Doomsday “Liquidation� for High-Def Voom?

 By Chris Forrester ; LONDON: Nov 11

Voom is the catchy name given to Rainbow Media’s HDTV satellite platform operating over the US. Twenty-one superb HD channels come from Rainbow while another 80-odd are made up of generally available HD services as well as ‘ordinary’ standard-def channels

However, a depressing report from investment bankers Bear Stearns states that Voom might end up being liquidated. Indeed, Bear Stearns is not alone with this Doomsday view. Tom Eagan of Oppenheimer and Co., in an October note to investors, said Voom will have a difficult time growing subscribers due to heightened HD competition, especially from DirecTV.

On November 9 the malaise at Vomm became even clearer, when Rainbow Media disclosed that as at Sept 30 the company had signed up just 26,000 subs, up just 1000 on its end-June figure. That’s not good.

Rainbow Media Enterprises is currently a subsidiary of Cablevision, the giant cable system where the Dolan family (founder Charles, and his two sons James and Tom) sit in control. It is Charles who is highly supportive of the HD–on-satellite, and is backing a spin-off where Rainbow is floated as a separate business. Charles Dolan will be resigning his chair/CEO position on Cablevision’s board. Bear Sterns states “we do not believe [new chair/CEO] James Dolan is a proponent of the satellite business�. Charles Dolan will still hold a significant (indeed, a controlling) number of shares in Cablevision.

The detailed 62-page Bear Sterns report, issued in October, pulls no punches on the prospects for Voom, which uses a mix of its own satellite Rainbow 1, and 16 transponders of leased capacity from SES Americom, at about $1m per transponder/year for its transmissions. “We believe the Cablevision spin-off of Rainbow Media (RME) is part of a larger picture, that of a refocusing of the parent company with new priorities and leadership,� says the report’s author, senior analyst Raymond Lee Katz. Katz says post spin-off Cablevision’s investors will be more comfortable with the business as a longer-term investment that might lead to it outperforming its peers. The bankers talk about Cablevision’s stock bouncing back to $28 a share by the end of next year (it has been as low as $16 over the past year, and is currently about $20). By comparison, Katz now values RME at a barely $2.60 a share (down from his earlier valuation of $8.68), and suggests that price could slip and slide down to $1.33 following initial distribution of stock.

Cablevision has some spectacular assets under its belt, some 3m mostly New York-based subscribers plus the New York ‘Mets’ and ‘Nicks’, the Madison Square Garden (MSG) channel and Fox Sports NY. But last month the Mets said they’d be launching their own channel effective 2006.

RME has an estimated income this year of $1,026m, or 25% of Cablevision’s total. The spin-off, initially announced in June 2003, could now be in place by year-end, says Bear Stearns, and putting an end to the cash drain on Cablevision, but it stresses there could b e a very bumpy road ahead especially given that Voom has already spent around $1 billion (by Dec 2004), with just 28,700 subscribers to its name (at the end of August). In mid-October at a high-profile MIPcom event in Cannes, on the French Cote d’Azur, Greg Moyer, the recently appointed joint-CEO of Voom’s 21 HD channels (HD Originals), said that the market had to understand that these early adopters had in effect signed up during Voom’s soft-launch phase. There had been only limited test-marketing in specific markets, and besides there was a shortage of set-top boxes. Cablevision say that whatever the reasons, only 1200 homes were waiting for signals/equipment, and that churn was running at 30%, and twice the churn rate of DirecTV and Echostar. Moyer’s show-reel of HD content was spectacular, and made compelling viewing.

Bear Sterns agree with the quality of Voom’s content, saying Voom has a competitive HDTV advantage (for the “short term�), and predict subscriber sales this year of (to us a fairly optimistic) 75,000, another 350,000 next year, 508,000 in 2006, 508,000 in 2007 and then tailing off (because of the rival cable and DBS HD offerings) to 381,000 in 2008 and just 286,000 in 2009. This is the nub of the problem, and will lead, says the report, to a negative cash-flow of $477m this year, $612m next year with Voom “out of currently available funds by early 2007�. Voom posted losses of $36m in Q1 2004 and $61.6m in Q2 2004. Q3 2004 losses are expected to exceed $80m.

Katz goes on to say that he does not expect Charles Dolan to “quit the business with less than a year of operation, and with an estimated $650m available for financing, we recognise that [a liquidation] probability is still greater than zero.� Bear Stearns then present a Liquidation Scenario, which includes (a small) chance that Dolan would sell off Rainbow’s satellite assets and spectrum, and “fold that business�.

The bank’s report suggests that liquidation is not likely in the next 15 months, “but we believe some portion of the market will still assume there is a reasonable chance for it to occur�. Bear Stearns might simply be guilty of covering its backside, and alerting investors to possible rough waters ahead, but they suggest that Charles Dolan will keep Voom in business until the cash runs out, around early 2007, with the options then allowing him to hold onto Rainbow’s three cable networks (AMC, WE and IFC). These are valued by the bank at $3.2bn, and might win considerable interest from buyers at auction. Rainbow’s DBS business could be worth around $790m through a sale of assets, valuing spectrum at $130m, and $150m for its wholly-owned satellite “Rainbow 1�. Katz says “Another DBS company may be the likely buyer….

� Katz pulls no punches in alerting investors of the potential downside, which comes at the end of a challenging period for Cablevision, not least an SEC investigation into the company’s previously disclosed accounting regularities. Katz fairly stresses that his assumptions are far from hard and fast, and are undertaken in an area where there has been little or no information from management on their plans for the future.

Set against this somewhat downbeat scenario are much more robust statements from executives like Moyer. He says that some 10% of US homes have now invested in HD equipment, which will lead to a 40% ownership level within 3 years. “Our proposition is that HDTV is going to expand dramatically, and we hope to capture a large slice of that market. We are audacious, we are driving trends in the degree of programming choice and picture quality.� Moyer has been with Voom since 1999. Previously he spent 13 years at Discovery. Finishing up as chief creative officer.

Moyer says Voom has to be competitive and has been test-marketing various options and is now ready to move rapidly ahead. And soon it will migrate from MPEG2 to MPEG4 compression, thereby squeezing more channels into existing transponders. Moreover, Rainbow has made no secret of its plans to expand orbital capacity. Recently, it acquired two new orbital slots (175 deg W, and 61.5 deg W), favouring Hawaii and the Western half of the US respectively. Rainbow also holds 5 ka-Band licences (at 62 deg W, 71 deg W, 77 deg W, 119 deg W, 129 deg W), and according to a recent filing Rainbow is soliciting information from satellite manufacturers. One option would be to use these Ka-band frequencies for local-into-local programming, thereby matching that already offered by DirecTV and Echostar.

But if the Bear Stearns report paints a pretty bleak picture, it is worth remembering that Voom’s Rainbow 1 satellite is nestled in at the exact same position as Echostar’s 61.5 deg West slot, representing a terrific opportunity to tap into Charlie Ergen’s subscribers. That’s also the more upbeat view from Oppenheimer. If Voom manages to grow to more than 200,000 subscribers in the next 15 months, then Oppenheimer’s senior analyst Eagan puts Voom’s valuation per subscriber around the $1,000 to $1,200 range. While this is well down on the $1550 per-subscription valuation for DirecTV and Echostar it does give a useful $300-600m overall valuation for Voom, plus the satellite’s resale worth.

Despite the challenges from DirecTV and Echostar (and those pesky cable companies), we like Voom. We like its line up, we like it being audacious, and we’d like it to be a success. The satellite industry needs more HD, not less, and Voom seems to us to be sound value for money. We hope discerning subscribers agree.