When Cablevision Systems committed its Rainbow programming assets as part of the Bronfman bid for Universal, the perception was that those assets, including the AMC cable channel, were in play. Now that Vivendi has chosen to do a deal with NBC, the question remains: What is next for Cablevision and Rainbow?

There were reports late last week that Cablevision, which operates the Fuse music channel (a competitor to MTV), would once again join with the Bronfmans to make a bid for the assets of the Universal Music Group, the world’s top seller of recorded music, with almost one-quarter of all music sales globally and operations in 71 countries. It makes sense: Both Cablevision President James Dolan and Edgar Bronfman Jr. are musicians and have expressed an interest in the music business. Mr. Dolan’s rock and blues band is called J.D. & the Straight Shot.

However, in an interview with Fox News last week, Mr. Bronfman denied interest in mounting a new bid for Universal music in the wake of his failed attempt to acquire Vivendi Universal’s film and TV businesses. It is also unlikely a deal could be done that would allow Cablevision to barter assets such as Rainbow for the music business. It would probably have to be a cash deal, which appears much less likely.

In reality, though it may take longer, the most likely scenario for Cablevision, according to analysts and insiders, may not even involve Rainbow’s channels. Instead, it would be the long-discussed merging of Cablevision’s cable systems with those of AOL Time Warner, consummating a marriage of the two largest multiple system operators in the greater New York City area.

There is no assurance such a deal will ever actually happen, and even if it does, it could be many months before it actually comes to fruition, since both Cablevision and AOL Time Warner are separately under investigation by the Securities and Exchange Commission. “If you can’t give clean financials, you can’t do a deal,” said one knowledgeable source.

However, that has not stopped the talk from heating up again, if only because it seems like such a natural fit for both companies. “One day these companies will get together; it’s inevitable,” said Edward Adler, a spokesperson for AOL Time Warner. “Comcast needs a competitor.”

Whether it is inevitable or not, it appears clear that Cablevision is looking to do some kind of major deal as soon as it can get clear of the SEC investigation. In last month’s interview with TelevisionWeek, Cablevision President James Dolan described cable networks as having a “horizon for their future” because of increasing encroachments by video-on-demand and TiVo technology. In other words, he sees those assets becoming less valuable in the future.

The Rainbow programming assets include American Movie Classics, Independent Film Channel (IFC), the five Fox Sports Net channels (co-owned with News Corp.), WE: Women’s Entertainment and Fuse (formerly MuchMusic).

Cablevision has invested in a new satellite TV service and continues to look at other options. It remains well positioned to do a major deal some time in the future. “Cablevision is willing to use [the cable channels in Rainbow Media Holdings] as a pawn in any kind of a bigger deal, as with Vivendi, that would give it a bigger piece of something else,” said Tom Rogers, the former Primedia CEO who is currently a New York City-appointed mediator in Cablevision’s ongoing negotiations with the YES Network.

Still, some informed observers wonder whether AOL Time Warner would be interested in Rainbow, since it has stronger cable channels itself, including those in Turner Broadcasting, such as TBS and TNT, that duplicate Rainbow channels such as American Movie Classics.

These sources and those at AOL believe that the eventual initial public offering combining Cablevision and Time Warner systems will not be encumbered by any programming assets. A more likely scenario would have Cablevision eventually selling Rainbow channels to other entertainment companies.

The most likely deal between Cablevision and AOL Time Warner would be to combine the cable systems. Cablevision has over 3 million New York City subscribers, while AOL Time Warner has about 1.2 million subscribers in the metropolitan area.

Mr. Dolan has called such a combination a “dream idea.” AOL Time Warner’s Mr. Adler was closely in sync with that sentiment, referring to the combination as “a dream for our company.”

The hang-up is over price. Cablevision is said to value the properties at about $6,000 per subscriber, or as much as $18 billion just for the cable systems. Only AOL Time Warner and Comcast are large enough to do that kind of deal, and both have indicated they find the asking price far too rich. In recent deals, cable systems have traded at closer to $4,000 per sub.

It is an especially difficult time for AOL Time Warner, because the company has been focused on reducing debt. In fact, AOL Time Warner debt covenants require a reduced debt load by this December. Failure to lower the debt by then will result in a higher interest rate for at least some of AOL Time Warner’s $24 billion worth of debt. (According to a company filing, as of June 30, AOL TW’s net debt (defined as total debt less cash and cash equivalents) totaled $24.243 billion.

However, that will be cut by the sale of its CD and DVD manufacturing and distribution business for approximately $1.05 billion in cash. The company said it planned to reduce net debt to approximately $20 billion by the end of 2004, partially through the use of free cash flow and also through “the sale of other noncore assets.”

To meet this pledge, AOL CEO Richard Parsons has to keep cash flow at its current levels, which could mitigate against a sale of its AOL online service (projected to generate over $1 billion in free cash flow this year) and sell a bigger asset than just CD back-end services or he has to come up with another financial maneuver that will accomplish the same goal.

There is another way that Cablevision and AOL Time Warner could merge their cable systems and solve some of their debt problems. Under that scenario, they would borrow a page from the NBC deal with Vivendi, which creates a new entity but does not involve a cash outlay up front. The reason NBC could meet Vivendi’s demand for a valuation of $14 billion-even as MGM, Liberty and others balked-is that it was all on paper. There was no cash trading hands. So the more valuable the better.

In the case of the Cablevision and AOL Time Warner subs, the valuation could go from a problem to a possible benefit under such a combination. If there is a noncash stock-based transaction, the incentive would be to create a new company with as high an asset valuation as possible. “If they merge the Time Warner systems into a new entity, they can do what GE has done,” observed Porter Bibb, a principal at MediaTech Capital in New York.

In other words, they would create a new entity in which each would hold an interest in proportion to the value of what they contributed. The companies could even assign some of their current debt load to the new company, but they may not do that if the long-term goal is to go to the public markets to monetize the value, cautioned AOL Time Warner’s Mr. Adler.

Ultimately, then, it is a waiting game. Resolution of the AOL Time Warner SEC probe might not come “for eight months or more,” according to an informed source. An end to the Cablevision SEC probe, involving improper expensing of millions of dollars in revenue, is not apparent either and the probe is likely to continue until next year.

In the meanwhile, the cable systems continue to spin off significant cash, even if, as some predict, their overall value is likely to continue a long, slow downward spiral.