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October 10, 2012

Charlie Ergen and the Dolan family are facing off in court. And it's one legal drama that investors in AMC Networks should keep an eye on.

A week and a half into the trial pitting Mr. Ergen's Dish Network against the Dolans' Cablevision Systems and its former subsidiary AMC, analysts and investors say the evidence appears stacked in the Dolans' favor. Aiding this view is the fact that Dish was found by a judge in November 2010 to have improperly destroyed email evidence. The same judge, who is presiding in the current trial, has said he would tell the jury to assume the emails would have been negative for Dish. But the trial may ultimately be less about winning than about gaining leverage in shaping the structure of a likely settlement. And even if Cablevision and AMC win the case, the latter, spun off from Cablevision last year, could still lose out.

The trial revolves around Cablevision's high-definition Voom TV channels, most of which it shut down in 2009. Dish agreed to carry the channels years ago if Cablevision invested $100 million a year for five years. After a 2007 audit, Dish dropped the channels, claiming Cablevision wasn't spending the required amount. That led Cablevision to sue Dish for $2.5 billion.

AMC now houses the Voom unit and has an agreement with Cablevision to evenly split any settlement arising from the case. On the face of it, Cablevision would have an incentive to allow the trial to continue to get more cash out of Dish. But by dropping AMC's channels on June 30 when its seven-year contract ended, Mr. Ergen has effectively created a threat to compel the Dolans, who also control AMC, to the settlement table.

Being absent from Dish, which represents 14% of AMC's subscriber base, is costing AMC about $150 million a year in earnings before interest, taxes, depreciation and amortization, according to brokerage Gabelli. That's off an estimated base of $474 million in 2012 and $539 million in 2013. The lack of an affiliate deal could also undermine affiliate negotiations with other pay-TV operators. Dish has said its decision to drop AMC is unrelated to the Voom litigation, but Mr. Ergen stated that he would "never say never" about a relationship with AMC.

Indeed, Dish appears to be calculating that it can persuade the Dolans to let it wrap in a new contract to carry AMC with any settlement for the Voom case. This may reduce the cash component or even allow it to take back AMC's channels at a price below that originally demanded by the cable network. If this plan falls through, the worst that could happen is Dish may be forced to pay the $2.5 billion, but a cash settlement would likely be well below that. Of course, Dish may decide to strike an affiliate deal with AMC whatever the outcome of the trial, particularly if the network's absence is having a significant impact on subscriber numbers. But the loss of AMC's channels, of which only its eponymous one has significant viewership, probably isn't going to cause much of a dent.

The Dolans may soon decide that the toll the dispute could take on AMC is too high to avoid hashing out a deal with Dish. But investors may already be starting to fear the worst: AMC's shares have fallen nearly 4% over the past five days, compared with gains of 4.8% and 8.2%, respectively, for Dish and Cablevision. Squeezed between two bitter rivals, AMC offers potential for drama, but when that happens investors often don't stick around for the ending. Wall Street Journal

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