NEW YORK – Cable operator Cablevision Systems is expected to complete on Thursday the spin-off of its Rainbow Media programming arm, which will now be known under the name AMC Networks and whose stock is scheduled to start trading on Friday.
Cablevision shareholders are getting one share of AMC Networks for every four shares of Cablevision they held as of June 16. But how will the two stocks fare after the spin-off?
Analysts have largely been bullish on the outlook for the shares of AMC Networks, which includes the AMC, IFC, Sundance Channel and WE tv networks. They have cited upside to carriage fees and advertising revenue as well as investors’ expectation that AMC could become an acquisition target.
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Collins Stewart analyst Thomas Eagan recently launched coverage with a “buy” rating and $44 target price, while BTIG analyst Rich Greenfield started the stock with a “buy” and $48 target.
A few days ago, he updated his model and raised his price target to $50. Among other things, he has highlighted how well the AMC cable brands have done, particularly the flagship AMC network, whose hit shows include Mad Men, Breaking Bad, Walking Dead and The Killing.
Earlier this week, Miller Tabak analyst David Joyce initiated coverage of AMC Networks with a “buy” rating, a $44 one-year target price and a $49 long-term target.
“We like the upside potential for the national networks’ ratings, advertising rates, sponsorship revenue and, particularly in 2013 and beyond, much higher affiliate fees” when carriage deals, mostly struck before the success of AMC shows such as Mad Men, Breaking Bad and The Walking Dead, come up for renewal, he said in a report. “In addition, the international and other businesses are winding down the money-losing Voom HD service, but are likely to grow the international subscriber [count] and platforms of the AMC and Sundance brands (currently totaling a small 8 million subs in Europe, Canada and Asia).”
And Brett Harriss, analyst at Gabelli & Co., said that “like cable networks in general, AMC possesses attractive underlying economics,” such as the dual revenue streams of affiliate fees and advertising.
“As the smallest pure-play cable network, we believe AMC will be viewed as an acquisition target,” he added. “We estimate an acquiror could comfortably pay at least $43 per share for AMC and expect the perception of AMC as a near-term target could drive the company’s valuations.”
Greenfield recently also said that while nobody expects the Dolan family that controls Cablevision to sell Madison Square Garden, which the firm previously spun off, or the remaining core Cablevision cable systems anytime soon, “we do not sense they have the same views about holding onto AMC Networks if the right bid were to be made in 2012/2013.”
Maxim Group analyst John Tinker initiated AMC Networks with a “buy” rating and $34 price target. “There could be short-term pressure on AMC when Cablevision S&P 500 index investors sell the spun-off non-index stock,” he cautioned.
What does the spin mean for Cablevision and its stock? Analysts have different opinions, but many like the stock’s chances.
Tinker continues to recommend investors buy the stock, on which he has had a $41.50 target, or $33 after the spin, on the basis that “spinning out AMC would highlight both companies’ value.”
Similarly, Joyce this week adjusted his price target on the stock, which he also rates a “buy,” from $44 to $35 to reflect the separation of AMC.
Marci Ryvicker of Wells Fargo recently said that the Rainbow spin-off will provide Cablevision with “substantial” financial flexibility and maintained her “outperform” rating, the equivalent of a “buy,” on the stock.
But Sanford C. Bernstein analyst Craig Moffett and Bryan Kraft of Evercore Partners are less bullish on Cablevision than their peers.
After the firm’s latest earnings report last month, Kraft said that “concerns over subscriber trends and competition, as well as potential acquisitions are likely to limit upside potential for the stock, which he rates “underweight” with a $35 target.
Meanwhile, Moffett recently put his target price for Cablevision’s stock after the spin at $27 and maintained his “market perform” rating on the stock.
“Our new target price is essentially in-line with our prior $33 consolidated target adjusted for our prior estimate of the value of AMC’s cable networks, net of the $2.4 billion in debt the entity is incurring,” Moffett said and added: “The company faces headwinds given its already high penetration rates and higher exposure to Verizon’s FiOS.”
Cablevision shares on Thursday closed up 1.3 percent at $36.21, giving the company a market value of $10.4 billion. AMC shares, which have been trading on a so-called when-issued or preview basis, closed up 9 percent at $43.50.
Email: Georg.Szalai@thr.com
Twitter: @georgszalai
