Cable Operators

Voom’s Bird Will Take Flight to EchoStar’s Camp

1/23/2005 7:00 PM Eastern

After months of uncertainty, pressure from analysts and investors and some corporate infighting, Cablevision Systems Corp. made the first step in jettisoning Rainbow DBS, parent of its Voom-branded direct broadcast satellite service, agreeing to sell some assets to EchoStar Communications Corp for $200 million in cash.

Under the terms of the agreement, EchoStar will acquire the Rainbow 1 satellite, located at the 61.5 degree west longitude orbital position, as well as Federal Communications Commission licenses to construct, launch and operate DBS services over 11 frequency channels at the same orbital position.

EchoStar will also acquire the contents of Rainbow DBS’s ground facility in Black Hawk, S.D., and related assets. The transaction is subject to regulatory approvals.

In a statement, Cablevision said it will continue to explore strategic alternatives, including monetization, for its remaining Rainbow DBS-related assets, including programming, equipment and spectrum.

Most analysts were cheering Voom’s apparent eventual demise.

“It appears that Voom will be maintained during a transition period, but beyond that it appears to us that the service is finished,” wrote Fulcrum Global Partners media analyst Richard Greenfield in a research report.

The sale marks the latest chapter in the Voom saga, an ambitious, HDTV-centric service spearheaded by Cablevision founder and chairman Charles Dolan.

Dolan launched Rainbow DBS about a year ago, but the service has run into myriad troubles since. Voom — which offers more than 35 channels of HDTV programming, much of it exclusive content — blew through an estimated $500 million in 2004. It could need as much as $1.5 billion to $2 billion more over the next several years to build and launch new satellites.

Meanwhile, Voom has been bleeding subscribers. It lost 2,700 customers between August and September and currently has 26,000 customers. In contrast, Cablevision’s own HDTV service has about 104,000 subscribers.

Cablevision had planned to spin off the Voom service last year, along with its Rainbow Media Holdings national programming assets, into a new entity to be called Rainbow Media Enterprises. But after several delays, Cablevision announced in December that the RME spinoff would be suspended and the company was investigating strategic alternatives for Voom.

In a research report, Sanford Bernstein & Co. cable analyst Craig Moffett said the sale “closes the book on Voom, and is good news for everyone involved.”

Investors apparently agreed. Cablevision stock rose more than 11% last Friday morning ($2.88 per share) to $28.36 each.

The deal also appears to be a good one for EchoStar, which has been seeking additional satellite capacity to offer HDTV services to its customers.

In his report, Moffett said that EchoStar gets an operational satellite at a bargain price — he estimated it would have cost about $250 million to build and launch its own bird — and shaves more than two years from EchoStar’s time-to-market for offering local HDTV channels.

EchoStar said it is assessing how the Rainbow satellite’s flexibility can best be utilized to enhance its existing Dish Network services. One likely option is for EchoStar to use the Voom assets to expand the number of HD channels it carries.

“Assuming this deal goes through, it would be nice to have the capacity. High-definition is one issue we’ve been looking at in terms of capacity,” EchoStar spokesman Steve Caulk said.

According to sources, whether to shutter, sell or continue funding Voom has been a bone of contention between Cablevision CEO James Dolan — who favored selling off or shutting down the unit — and his father Charles. That dissent culminated in a board meeting Jan. 18, when a majority of directors sided with the younger Dolan to discontinue funding of Rainbow DBS.

Caulk said EchoStar executives first met with Cablevision executives “months ago” to discuss a possible sale. The deal was completed after the Cablevision board of directors met last Tuesday.

With the Voom albatross squarely off the MSO’s neck, Moffett said the remaining question is what to do with the national programming assets that were to be included in RME — AMC, the Independent Film Channel and WE: Women’s Entertainment.

In his report, Moffett said the three networks could attract strong interest. Possible suitors could be NBC Universal, which purchased the Bravo network from Cablevision in 2002; Viacom Inc.; The Walt Disney Co.; and News Corp.

Merrill Lynch & Co. media analyst Jessica Reif Cohen estimated that Rainbow DBS has cost Cablevision about $1.4 billion so far — $900 million in capital expenditures through 2003 and an estimated $477 million cash burn in 2004. The sale of Voom could also imply that an auction for the Rainbow national networks could be forthcoming, she added in a report.

While Reif Cohen wrote that Cablevision has no immediate capital needs to sell the networks, she added that they probably have more value as part of a larger stable of content assets. She valued the three networks at between $3.6 billion and $3.9 billion.

September