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Rainbow Appears in a New Voom

Acknowledging that the startup of high-def DBS service Voom will cost more than expected, Cablevision Systems has drastically restructured its plan to spin off the satellite operations, sending its Rainbow entertainment networks along with it.

In another big surprise, Cablevision founder and Chairman Chuck Dolan will leave the cable company and become chairman and CEO of the new company, dubbed Rainbow DBS, which will include not just Voom but Rainbow's cable networks AMC, IFC and WE: Women's Entertainment. Dolan had been planning to be chairman of both Rainbow DBS and Cablevision.

The Dolan family will continue to control 23% of Cablevision's outstanding shares, and their supervoting shares give them majority of the company's shareholder votes.

Chuck Dolan's move heightened perpetual speculation that he's ready to sell the cable systems, which circle New York City. Time Warner is the most obvious buyer. However, Wall Street's immediate reaction was negative, with Cablevision shares dropping 12% by noon Friday and analysts cutting their target prices 15%-20%.

It didn't help that prominent media investment banker Steve Rattner decided to cash in a big Cablevision stake held by his Quadrangle Partners. Cablevision heavily touted Rattner's $75 million investment in July 2002 as a strong sign of confidence in the company. Rattner is selling out at a fat $39 million profit.

It's not clear whether Dolan made the move to satisfy tax and securities regulators' requirements that the companies be truly separate or because his interests lie more in the DBS and networks business than with the cable systems. Friends of Dolan say he is more enthusiastic about Voom than about anything they've seen in years. Dolan's son, President and CEO Jim Dolan, will become Chairman and CEO of Cablevision, which will have 3 million cable subscribers, stakes in Rainbow's regional sports networks, Radio City Music Hall and Madison Square Garden. A few other businesses remain with Cablevision, including music channel Fuse, formerly MuchMusicUSA.

The spin-off gives Voom a more stable financial base. Last August, Cablevision said it would spin Rainbow DBS off on its own, with the small ailing theater chain its only other operating asset. (Spinning that off too made it easier to keep the transaction tax-free to shareholders). Cablevision had planned to put $450 million in cash into Voom. Morgan Stanley satellite analyst Ben Swinburne estimates that would carry the DBS service through perhaps two years of operations.

Now Voom will be accompanied by networks that analysts estimate to be worth $2.5 billion-$3 billion and should generate $150 million-$175 million next year. But Rainbow DBS will already have lots of debt out of the gate, although $350 million of about $950 million in liabilities will be in non–cash-paying preferred stock owed to Cablevision, a relatively light financial burden.

The Voom service will be free until February, mostly because there are giant holes in its lineup. For example, there's no ESPN or HBO, in HD or otherwise. And Voom doesn't even have a deal with HDNet, which has made high-def programming its reason for being. It's also missing most of the top 10 basic services.