Cablevision Says Rainbow Spin Will Unlock Value

The planned spin of Rainbow Media
will not only unlock the inherent value of its cable networks but could
free Cablevision Systems to expand its distribution footprint,
executives told an industry conference Tuesday (Mar. 1).
Cablevision first announced its intention to spin Rainbow in November.  The programming unit includes cable networks AMC, WE tv, IFC, Sundance Channel and Wedding Central.

At the Morgan Stanley Technology, Media & Telecom conference in San
Francisco Tuesday, Cablevision Executive VP Gregg Seibert
said that the decision to spin out Rainbow came after looking that the
success of an earlier spin – Madison Square Garden.

Seibert said that Cablevision had received little or no credit for MSG
when it was part of the larger company – he pointed to how Cablevision’s
stock dropped more than $1 per share when MSG revealed a small
accretive acquisition of the Chicago Theater
in 2008 as an example.

“There was a disconnect in terms of what investors were looking for,”
Seibert said. "The mismatch of cash flow objectives gave us an
opportunity to highlight the value of MSG with our investor base.”

While the disconnect with Rainbow was not quite as dramatic, Seibert
said that the programming unit was being valued on par with the cable
operation, despite being part of a faster growing segment.

Seibert said the company sees the spin as an opportunity not only to
grow the valuation multiples for Rainbow, but also free the cable
operation to expand.

“We have three distinct assets,” Seibert said. “Having them in three
distinct public companies makes all the sense in the world. And in
addition the Rainbow spinoff will give us additional financial
flexibility at Cablevision to either make more acquisitions, invest in
the business or continue to return capital to shareholders and probably
some combination of all of those.”

Cablevision closed on its purchase of Bresnan Communications in December
and already the company has made moves to put its own stamp on the
business. Cablevision COO Tom Rutledge said that
contrary to popular belief, the home densities in the Bresnan systems
are similar to Cablevision’s existing suburban footprint. And though
Bresnan  has higher satellite penetration than Cablevision and its cash
flow per customer metrics lag the larger operator (under $250 per year
vs. more than $400 per year for Cablevision), Rutledge believes the
operator can drive growth.

“We’re going to use telephony to drive data penetration, we’re going to
use data to drive video penetration,” Rutledge said. “One of the things
we immediately set about doing was upgrading all the video products so
that we have a better product than satellite, more HD, more video on
demand, higher data speeds so that we would be more competitive against
DSL and a voice product that can’t be beat by anyone in the marketplace
and using all of that combination to drive deeper into the marketplace.”

Cablevision has been the top performing MSO for years, but in the fourth quarter
showed some signs of weakness when it reported a loss of 35,000 basic
video customers, its biggest quarterly loss in years. While those losses
were mainly due to a retransmission consent fight the operator had with Fox broadcasting in October, Rutledge said the battle was worth it.

Rutledge estimated that Cablevision saved $100 million in programming costs over Fox’s original “take-it-or-leave-it” offer.

Rutledge called the 35,000 basic losses temporary, adding that despite
some Wall Street concerns, there is still plenty of growth in the
residential market.

“We think the basic residential business is still a business that will
grow for us growing forward, that we’re not maxed out in penetration by
any means,” Rutledge said.