Street Applauds Rainbow Decision

Wall Street watchers are applauding Cablevision's decision to suspend its planned spin-off of Rainbow Media assets. That decision calls into question the future of the company’s DBS service, VOOM!. 

Investment firm Friedman Billings Ramsey, which didn't like the idea of Cablevision tying its entertainment assets to its struggling DBS play, has upgraded the company's stock. Openheimer and J.D. Hanauer agree the move helps Cablevision.

Rainbow Media assets include VOOM!, which launched in October 2003, plus three cable nets We: Women's Entertainment, American Movie Classics and the Independent Film Channel. According to FBR, VOOM! lost $60 million in operating cash flow in the most recent quarter, and could lose another $200 million in 2005.

“Without a spin-off, we like the valuation of CVC even more because the company is free of the significant cash-flow losses and it clears away much of the ambiguity on the company valuation,” Oppenheimer media analyst Thomas Eagan said in a report.

Through the third quarter, VOOM! counted only about a quarter of a million subscribers, compared to DirecTV’s 13.5 million subscribers and EchoStar Communications’ Dish Network’s 10 million subs.

“Basically, having a smaller, third satellite TV competitor based on gaining traction with proprietary and widely available high-definition channels could be a bit too Quixotic for the public markets,” media analyst David Joyce of JB Hanauer & Co. said in a report.

Cablevision will likely have to spin-off, shutter, or reconfigure VOOM! at some point if it wants to keep its key New York City cable franchise. It cannot own both a cable system and the land-based distribution licenses, which are currently tied to VOOM!

Cablevision could look to sell VOOM! or find a partner, but media analysts are skeptical about both prospects. It is also unclear what Cablevision would do with its VOOM-related satellite, a Lockheed-Martin bird that Merrill Lynch values at $250 million.  

Alan Bezoza, FBR's SVP, broadband and cable research, says the company has upped its rating from "market perform" to "outperform" on the news.

"We had been skeptical regarding the rationale for the spin-off that would have married Rainbow's cash-flow-rich content with the cash-flow-draining DBS assets (a.k.a. VOOM!)," he said, "while adding a heavier debt load to the remaining cable assets. We believe that this move removes an overhang on the stock," he said, pointing out that its cable and content businesses are doing well.

FBR pointed to the company's voice business; cutting-edge VOD offerings, particularly gaming; and recent DVR roll-outs as reasons to be buoyant about Cablevision's core businesses.

In a statement filed with the SEC, Cablevision said, "The board of directors has decided to suspend pursuing the spinoff of its Rainbow Media Enterprises subsidiary, in its previously announced form, and instead to pursue strategic alternatives for its Rainbow DBS business."