With just over a week to go before Cablevision launches its Rainbow DBS satellite and with an SEC accounting probe now under way at its Rainbow Media programming unit, questions are orbiting over whether the company will be able to conduct business as usual.
Several analysts on Monday warned that the announcement of a formal SEC investigation last Thursday could delay the company’s plan to spin off its satellite and cinema assets as a separate company, thus increasing the risk that Cablevision will have to invest more money in the controversial new DBS service. If the spinoff is delayed, Cablevision could be under greater pressure to sell the satellite and orbital slots, most logically to rival EchoStar.
While most analysts insist the SEC review is immaterial to the stock in the long term, the open-ended nature of the investigation could derail the spinoff and potentially undermine Cablevision’s alliance with Edgar Bronfman Jr.’s bid for Vivendi Universal Entertainment.
The three Rainbow media channels — IFC, WE and AMC — are pledged as supporting assets in the bid and would become part of VUE should Bronfman’s private-equity backed bid be successful. Sources say that if Bronfman does not make the final cut with VUE, Cablevision will likely look to sell off Rainbow in its own auction later this year or early next. Viacom is believed to be an interested buyer for the assets if they are offered up for sale.
Cablevision declined to comment on the status of any of its planned financing schemes and said that “particulars” on next week’s satellite launch will be forthcoming.
According to Merrill Lynch, the SEC’s probe into Rainbow could delay the planned spinoff of Cablevision’s DBS and Clearview Cinema assets, since the regulators will not approve any registration filings until the review closes. Probe could also delay any Cablevision plans to refinance its debt.
Merrill analyst Jessica Reif Cohen said in a note Monday that if the SEC investigation extends past December (the anticipated spinoff date), Cablevision may not be able to secure additional credit needed to fund a full-fledged DBS operation, increasing the possibility that it will pursue an outright sale of the asset.
The spinoff, scheduled for the fourth quarter, is designed to isolate Cablevision from the exposure to the risky and expensive DBS campaign, which is said to be founder-chairman Chuck Dolan’s pet project. Spinoff also caps Cablevision’s investment in the Rainbow DBS venture at around $560 million. Merrill Lynch estimates the cost of funding a competitive third national DBS operation could run as high as $2 billion.
Cablevision is due to launch its new bird into orbit July 17 and is obliged under the terms of its FCC license to have a commercial service up and running from its orbital slots by the end of the year.
Sources say Cablevision may well be trying to broker a wholesale high-definition distribution deal, effectively making Rainbow DBS a nonretail supplier of high-definition versions of other suppliers’ services. That approach would certainly minimize the cost of launching the service.
JPMorgan analyst Jason Bazinet said he’s confident the media group has sufficient bank credit to fund a modest satellite service launch as well as last week’s agreement to buy out MGM’s 20% stake in Rainbow for $500 million.
For the most part, Cablevision’s accounting woes are getting the benefit of the doubt with investors, if not yet the feds. The amount of money involved ($6.2 million out of $630 million in total expenses at Rainbow this year) is seen as insignificant, and the company has been aggressive in pursuing culprits (14 staffers fired last month) and stamping out any endemic accounting problems with a thorough internal audit.
Few believe Cablevision, whose shares have rallied nearly 25% this year alone, is in anywhere near the kind of regulatory trouble facing fellow cabler Charter Communications or AOL Time Warner.