Cablevision Systems ( CVC) has got people wondering what lies at the end of the Rainbow.

On a day when a downgrade of fellow cable operator Cox Communications ( COX) hung over an already fog-shrouded industry, Cablevision said it was eliminating the tracking stock for its programming subsidiary, Rainbow Media Group ( RMG).

Cablevision's transaction raises the question of whether it is preparing to sell all or part of Rainbow to make ends meet at its other operations, including its 3-million-subscriber New York area cable systems, or whether the company is taking advantage of what it sees as a bargain price for its stakes in channels including Fox Sports Net, American Movie Classics and Bravo.

A Cablevision spokesman declined to comment Monday on the transaction, in which the company says Rainbow shareholders will receive 1.2 shares of Cablevision stock for each Rainbow share they hold. But the move had investors speculating that the cash-hungry cable industry could be ripe for some big transaction or another.

Free Fall

The scenario that Cablevision is doing some opportunistic bargain-hunting doesn't jibe with Rainbow's performance since the tracking stock was issued in March 2001. Since then, as well as during shorter windows such as the last six months and the last 12 months, Cablevision's shares have performed worse than Rainbow's, making Rainbow relatively more expensive, compared with the parent company, than it was in early 2001.

That analysis, however, ignores the possibility that Cablevision executives might think Rainbow is in a position to recover faster and rise further than shares in the rest of the company, which includes its cable system operations, Madison Square Garden and the retail chain The Wiz.

A more intriguing possibility behind the Rainbow buyback is that Cablevision is cleaning up its capital structure to smooth the way for a sale. One likely suspect among possible buyers is Metro-Goldwyin-Mayer ( MGM), which already owns a 20% stake in four Rainbow properties: AMC, Bravo, Independent Film Channel and WE: Women's Entertainment. An MGM spokesman wasn't immediately available for comment.

On the Prowl

JP Morgan analyst Spencer Wang, in a recent report initiating coverage on MGM, pointed out that MGM is on the prowl. "MGM has clearly stated its intention to undertake strategic acquisitions to diversify its businesses and to integrate vertically to better compete with some of its more diversified entertainment peers," wrote Wang, who didn't mention Rainbow as a specific target.

Pot of Gold?
Cablevision, Rainbow plunge

Uri Landesman, a principal at Arlington Capital Management, says MGM -- majority-owned by billionaire Kirk Kerkorian -- would be the most likely buyer for Rainbow. "Uncle Kirk is behind that company, so if he can put up more cash, they can do what they want," says Landesman, a former shareholder of both Cablevision and Rainbow.

Certainly, Cablevision is a motivated seller. The company's shares have plummeted nearly 88% from their 52-week high, as investors have wondered how the highly leveraged operator will come up with the $1 billion in additional financing that analysts say the company will need to make ends meet in 2003.

Cablevision has vowed to address its 2003 funding needs at an investor meeting Thursday, the day the company is slated to release its financial results for the second quarter ended June 30.

In early afternoon Monday, Cablevision's shares were down $1.06, or 13.2%, to $6.95, while Rainbow's had fallen $1.72, or 17.4%, to $8.18.

Leading the way down in the cable sector was Cox, which dropped 18.5% to $20.40. Cox, commonly said by analysts to be the safest bet among cable operators, buckled after Credit Suisse First Boston analyst Lara Warner downgraded the stock from strong buy to hold.

Though Cox, like other cable operators, is telling the Street that its capital expenditures are on its way down, Warner said she believed that rising selling, general and administrative costs would erase expected margin improvement at the operator.