God I feel sorry for you guys...This is good stuff
No one has access to DJ or the Journal?
6 Sep 2004 23:00 ET WSJ(9/7) Heard On The Street: Cablevision Spinoff Risky Bet
(From THE WALL STREET JOURNAL)
By Peter Grant
CABLEVISION SYSTEMS Corp.'s plan to spin off Rainbow Media Enterprises this month gives investors the opportunity to buy into the quixotic satellite-television dream of Cablevision founder Charles Dolan.
The price of entry should be low. The betting is solidly against the success of the new satellite service for high-definition television owners, called Voom. Mr. Dolan has a great track record, having built Cablevision Systems into the country's sixth-largest cable operator with about three million subscribers in the lucrative New York City market.
But many analysts and investors feel his business plan for Voom is flawed, given the tough competition the service faces from the two established satellite TV companies, DirecTV Group Inc. and EchoStar Communications Corp.
Some institutional owners of Cablevision are expected to dump their shares of the spinoff when it occurs. "I have a hard time understanding what they're offering that will make them unique enough to build a business as the No. 3 satellite company," says Kurt Funderburg, an analyst with Harris Associates, a money-management firm based in Chicago that owns Cablevision shares.
For those with a high-risk threshold, though, Rainbow might turn out to be a decent investment -- especially if its shares can be picked up cheap. There is always the possibility that Mr. Dolan is right and most everyone else is wrong. The cable-industry pioneer has won over his skeptics on several occasions, like when he founded HBO.
Another reason to own Rainbow is that the spinoff, along with Voom, will include three of Cablevision's successful cable networks: AMC; WE: Women's Entertainment; and Independent Film Channel.
Analysts value those networks at more than $1.37 billion -- or $4 to $5 a Cablevision share. But the value of the spinoff is expected to be less than that because the satellite venture likely will eat up a good chunk of the networks' earnings, about $200 million annually before interest, taxes, depreciation and amortization.
One bullish scenario would be if Voom fails sooner rather than later. In that case, the service's existing satellite would be sold and the cash flow of the three networks would be available for dividends or more productive uses. Some investors in Rainbow "will be betting counterintuitively on the early demise of the satellite business," says Craig Moffett, a cable analyst with Sanford C. Bernstein & Co.
Mr. Moffett rates Cablevision shares as "market perform," meaning he believes the stock's performance will track the Standard & Poor's 500 index. He hasn't yet rated the Rainbow spinoff.
That may be a good bet given Voom's initial results. Cablevision launched the service's first satellite in July 2003 and began offering service late last year. As of the end of June, Voom had signed up only 25,000 subscribers. The service posted $81.5 million in losses in the second quarter with just $2.7 million in revenue. Even more worrisome, close to one in five subscribers that have signed up for the service have canceled it.
Cablevision is hoping to complete the spinoff by the end of September. But it might be delayed by an investigation by the Securities and Exchange Commission, which is looking into accounting irregularities at AMC, formerly the American Movie Classics network.
Once the spinoff is completed, Cablevision shares may rise a bit on investor relief that the cash drain is over. "The spinoff allows a pure play in the cable business," says Thomas Eagan, an analyst with Oppenheimer & Co.
Cablevision executives declined to comment on Voom, citing the fact that the Rainbow spinoff is in a quiet period with the SEC. But Mr. Dolan, Cablevision's chairman and the driving force behind the satellite venture for over 10 years, has long extolled the greater efficiency of beaming television from satellites rather than over a cable network.
When the spinoff is completed he is scheduled to step down as Cablevision chairman to become chairman of Rainbow. His son, James Dolan, now chief executive of Cablevision, will take on the chairman post as well. Another son, Thomas Dolan, will become chief executive of Rainbow.
Voom's appeal is that it offers more than 35 HDTV channels -- far more than any other cable or satellite company, as well as over 80 standard-definition channels. The service hasn't exactly caught fire yet, partly because only 10 million households have purchased HDTV sets. While that number is expected to grow rapidly, most cable operators and the established satellite services already offer the most popular networks on HDTV, like ESPN and HBO, and will likely add channels as more households get HDTV.
Voom doesn't offer local channels without setting up a special antenna and charges more than other satellite services to install at $199. Other services offer free installation but, unlike Voom, require subscribers to commit to at least a one-year contract.
Cablevision has sunk over $500 million into the satellite venture over the past decade and its stock has been weighed down by investor anxieties over how much more will be needed. All cable stocks are down this year but Cablevision's drop has been one of the biggest. Its shares on Friday were trading at $18.25 a share in 4 p.m. composite trading on the New York Stock Exchange, down 10 cents for the day and down 34% from their 52-week high of $27.70 that was reached in February.
As for Rainbow, much will depend on whether Voom can get enough traction before it runs out of cash. The spinoff will be launched with a sizable cushion, thanks to its ability to borrow against the cable networks. Last month, Rainbow obtained $950 million in funding commitments from banks and sold $800 million in junk bonds. After repaying existing debt and fees, Rainbow will be left with a war chest of about $650 million. But investor concern about Voom is reflected in Rainbow's debt covenants, which limits the satellite business to $150 million a year of the cash flow generated by the three networks.
How long will the recently raised cash last? Ironically, the faster Voom sells subscriptions, the quicker it runs out of cash because of the high capital costs associated with installing dishes and set-top boxes. Cablevision executives haven't broken down these costs, but analysts believe they could exceed $600 a subscriber. It also isn't clear how Rainbow would finance the launch of the additional satellites it would need to beef up its channel offerings.
Russell Solomon, a cable analyst at Moody's Investors Service, believes Rainbow probably will have enough cash to fund projected deficits at Voom for about two years. "We think 2006 will be an inflection point where [Rainbow] needs further financing," he says.
High Definition is awesome!
