Bear Stearns analyst defers action on Rainbow Media convert until after Cablevision call

By Ronda Fears

Nashville, Tenn., Aug. 6 - Bear Stearns & Co. convertible analyst Sarah Gallagher said she is holding off on making a recommendation on the Rainbow Media mandatory until after Cablevision's conference call Thursday, but initially it appears that the elimination of the tracking stock will be a positive for the convert.

Cablevision Systems Corp. is eliminating the Rainbow Media Group tracking stock, and each share of Rainbow Media will be exchanged for 1.19093 shares of Cablevision NY Group. The exchange date will be Aug. 20.

"Our reading of the prospectus for the RMG mandatory leads us to believe that the mandatory will become convertible into CVC and that both the upper and lower conversion ratios will be adjusted accordingly (i.e. upper and lower ratio will be adjusted upward to 0.9762 and 1.19093 respectively)," Gallagher said in a report Tuesday.

"That said, we have not been able to confirm this with the company. CVC is not returning calls until after its meeting on Thursday. With the company's investor meeting on Thursday and with the company not speaking to analysts until the call, we are holding off on any recommendation on the convertible until after the investor meeting."

Bear Stearns broadcasting and cable analyst Ray Katz currently has a buy rating on Cablevision stock, she noted.

After the announcement, the price of the Rainbow Media mandatory, which was issued by AT&T Corp., declined to 10.18 before bouncing back up to 11.70, perhaps due to negative comments about the whole sector, Gallagher said.

On Tuesday, the mandatory closed up 0.9 to 11.70. Rainbow Media shares ended up 80c to $9.80. Cablevision shares added 52c to $8.06.

Gallagher noted that at the current fixed exchange ratio, Rainbow Media shares are trading at a 0.1% premium to the implied roll-in price. She added that Cablevision stock is difficult to borrow.

Katz is also positive on the transaction. Even though Rainbow Media is a programming entity and not a cable company, its stock has been depressed in sympathy with Cablevision and therefore Cablevision was able to repurchase Rainbow Media at an attractive price. In short, Cablevision is buying growing programming assets at what Katz believes to be depressed multiples.

"So why were Cablevision and RMG down after the announcement? We believe Cablevision and Rainbow Media were down due to negative comments on Cablevision's competitors - comments that pulled the entire space down yesterday," Gallagher said.

"We also believe that Cablevision and Rainbow Media are down due to concerns that Cablevision is planning to address its funding gap (estimated by Katz to be between $500-$700 million) at least partially with Rainbow Media asset sales instead of divestitures of other assets."

She noted that MGM, which owns a 20% stake in Rainbow Media's National Cable Networks Asset, has expressed interest in increasing its stake.

There are alternative ways of addressing the funding gap, the analyst said.

"We believe the most favorable way of dealing with Cablevision's funding gap would be for Cablevision to discontinue its DBS project or to sell either partially or totally its Northcoast PCS license," she said.

"Other ways of addressing the funding gap would be for Cablevision to shut down The Wiz, which would save approximately $50 million a year, or to sell Clearview Cinema Group, which owns 65 theaters including Manhattan's famous Ziegfeld."

On Thursday she expects also that Cablevision could announce asset sales not related to Rainbow Media.

Cablevision is divided into two operating units. Cablevision Systems New York includes the cable systems, the New York Knicks professional basketball team and Madison Square Garden. Rainbow Media includes four cable networks - Bravo, American Movie Classics, WE: Women's Entertainment and the Independent Film Channel-and five regional sports channels. The units report financial results separately.

"We believe the meeting will not just focus on rolling in Rainbow Media," Gallagher said.

The Cablevision investor meeting and conference call is slated for 10 a.m. to noon ET on Thursday.

AT&T/Rainbow Media mandatory due 2005

Price: $11.70

Common: $9.77

Upper Price: $27.449

Lower Price: $22.50

Current Yield: 12.02%

Upper Ratio: 0.8197

Lower Ratio: 1.0000

Issue Price: $22.50

Breakeven: 2.63 years

Yield Pickup: 12.02%

© 2015 Prospect News.
All content on this website is protected by copyright law in the U.S. and elsewhere. For the use of the person downloading only.
Redistribution and copying are prohibited by law without written permission in advance from Prospect News.
Redistribution or copying includes e-mailing, printing multiple copies or any other form of reproduction.