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Cablevision unplugs

Company to spin off DBS service, cinemas

NEW YORK — Cablevision caught Wall Street by surprise for the second time in two weeks Monday, announcing plans to spin off its controversial new direct broadcast satellite service and its ailing Clearview Cinema chain into a newly floated company.

Investors, who’ve grown accustomed to expecting the unexpected from the Long Island, N.Y.-based media group, hailed the fiscally prudent move, which will limit the amount of money Cablevision will have to invest directly in the speculative Rainbow DBS venture. The transaction is expected to be completed by year’s end and includes a $450 million maximum contribution from Cablevision to help fund the new entity.

The spinoff news was a boon for the stock, which soared 12.5% Monday as investors breathed a sigh of relief that the risky and potentially expensive satcasting business will be separated from the core cable networks and programming business.

Outside approval

Plan, which has been approved by the board but will require IRS and Federal Communications Commission approvals, calls for Rainbow DBS and the company’s remaining 56 Clearview Cinema theaters (the New York-area chain had been on the auction block for the past nine months) to be spun off to Cablevision shareholders by the end of the year in a tax-free transaction. As part of the spinoff, the board has approved a $114 million investment in Rainbow DBS for the balance of this year, possibly covering marketing expenses and ground facilities. This would put the total cumulative investment in the satcasting service at roughly $926 million.

“This transaction will permit Cablevision to remain focused on its core entertainment and cable operations, especially in the New York area,” Cablevision prexy-CEO James Dolan said in a statement Monday.

The only link between the two companies will be a shared chairman and patriarch, Chuck Dolan, who has championed the DBS project despite numerous internal and external objections. Insiders said no staff has yet been attached to the new company, fueling some speculation that the move could still be posturing on the part of Dolan in an effort to attract a buyer.

Yet others suspect the spinoff could set the stage for a sale of cable assets. Deutsche Bank analyst Karim Zia, who voiced a mixed opinion on the move, speculated the spinoff provides a vehicle for the Dolan family to pursue other interests. The 275 Clearview cinema screens are valued at $50 million-$75 million.

Pricey bird

Either way, launching a full-blown competitor to EchoStar and DirecTV will be expensive. EchoStar took some six years to break even and incurred an estimated $1.7 billion in cash losses in the process. Analysts also cite previous failed efforts by News Corp. (ASkyB), Primestar and BellSouth as evidence of how difficult it will be to build a credible third satcaster.

One way to reduce the hefty cost of launching a competing service, says JPMorgan analyst Jason Bazinet, would be to negotiate a wholesale agreement with an existing player, most likely EchoStar.

Cablevision said it still intends to generate free cash flow next year, suggesting the $564 million cash payment can be met with its current cash reserves or by dipping into its existing bank credit.

“This is not as good as an asset sale, but it’s better than doing nothing … or worse, spending $2 billion (on Rainbow DBS),” said Bazinet, who added the focus on high-def could make sense and differentiate it from existing services.

Analysts at Janco Partners noted Monday: “We would have preferred to see a clean break from these assets facilitated through an outright sale, and believe the issue remains a nuisance to shareholders.”

Rainbow offer

Last month, Cablevision stirred up the pot by offering its Rainbow Programming cable nets in support of an Edgar Bronfman Jr.-backed bid for Vivendi Universal Entertainment.

Speculation swirls over the possible sale of Rainbow to any one of several interested cable net bidders, including Viacom and MGM, while Comcast is believed to be eyeing some of Cablevision’s regional sports nets. AOL Time Warner is considered the obvious buyer for Cablevision’s New York systems once it spins off Time Warner Cable late this year or early next.

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