Cablevision Explores Spin-Off of Rainbow Programming Unit Again

Company emphasizes it plans no sale of its cable systems or networks arm though

NEW YORK - Shares of Cablevision Systems hit a 52-week high Thursday after it said that it is once again considering separating its cable systems and cable networks operations - something it has mulled in different scenarios several times in recent years.

The company previously even launched a Rainbow tracking stock in 2001 to highlight the value of that business, but decided after about 16 months to pull it. Cablevision president and CEO James Dolan said in a conference appearance Thursday though that "Rainbow now has become such a strong product offering...that it could stand alone." He cited AMC hit shows Mad Men and Breaking Bad as examples of Rainbow's success.

Cablevision emphasized that it is not considering a sale of its networks or cable systems, but simply looking at a spin-off of its Rainbow Media programming business. Industry and Wall Street folks have  often suggested a possible sale. In that vein, Sanford C. Bernstein analyst Craig Moffett said Thursday that recurring market chatter about a possible sale of the Cablevision cable systems by the likes of Time Warner Cable could return. He also said that after a spin-off "Rainbow would be a far easier acquisition target for one of the larger media companies," although it would also be "likely to command a far higher valuation as an independent entity."

The news of the possible spin-off fits in with an industry trend of recent years to separate content and distribution assets, such as when News Corp. sold DirecTV - a trend that the expected acquisition of NBC Universal by cable giant Comcast is running counter to.

The spin-off idea also fits in with Cablevision management's recent focus on providing more shareholder value via different initiatives, such as dividends and stock buybacks. For example, it previously also spun off Madison Square Garden. And analysts and management have at times argued that the company could unlock more stock value for its content and distribution businesses if they were separated.

Speaking at a Deutsche Bank investor conference, Dolan highlighted that this "clarity of assets" is what is driving the look at a spin-off. "We want to see shareholder value continue to increase," he said.

Cablevision said Thursday that its board has authorized the company’s management to explore a potential leveraged spin-off of Rainbow to Cablevision’s stockholders in a tax-free pro-rata distribution. It is eyeing such a move, if it decides to go forward with it, around mid-2011.

The pro-rata distribution would mean that the Dolan family that controls Cablevision would also retain control of a spun-off Rainbow. Dolan told the Deutsche Bank conference that his family likes the outlook of all  its companies and would be "happy" to stay invested in all three.

The firm plans to file the necessary documents with the Internal Revenue Service to seek a private letter ruling on the possible transaction’s tax-free status.

"Cablevision is confident of the strength of the Rainbow business, which houses an attractive portfolio of programming assets," and believes that the spin-off has the potential to enhance the value of that business and Cablevision's cable systems business alike, the company said.

It also highlighted that the separate entities would have greater flexibility to pursue strategic objectives, a reference often used to indicate potential deals.

A new, public Rainbow company would likely include: national programming networks AMC, WE tv, IFC, Sundance Channel and Wedding Central; IFC Entertainment, an independent film business; Rainbow Network Communications, a network programming origination and distribution arm.

The firm's cable and telecommunications business, Newsday, News 12 Networks, MSG Varsity and Clearview Cinemas would stay with Cablevision.

Cablevision didn't announce leadership plans should Rainbow become a separate public company, but Dolan lauded the firm's "excellent management team" led by president and CEO Joshua Sapan.
Dolan said though it would be "presumptuous" to announce a management structure given that the spin-off is in the early exploratory stages.

"These assets are performing at their historical best at this point, so there is a scale to Rainbow now that could make standalone valuation relatively attractive," said Miller Tabak analyst David Joyce about the potential spin-off. "Highlighting these assets could help their valuation and also make Cablevision a pureplay cable distribution company."
He also said Rainbow could use a separate stock for possible acquisitions.

Similarly, Thomas Eagan, analyst at Collins Stewart, predicted that the spin-off could add $2-$3 per Cablevision share.

As of 10am EDT, Cablevision shares traded at $31.94, up 10.4%, after earlier hitting a 52-week high of $32.09.