Copyright 2003 The Deal, L.L.C.

Daily Deal/The Deal

October 24, 2003 Friday

Cablevision Systems Corp. said late Thursday, Oct. 23, that its board approved an amended plan to spin off its recently launched Rainbow DBS satellite service in early 2004.

In addition to its satellite assets, Bethpage, N.Y.-based Cablevision plans to contribute Rainbow's three national cable networks — American Movie Classics, The Independent Film Channel and WE: Women's Entertainment — to the spun-off entity. Cablevision will retain its 3-million-subscriber New York-centric cable system, its Lightpath telecommunications operation, Madison Square Garden, Radio City Music Hall, Clearview Cinemas, Rainbow's interests in regional sports networks and the New York Knicks and Rangers teams, among other assets.

"The spinoff will create two distinct companies for Cablevision shareholders, each with separate funding and management, defined business focuses and clear investment characteristics," said father-son duo Charles and James Dolan in a joint statement.

Of particular concern to current shareholders are the funding and investment changes under the new proposal. Cablevision's share price was hit hard earlier this year when the company faced a liquidity shortfall of several hundred million dollars. The cabler's stock rebounded after it bridged the funding gap, but investors kept downward pressure on its stock mainly because of analysts' questions about Cablevision's ability to fund its satellite plans.

In its statement Thursday, the company said: "The spinoff will enable Cablevision to reduce its debt level and leverage, and increase availability under its bank lines of credit as compared to the prior spinoff plan."

Specifically, Cablevision said it will eliminate plans to contribute $450 million in cash to Rainbow DBS. Instead, the company will increase its Rainbow DBS investment in 2003 to $261 million from $194 million. Beyond that, Cablevision will not provide any additional investment or debt guarantees to the new business. The company also said it remains on track to achieve positive free cash flow next year.

To offset the increased investment, AMC, IFC and WE will deliver their cash on hand — which stood at $75 million as of Sept. 30 — to Cablevision sometime before Jan. 1, 2004. At the time of the spinoff, AMC will also give Cablevision a $350 million payment-in-kind note.

Funding for the spun-off entity is expected to come primarily from the cash flow and new financing agreements on the part of AMC, IFC and WE. Those new arrangements are expected to be enough to repay Rainbow's existing debt — $321 million as of Sept. 30 — as well as the $250 million note issued after purchasing Metro-Goldwyn-Mayer Inc.'s 20% interest in the three cable networks earlier this year.

Moving to preempt questions about possible divestitures, Cablevision said "there are no plans to sell the entertainment services following the spinoff." Viacom Inc. and several other potential buyers expressed interest in acquiring AMC after Cablevision and MGM sold the Bravo cable channel to General Electric Co.'s NBC in February.

Cablevision had tried to sell its Clearview Cinemas operation for months to no avail. The company said it now plans to keep that business.

What the company didn't say, however, was whether plans called for an eventual exit of its traditional cable business. Rumors have long persisted that Time Warner Inc. would buy Cablevision's systems. Given its intention to carry through with a satellite offering, those whispers will surely grow louder as the plan moves forward.

Plans call for the spinoff to be tax-free to shareholders. The company will begin operations as two separate businesses beginning Jan. 1, 2004, though the actual spinoff won't occur until sometime later. Post-spinoff, James Dolan will add chairman to his CEO title at Cablevision. The senior Dolan will chair the new business.

Morgan Stanley, Bear, Stearns & Co. and Banc of America Securities LLC advised Cablevision on its plans.