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Rainbow is finally showing its colors

Apr 2, 2001  •  Post A Comment

The Rainbow Media Group tracking stock, the only media-related initial public offering so far in 2001, should be liberating for both the cable programming concern and its parent, Cablevision Systems.

Executives at both companies have indicated that business pursuits will begin as early as this week as a result of the stock’s initial public offering. The stock (symbol: RMG) began trading at $25.10 per share on Friday and closed at $26 per share at the end of the trading session that day. Cablevision shareholders received one share of Rainbow Media for every two shares of Cablevision stock.

Rainbow has begun its new life with a virtually debt-free balance sheet and an estimated $1 billion in deal-making and investment capacity, according to analysts.

Its simultaneous equity partnership with MGM, which closes April 3, allows Rainbow to retire its two credit facilities totaling about $650 million. Rainbow will be left with more than $150 million cash and an ability to tap MGM films and TV shows in creating new program services. However, direct access to the MGM film library is not part of the partnership agreement, although the arrangement gives the studio much-needed global broadband distribution for its product and a closer relationship with NBC, a 26 percent owner of Rainbow.

MGM, NBC and Rainbow already have a long list of cross-promotion and co-production projects in the works, sources say. Executives met recently to begin hammering out specifics.

Rainbow’s cable TV channels will promote various MGM theatrical releases with related programming. Rainbow is also talking to MGM about distributing some of its TV programming on MGM channels overseas and plans to coordinate with MGM’s home video group to provide support programming on its program channels. MGM’s United Artists label will cooperate with Rainbow’s Independent Film Channel on theatrical film releases and other programming.

John Martin, analyst at ABN AMRO, estimates that Rainbow will generate $650 million of cumulative free cash flow from 2001 to 2005.

“Rainbow is likely to be an attractive pure play within the cable industry because it has full and partial ownership in several well-positioned cable networks … and prospects for substantial growth,” Mr. Martin said. “We forecast Rainbow can increase revenue at an annual rate in the mid-teens and achieve [earnings before interest, taxes, depreciation and amortization] growth exceeding 20 percent on a compound annual basis through 2005.”

Rainbow executives said they see their position as better than average because of the company’s target audience appeal, the early stage of its services growth and its relatively new attempts to sell conventional ad time and program sponsorships.

“The tracking stock allows us to improve our programming. If we bring more people to our channels and we are reasonably distributed, we can increase our ratings,” said Josh Sapan, Rainbow Media CEO.

Sources say Rainbow will increase its program budget between 30 percent and 50 percent this year by tapping funds from increased ad revenues.

However, Rainbow will secure debt using its balance sheet or its new tracking stock to create new services or acquire existing program services or other assets. Rainbow officials said they have no immediate acquistion plans.

Rainbow is especially committed to creating a cost-effcient indepedent film library and multiple new program service platforms.

For Cablevision, the Rainbow spinoff is an opportunity to realize greater return from those program assets. Cablevision stock will trade more like a pure-play cable investment with more than three-quarters of its value being generated by the company’s cable businesses, analysts say. The economic performance of Cablevision and Rainbow will be tracked separately.

There has been growing speculation that the controlling Dolan family eventually will seek to sell Cablevision Systems at the right price to the right buyer. Analysts say the spinoff of Rainbow’s programming operations would make it easier to effect that kind of sale.