Cablevision explores Rainbow Media spinoff

Cabler aims for mid-2011 move

At a time when pure-play cable programmers represent one of the hottest sectors in media, Cablevision said Thursday that it is exploring spinning off its Rainbow Media entertainment group, whose channels include AMC, We TV, Sundance and IFC.

AMC’s push into original programming with Emmy-winning shows “Mad Men” and “Breaking Bad” has given Rainbow new cachet in recent years, fueling speculation that Cablevision would consider selling it.

Earlier this year the Long Island, N.Y.-based cable operator spun off its MSG business, which includes Madison Square Garden, the New York Knicks and Rangers and Radio City Music Hall.

The Rainbow divestiture would be structured as a tax-free distribution to shareholders, the company said, adding, “Cablevision is confident of the strength of the Rainbow business, which houses an attractive portfolio of programming assets, and believes that the spinoff has the potential to enhance the value of that business and Cablevision, thereby providing each company with greater flexibility to pursue strategic objectives.”

During the third quarter, Rainbow’s revenues rose 12% to $291 million while operating profits grew 18% to $63 million. Ad revenues grew 13%, largely on higher rates charged at AMC. BTIG analyst Richard Greenfield estimated that Rainbow could be worth $2.5 billion in the first full year after it is sold.

The company is targeting the middle of next year for the move.

The Rainbow spin could be a precursor to an attempt by Cablevision to go private again. The controlling Dolan family has tried to take the company private in the past; the last time was in 2007, when father and son Chuck and Jim Dolan offered $10.6 billion for the company. But shareholders opposed the offer, saying the Dolans were trying to get the company on the cheap.

Stripped of Rainbow, Cablevision would be seen as more of a pure-play cable operator, except for its Newsday newspaper holdings and Clearview Cinemas. Still, Cablevision could become merger bait. Speculation has long been that Time Warner Cable covets Cablevision’s assets in the wealthy footprint of metro New York.

A free-standing Rainbow would certainly garner a lot of attention from investors. Wall Street is enamored with cable programmers’ dual revenue streams of advertising and distribution fees. Discovery Communications and Scripps Networks Interactive are among the top performers in the media sector, with their stocks up 32% and 28% in the past year, respectively.

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