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Cablevision’s Rainbow Strikes Deal to Acquire Sundance Channel

May 7, 2008  •  Post A Comment

Cablevision Systems’ Rainbow Media Holdings said it agreed to acquire Sundance Channel.
Sundance Channel owners NBC Universal, CBS and Robert Redford will receive total consideration of $496 million in the transaction, which will leave Cablevision with 100% of the channel.
Rainbow already owns IFC, an independent film-based channel formed after Cablevision was unable to reach an earlier deal with Sundance.
“We are always looking for strategic opportunities for our business and Sundance Channel adds another valuable asset to Rainbow’s award-winning lineup of programming networks,” said Cablevision President and CEO James L. Dolan in a statement.
Rainbow said it will have a continuing relationship with Mr. Redford.
“The Sundance Channel team, led by CEO Larry Aidem, has exceeded every expectation I had for this venture,” Mr. Redford said in a statement. “We look forward to working with Rainbow to further distinguish Sundance Channel and to create even greater value for this important service.”
Mr. Aidem said that being an independent programmer created challenges for Sundance Channel, which now reaches 30 million subscribers.
“Rainbow unquestionably has the programming and distribution prowess necessary to run cable networks successfully over the long term. The opportunity to be a wholly owned, core asset in the Rainbow/Cablevision portfolio ensures a very bright future for Sundance Channel,” he said in a statement.
When independent cable channels are acquired, cost savings are usually achieved by combining functions such as human resources, business affairs and affiliate relations.
The transaction has been structured to be tax-free. NBC Universal will receive 12.7 million shares of parent company General Electric’s common stock currently held by Rainbow. CBS and Mr. Redford will receive cash. Rainbow acquired the GE shares when it sold Bravo to NBC.
Two analysts offered differing perspectives on the deal.
While he’d have preferred Cablevision used its resources to buy back its undervalued shares, Craig Moffett, VP and senior analyst at Sanford C. Bernstein & Co., said the deal isn’t half bad.
For one thing, by paying with GE stock, which few investors knew Cablevision had, it was essentially using “found money” to make the purchase, Mr. Moffett said in his report. Using stock also made the deal tax-free, wiping out a potential taxable gain he estimated could be as large as $80 million.
Mr. Moffett said the price Cablevision is paying appears reasonable. Based on figures from SNL Kagan that Sundance generates earnings of $40 million, Cablevision is paying a relatively low multiple of 12.4 times earnings.
“Finally, there are likely material (although not dramatic) synergies to be gained from the pairing of Sundance with Rainbow’s like-minded IFC. Even modest synergies, coupled with the tax savings associated with the swap, could put the pro forma valuation of this deal in the 10-times-earnings range,” he said.
But Mr. Moffett added that while he was “pleasantly surprised” by aspects of the deal, “this isn’t quite what Cablevision shareholders signed up for,” noting Cablevision also is bidding on the Long Island newspaper Newsday.
Richard Greenfield of Pali Capital was more negative on the price tag.
He estimated Sundance Channel earnings at $20 million, putting the multiple at a relatively high 24 times earnings.
“Even with synergies between IFC and Rainbow’s back-end infrastructure, we believe pro forma EBITDA is unlikely to be above $30 million, implying a pro forma acquisition multiple of at best 16x-17x EBITDA,’ Mr. Greenfield said in a research note.
Mr. Greenfield also questioned whether Cablevision planned to increase its emphasis on producing films to feed its networks.
(Editor: Jensen)
1 p.m.: Added analysts’ comments

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