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Rainbow Needs More Credit

5/23/2004 8:00 PM Eastern

Cablevision Systems Corp. has filed a Form 10 registration statement for its planned separation into two distinct companies, and the 180-page document pretty much said what analysts expected — except for one wrinkle.

To do the spinoff, Cablevision must increase the borrowing capacity of its Rainbow Media Holdings national programming networks by $200 million to $400 million.

Rainbow Media Holdings currently has an $821.4 million line of credit, of which $98.8 million was unused.

According to the securities filing, that debt — less the undrawn amounts — would have to be repaid on the date of the spinoff, along with a $250 million credit facility for Rainbow Media Holdings.

A new $1.2 billion to $1.4 billion credit facility would pay off that debt and provide additional borrowing capacity for the new entity.

'COULD BE DIFFICULT’

In a research report, Prudential Securities Inc. analyst Katherine Styponias wrote that obtaining the necessary credit facility “could prove to be difficult and/or come with restrictive covenants attached.”

According to the Securities & Exchange Commission filing, Rainbow DBS will need about $482 million in additional funding (including $85 million for DTV Norwich, a holding company for satellite spectrum licenses Cablevision acquired earlier this year).

The document said Cablevision will provide about $237 million of that funding to Rainbow DBS ($160 million has already been dispersed).

Businesses remaining with Cablevision following the spinoff will include its cable and telecommunications businesses; Lightpath; Madison Square Garden and its pro sports teams; Radio City Music Hall; and certain other businesses including: Fuse, News 12, Metro Channels and Rainbow’s interests in regional sports networks around the country.

Rainbow Media Enterprises Inc., the new entity, will include Rainbow DBS; Rainbow Programming, which will include national movie channels AMC, WE: Women’s Entertainment and the Independent Film Channel, Mag Rack, Sportskool, World Picks and other video-on-demand services; and Rainbow Movies, the corporate name for the theater group that will continue to do business as Clearview Cinemas.

'RM’ STOCK COMING

The spinoff is slated for some time in July, and Rainbow Media Enterprises shares would be traded on the NASDAQ exchange under the symbol “RM.”

No price has been set for the shares, which will be distributed to existing Cablevision shareholders.

Like most other analysts, Styponias is still unconvinced about the viability of Rainbow DBS (doing business as Voom), which launched last October and provides basic cable channels as well as 21 proprietary HDTV channels to subscribers.

“We have doubts as to the sustainability of any competitive advantage Voom may now have as an 'HD-heavy’ multichannel service,” Styponias wrote.

All has not been smooth sailing for Voom.

The service reported a $45 million operating cash-flow deficit in the first quarter, even after making some big changes to its programming packages.

When Voom launched in October, customers were required to pay $799 for equipment and as much as $79.90 per month for the service.

According to the Form 10, Voom extended a free service promotion to March 31, while it experimented with different offers.

In February, it finalized carriage deals with Home Box Office and Cinemax (providing seven standard-definition channels and two HDTV channels); eight Turner Broadcasting System Inc. networks (including Cable News Network, Turner Network Television and Turner Classic Movies); and four NBC networks, (Bravo, Bravo HD, CNBC and MSNBC).

PICKING UP SUBS

Voom also modified its programming packages, offering different programming for between $39.90 and $79.90 per month, and allowed customers to acquire the necessary equipment in one of two ways: leasing the satellite receiver for $9.95 per month or purchasing it for $499. Voom also gave each new customer a $300 programming credit.

The revamping seemed to work — Voom said it had 8,000 customers in the first quarter (up from 1,600 in December) and another 3,400 customers were awaiting installation.

The Cablevision operations had an easier time in the first quarter, with revenue increasing 19% to $1.2 billion, on strong growth in digital, high-speed Internet service and cable telephony. Adjusted operating cash flow was up 13%, to $275 million, slightly below expectations.

Cablevision said the first-quarter figure includes $13.5 million of legal and indemnification expenses and retroactive 2003 programming cost increases related to the agreement with the Yankees Entertainment & Sports Network.

Cablevision added 42,000 new subscribers to its voice-over-Internet protocol product, finishing the period with 71,000 Optimum Voice customers.

Optimum Online, its high-speed Internet offering, added 72,000 customers in the period.

Cablevision’s digital offering, iO: Interactive Optimum, added 150,000 new subscribers in the period. Basic subscribers dipped by 820 customers in the quarter.

VOIP SELF-INSTALLS

On a conference call with analysts, Cablevision chief operating officer Tom Rutledge said the MSO was moving toward a self-install model for the voice product later this year, which should help improve profit margins now in the 40% to 45% range. He estimated that Cablevision spends about $135 per customer for the voice product.

Rutledge said self-installation of the voice product would occur later this year. There are no short-term plans to make the voice service available to non-high-speed Internet customers, he said.

“We have not unbundled the product,” Rutledge said. “We think that a lot of functionality that you can get out of this product ultimately derives from having a high-speed access service.

“We think we can drive more value out of combining the service and making it surpass what the public switched network does, rather than limit it to traditional telephony.”

Cablevision’s 1Q
Subscriber Changes
Source: Cablevision Systems Corp.
Basic: Down 820
Digital: Up 150,000
High-Speed Internet: Up 72,000
Telephone: Up 42,000

September