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Cable Operators

Dolans Seek Gold at End of Rainbow

11/29/2010 12:01 AM Eastern

About two years ago, on July 31,
2008 — after the third attempt to take Cablevision
Systems private failed — CEO
James Dolan vowed on a quarterly earnings
call to work hard toward closing the
gap between the public and private valuations
of the company, what many analysts
have called the “Dolan discount.”

With the announcement on Nov. 18 of its
plans to explore a spinoff of its Rainbow Media
Holdings programming unit, Cablevision
has come yet another step closer to realizing
that goal.

“It’s really a continuation of the same philosophy
the company has been using for
some time now,” Dolan said of the possible
spin at the Deutsche Bank Securities Media
and Telecommunications conference on
Nov. 18. “It is about shareholder value. The
company instituted a dividend, a share repurchase,
spun off [Madison Square Garden],
all of which we think were beneficial
to our shareholders and good for the companies
that split apart. We’re studying the same
thing for Rainbow. We think the two companies
could possibly operate more effectively
separated out and that it again could bring
more value to shareholders.”

MORE THAN NETS

In addition to networks like AMC, IFC, WE
TV, Wedding Central and Sundance Channel,
the spin would also encompass IFC Entertainment,
the independent film business
that consists of multiple brands, including
IFC Films, IFC Productions and the IFC
Center, and Rainbow Network Communications,
a full-service network programming
origination and distribution company that
supplies varied services to the cable, satellite
and broadcast industries.

Assets not involved in the split would include
the cable and telecommunications
business, Newsday, News 12 Networks, MSG
Varsity and Clearview Cinemas. Th e company
is targeting a mid-2011 date for the
transaction.

Cablevision has made several moves
since that July day when it declared war on
the valuation gap. It issued a 10 cents per
share quarterly cash dividend in 2008 (upping
it to 12.5 cents per share in May 2010) ,
authorized a $500 million stock repurchase
program in June, spun off its Madison Square
Garden business to shareholders in a tax-free
transaction in February and agreed to purchase
independent MSO Bresnan Communications
for about $1.4 billion in June. The
company accomplisned all that while also
reporting some of the strongest cable systems
operating results in the industry over
the past several years.

Since July 31, 2008, Cablevision’s stock
price has risen 82% from $16.97 per share
to $30.91 each on Nov. 22. Madison Square
Garden, which was valued at about $5 per
share within Cablevision, was trading at
$23.15 per share on Nov. 22 (which equates to
about $5.89 per Cablevision share). Rainbow,
according to several analysts, could now be
worth between $9 and $12.50 per share, depending
on the structure of the deal.

“I don’t think that anyone can fault them
now,” Miller Tabak media analyst David
Joyce said last week. “They have been doing
all the right things. There is still upside
in the stock.”

Nearly every analyst that follows the stock
praised the Rainbow deal, adding that the
spin would unlock value that has been hidden
inside the Cablevision structure and
while increasing overall transparency.

Pivotal Research Group principal and media
and communications analyst Jeff Wlodarczak
made the boldest move, removing
the 10% “Dolan discount” on the stock altogether,
adding that the management volatility
and complex corporate structure that
warranted the discount in the first place has
all but been eliminated. He also boosted his
12-month price target on Cablevision stock
by $5 per share to $40. Other analysts’ targets
range from $35 to $37 for Cablevision.

In a research report after the deal was
announced, BTIG media analyst Richard
Greenfield noted that Rainbow will
likely receive a “takeover multiple”
after it is spun off , because it is more
likely to be sold in the future than
MSG.

Greenfield called MSG a “trophy
asset” that the Dolan family would
never part with. But Rainbow could
be the target of several interested
parties after 2012, when the tax penalties
associated with a sale would
expire.

While Cablevision has said publicly
it has no intention to sell
Rainbow now, a future sale would give
shareholders a second chance to extract
value from the asset.

Greenfield estimated that Rainbow could
be worth about $2.5 billion in 2012, or about
12 times estimated 2012 free cash flow and
10 times estimated 2012 earnings before interest,
taxes, depreciation and amortization.
That would put it on par with larger diversified media companies.

THIRD TIME’S THE CHARM?

If this spin is completed, it would be the
third time since 2002 that Cablevision has
tried to separate its programming assets
from its cable properties. It spun off Rainbow
as a tracking stock in 2002, bringing
it back in-house in 2005. In 2007, as part of
the Dolans’ second attempt to take Cablevision
private, the family proposed spinning
Rainbow at $12.50 per share.

Rainbow has invested heavily in original
programming, which has translated
into a slew of Emmy Awards (especially for
hits like Mad Men and Breaking Bad) and
robust growth. In the third quarter, Rainbow
grew revenue 12% to $291.4 million, and
adjusted operating cash flow rose 12.2% to
$96.4 million. At the National Networks division
(AMC, IFC and WE TV), net revenue
grew 10.7% to $228.2 million and AOCF was
up 3.8% to $99.5 million.

September