MGM Buys 20% Slice Of Four Rainbow Nets

In a late-breaking development, Cablevision Systems Corp. last week agreed to sell a 20 percent stake in four Rainbow Media Group networks to Metro-Goldwyn Mayer Inc. for $825 million.

Included in the deal are American Movie Classics, Bravo, The Independent Film Channel and WE: Women's Entertainment (formerly Romance Classics).

"This partnership will provide an opportunity to enhance Rainbow's networks, particularly as we move these channels into the digital era," Cablevision CEO James Dolan said in a statement last Thursday night.

Cablevision said it plans to move forward with a proposal to issue a tracking stock for Rainbow and will hold a shareholders' meeting Feb. 16 on the topic.

The MGM deal will not affect the distribution of ownership for the tracker, in which Cablevision will own 66 percent and NBC, a General Electric Co. unit, will hold about 34 percent.

MGM would receive no shares of the Rainbow Media Group tracker once it is issued, according to Cablevision. But it will have an economic stake in four of the networks within that tracker.

Rainbow, on the block since November, was widely believed to have taken down its for-sale sign after a disappointing auction process. The MGM deal values Rainbow at $4.125 billion, which is about what Cablevision wanted for the whole enchilada.

SG Cowen Securities Corp. analyst Gary Farber valued the deal at about 26 times Rainbow's consolidated cash flow.

"This was a good deal, particularly for Cablevision," Farber said. "They didn't give up that much and they maximized their value."

As it stands, MGM gets a passive stake in Rainbow and Cablevision gets cash: the deal does not give Cablevision access to MGM's film library.

But Rainbow CEO Josh Sapan said last week that could change. "This sets the stage for future things to be done," Sapan said, adding the deal could lead to Rainbow using MGM content to develop additional channels.

"In the future-and with them as an equity partner-that is, of course, a possibility," Sapan said.

Sapan said the deal allows Rainbow to pay down debt and provides cash "to expand and accelerate our activities, [and] that includes improvement of programming on the channels."

"MGM has a great library, their film production slate for 2001 looks terrific, they've revived their [United Artists] label and they're a television producer," Sapan added. "We have an increasing appetite for movies and TV shows.

In the future, anything is possible."

MGM chairman Alex Yemenidjian called the Rainbow deal the tip of the iceberg.

"This is the first step in MGM's vertical integration strategy in the United States, and it would be a mistake to assume that it will be the last," Yemenidjian said in a statement.

Cablevision's stock took a hit the day after the announcement, dropping $3.34 per share to $84.55 each in early trading Feb. 2.