May 7 (Bloomberg) -- Cablevision Systems Corp., the media company controlled by the Dolan family, may spin off the Madison Square Garden unit that owns the New York arena and the Knicks basketball team, bowing to shareholder pressure.

The stock rose 4.5 percent after Cablevision said its board has authorized managers to study the move. The spinoff may value the unit at $3 billion and allow Cablevision to focus on its more profitable cable-TV business, said Chris Marangi, associate manager of the Gabelli Value Fund in Rye, New York.

Investors criticized the company last year for spending earnings from its New York-area cable service on media properties instead of investing them back into its main business or returning money to shareholders. A spinoff could set the stage for a slimmed-down Cablevision to be sold to a cable rival such as Time Warner Cable Inc. or Comcast Corp., Marangi said.

“It’s a very big step in the process of distilling Cablevision down to its core telecom assets, which paves the way for consolidation,” said Marangi. His fund’s parent owns 7.8 percent of Bethpage, New York-based Cablevision’s Class A stock.

Cablevision’s stock pared some of its gains after executives emphasized on a conference call the spinoff plan is mere exploration at this point. They also said Madison Square Garden’s renovation will cost more than planned.

Cablevision rose 82 cents to $19.15 in New York Stock Exchange trading at 4 p.m. after earlier jumping as much as 18 percent. The company also posted first-quarter profit that trailed analysts’ estimates.

Shareholder Pressure

As recently as November, Cablevision Chief Executive Officer James Dolan said the company is focused on operations amid the economic slump, not strategic alternatives. That was a reversal from August, when he said the company would explore asset sales.

Shareholder criticism mounted last year after Cablevision bought the Sundance Channel and Long Island’s Newsday newspaper. Gamco Investors Corp. Chief Executive Officer Mario Gabelli threatened a proxy fight if Cablevision didn’t take steps to sell off assets and boost the stock price. Dolan responded by scheduling a series of meetings with investors to hear their concerns and instituting a quarterly stock dividend.

The Dolans control the company’s major moves because they own Class B shares that help give them 70 percent of the votes. The family’s 2007 proposal to take the company private for $36.26 a share required a majority vote of other shareholders, who voted the deal down.

Sports Teams, Channels

The Madison Square Garden unit, whose sales climbed 2.3 percent last quarter, operates the venue next to New York’s Penn Station, billed as “The World’s Most Famous Arena.” The unit also includes the Knicks, the Rangers hockey team, the Radio City Music Hall and two New York-area cable sports networks.

The sports networks will make about $150 million this year in profit before interest, taxes and non-cash charges, and are worth about $1 billion, Marangi said. The Knicks and Rangers are worth a combined $900 million, he estimates.

Radio City Music Hall and the Fuse music-video network are each worth about $200 million, Marangi said. The Madison Square Garden building, along with air rights allowing developers to build future office space on its site next to Manhattan’s Pennsylvania Station, is worth $500 million, he estimated.

“Nobody will use those air rights soon, but they still exist,” he said. “It’s prime New York real estate.”

The company didn’t provide further details about its spinoff plans. Vice Chairman Hank Ratner declined to answer related questions on the conference call.

Operating Loss

Cablevision and ITT Corp. bought Madison Square Garden from Viacom Inc. for $1.08 billion in 1994. Less than three years later, ITT sold its stake, along with stakes in the Knicks and Rangers sports teams, to Cablevision for $650 million.

The business boosted sales to $271.3 million last quarter, accounting for 14 percent of Cablevision’s total revenue. The unit’s TV channels increased sales, while revenue from the entertainment unit decreased because of fewer arena events. The sports teams increased sales on ticket revenue. The unit’s operating loss shrank to $2.2 million.

Net income amounted to $20.2 million, or 7 cents a share, compared with a loss of $31.6 million, or 11 cents, a year earlier. Excluding some items, profit was 12 cents a share, compared with the 14-cent average of estimates compiled by Bloomberg. The company lost 6,300 basic cable subscribers during the quarter.

(Cablevision held a conference call to discuss results. For a replay, go to http://www.cablevision.com)

To contact the reporter on this story: Tim Mullaney in New York at tmullaney1@bloomberg.net; Katie Hoffmann in New York at khoffmann4@bloomberg.net

Last Updated: May 7, 2009 16:11 EDT