 million. (That’s more than such high-visibility networks as FX, the Disney Channel, Sci Fi Channel and Court TV, according to Nielsen Media Research.)

A few years ago, AMC featured black-and-white oldies as its stock in trade when the initials stood for American Movie Classics. However, when the network started selling 30-second spots for the first time in 2000, it began loading up on more recent theatricals, figuring that fresher movies lure younger viewers.

The blueprint worked: AMC’s ratings have risen steadily over the past few years, up in total viewers by 12% (and by 8% in adults 18 to 49) in 2003, and by 11% (and a gaudy 18% in A18-49) in 2004, according to Nielsen. (The gains among young viewers are even bigger in the first half of 2005.)

One scenario that’s making the rounds focuses on NBC Universal, a logical buyer, at least of AMC. The network’s schedule is wall-to-wall movies, and NBC U owns thousands of theatricals (not only the Universal Pictures library but all the movies made by Paramount before 1948).

NBC and Dolan have done business in the past: More than two years ago, NBC bought another Dolan-owned network, Bravo, for about $1 billion.

WE, which runs lots of movies along with highly promoted reality shows like “Bridezillas,” is far behind AMC. But, like AMC, more and more young viewers are checking it out: WE has shot up by double digits in adults 18 to 49, A18- 34 and A25-54 in the past two years. Although WE hasn’t added subscribers in the past year, it still reaches 55.3 million customers, whose cable systems pay the network an average of 9¢ a month for each sub.

“Rainbow is in a really cushy situation,” says Rob Stengel, a principal in the Boston-based Continental Consulting Group. Echoing Moffett, Stengel says any one of the five giant media conglomerates with vast cable-network holdings could find ample justification for scarfing up AMC, WE, IFC and Fuse.

The most rumored potential buyer is Malone, whoresigned from Cablevision’s board earlier this month, citing unspecified conflicts of interest.

Larry Gerbrandt, who runs his own cable consultancy, says if Malone succeeds in taking the Discovery Networks public (with or without a greenlight from Discovery’s other owners, Cox and Advance Newhouse), “I could see Discovery merging with Rainbow at some point.”

But if the price isn’t right, Gerbrandt says Rainbow might reverse course and become a buyer, pointing out that it’d be relatively easy for the company to line up the capital because of its healthy balance sheet. He cites Geraldine Laybourne’s standalone network Oxygen as a program service that could serve as a companion to WE, since both gear their schedules toward women.

Another network that could snuggle up nicely with the Rainbow group is Hallmark Channel, a long-rumored takeover target because it has very little marketplace leverage; its only sibling is the 18-month-old Hallmark Movie Channel.

Mike Egan, a partner in Renaissance Media, the cable consultant, also thinks Rainbow is a more likely buyer than seller.

“So many people in the industry keep telling us that we’re going to wake up tomorrow morning to the news that a big media company has swallowed up Rainbow,” Egan says.

But he adds that reports of the imminent sale of Rainbow and its Cablevision parent have risen to the surface periodically almost from the day AMC opened for business in October 1984.

Egan’s conclusion: “I’d be surprised if Chuck and Jim Dolan are ready to pack it in.”

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