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Cablevision's Voom service to take spin; spinoff awaits final SEC OK

Wed, 10/27/2004 - 8:00pm
Reinhardt Krause

Copyright 2004

Investor's Business Daily

October 27, 2004 Wednesday

Cablevision Systems is close to spinning off its fledgling satellite TV business, Voom.

Cablevision shareholders will get one tax-free share of Rainbow Media Enterprises for every share of Cablevision they own.

The move means Cablevision will no longer foot the bill for expanding the satellite venture after the spinoff. Voom's cost has been one factor in Cablevision's ailing stock. It's down 15 percent in 2004.

The spinoff awaits a green light from the Securities and Exchange Commission. Most analysts expect Rainbow Media, which also owns American Movie Classics and two other cable TV channels, to be valued at around $5 per share.

Once on its own, Rainbow will face more pressure to show growth at Voom, which competes against satellite TV kingpins DirecTV and EchoStar's Dish Network.

As of June 30, Voom had only 25,000 customers after eight months in service. Voom's marketing thrust will gobble up cash from Rainbow's dowry. The move casts questions on Rainbow's stock.

"The challenge is to determine where (Rainbow) will trade, given that the market believes Voom will be a black hole," said Lehman Bros. analyst Vijay Jayant.

Rainbow Media will be controlled by Cablevision founder Charles Dolan and the Dolan family. They'll have a 22 percent stake and will control 75 percent of voting shares, analysts say.

If Voom struggles, some pundits wonder if Rainbow Media could shut down the satellite unit to focus on its programming and other assets. Besides American Movie Classics, Rainbow owns Independent Film Channel and WE (Women's Entertainment).

Cablevision structured Rainbow Media to give Rainbow some breathing room. Rainbow Media borrowed money to fund Voom by using the cable channels as collateral, analysts say.

Merrill Lynch says Rainbow Media has yet to tap a $350 million credit line and has about $660 million in cash.

Cablevision will not provide any funding or debt guarantees after the spinoff.

It's unlikely Rainbow Media would pull the plug on Voom soon, says Jimmy Schaeffler of the Carmel Group consulting firm. Worst case, Schaeffler says, Rainbow Media might try to sell off Voom to rival EchoStar, which has more spectrum needs than DirecTV. "But first they'd need to get the subscriber base up to around 250,000," Schaeffler said.

Subscriber count aside, some pundits say EchoStar might be interested in buying Voom's network assets. Those would include Voom's satellites and rights to orbital space.

EchoStar, though, has other options to boost its broadcasting capabilities, analysts say.

To attract customers, Voom set out to offer more programs in ultrasharp, high-definition format than EchoStar or DirecTV.

Voom offers 35 HD channels. Voom's satellite uses some of the most advanced digital technology available, analysts say.

But DirecTV and EchoStar seem committed to providing HD content as well. In September, DirecTV announced plans to dramatically expand local and HD programs by the end of 2007. DirecTV plans to launch four satellites to provide the bandwidth needed to expand HD channels.

DirecTV offers 14 national HD channels. It should be able to provide local TV stations in HD format in all 50 states with the four new satellites, analysts say.

"Cablevision's Rainbow subsidiary faces the greatest exposure to DirecTV's HD push," Merrill Lynch analyst Jessica Reif Cohen wrote in a note to clients.

Lehman's Jayant says Voom's subscriber count could hit 200,000 by 2006. By then, he says DirecTV and EchoStar will be well positioned with their own HD offerings, which would slow Voom's subscriber growth.

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