After spinning off Madison Square Garden, Cablevision Systems Corp should sell its Rainbow Networks cable channels to Comcast Corp and then buy Time Warner Cable Inc's New York operations, said influential shareholder Mario Gabelli.

Cablevision's board has approved a plan to move forward with a tax-free spinoff of MSG to shareholders, the company said on Thursday, sparking speculation that this will lead to a break-up of the company controlled by the Dolan family.

Gabelli led a successful revolt by some of Cablevision's largest shareholders last year to turn down a $36.26-a-share offer by the Dolans to take the New York-based cable operator private. These holders and some Wall Street analysts argued that Cablevision's assets were worth $45 to $50 a share.

The Dolans have made the right move now, and should set Cablevision on a path to maximizing the value of its assets with a number of follow-up transactions, Gabelli said.

Under the plan James Dolan will be executive chairman of MSG while also remaining chief executive of Cablevision.

This was long overdue, he told Reuters in an interview. Basically these are assets (MSG) that the Dolan family wants to keep with James Dolan.

Gabelli's funds hold 19 million Cablevision shares or around 6.4 percent of the outstanding float.

He argued vociferously last year that various Cablevision assets were undervalued.

The Dolan-led management team has since made similar statements and first hinted at exploring avenues to unlock value late last year.

Cablevision's assets include cable systems serving three million New York homes; cable television networks like AMC and WE; Madison Square Garden; Radio City Music Hall; the New York Knicks basketball team; Clearview movie theaters and the Newsday newspaper among others.

The next step would be to sell Rainbow to Comcast or someone who wants cable assets, said Gabelli.

Rainbow, which has been valued at between $2 billion to $4 billion, has had recent success with its AMC Network's award-winning 'Mad Men' series. It also includes the Sundance Channel which Cablevision bought last year for $500 million.

The third step would be to buy the Time Warner Cable assets in the New York metropolitan area and to exchange shares at a comparable multiple, said Gabelli.

The way Gabelli envisions such a deal would leave Cablevision's much-respected chief operating officer, Tom Rutledge, running the larger cable company with Time Warner Cable remaining a minority shareholder.

Gabelli, whose funds own cable and media companies including Comcast and Time Warner Cable, said he has not proposed this to Cablevision's management saying, I'm not an investment banker. It's got to be an alternative that's on their list.

Time Warner Cable runs cable systems in the boroughs of Manhattan, Staten Island, parts of Queens and Western Brooklyn. Cablevision owns systems in the Bronx and Eastern Brooklyn. The majority of Cablevision's systems are in the New York City suburbs of Long Island.

It's illogical to have the systems bifurcated in that fashion, you got to reunite the five boroughs of New York, Gabelli said.

Cablevision executives said details of the MSG spinoff will be available for investors in documents that will soon be filed with the U.S. regulators. But on a conference call with investors, they said there would be no additional debt on MSG's balance sheet at the time of the spin.

But the 67-year old Gabelli, a Bronx native and Knicks season-ticket holder who speaks with the Dolans on issues about the business from time to time, was pleased with the options it might create for his team.

They're going to give it to Jimmy (James Dolan) in a way that creates maximum flexibility for MSG and that means no debt and he's going to be able to buy LeBron (James), he said.

(Reporting by Yinka Adegoke; editing by Carol Bishopric)

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