Mediacom LLC, a small MSO based in Middletown, N.Y.,
vaulted into the top 20 with its pending $740 million buyout of Triax Midwest Associates
LLC.
The deal, expected to close in the fourth quarter, will add
342,000 subscribers in six states to Mediacom's current total of 360,000.
Including a pending deal with an undisclosed MSO for
another 15,000 subscribers, Mediacom will have about 725,000 subscribers.
Headed by chairman and CEO Rocco Commisso, Mediacom has
grown rapidly since its birth in 1996.
While the rest of the cable industry pays big bucks to gain
scale in major cities, Mediacom has stayed true to a strategy of expanding in
nonmetropolitan markets and spending as little as possible.
The Triax deal is the most costly in Mediacom's
history -- $2,164 per subscriber, or about 11.5 times Triax's running-rate cash flow
-- but it is still below the industry average these days.
Triax's systems are mostly rural, though, and they
only have about 1,100 subscribers per headend -- factors that bring down the cost.
"Our goal is to be more widespread," Commisso
said. "This fits in perfectly with our nonmetro-market strategy, bringing
state-of-the-art technology to Middle America."
Mediacom chief financial officer Mark Stephan said the
higher price was warranted, given the current climate in the industry.
"In the context of today's marketplace, this is a
good opportunity to buy 342,000 subscribers in a market where subscribers are going for
between $4,000 and $5,000 [each]," Stephan said. "These properties are strategic
to us. They allow us to scale up rapidly. A price of $2,164 [per subscriber] is very
reasonable."
Stephan added that Mediacom will likely have to make a
good-sized investment to upgrade Triax's plant, but this was expected.
CIBC Oppenheimer Corp. high-yield cable and
telecommunications analyst Aryeh Bourkoff said the purchase would most likely be financed
with debt. Considering the added leverage the company faces in financing the upgrades of
the Triax systems, that could be a heavy load to bear.
Still, Bourkoff said, the Triax purchase was a good one for
Mediacom.
"The market now has dictated that companies the size
of Mediacom have to get bigger or get out," Bourkoff said. "Mediacom has been
growing."
He added that while the Triax systems may take a
substantial amount of capital to upgrade, Mediacom has proven in the past that it can and
will upgrade its systems.
"Mediacom has demonstrated that it can adequately
upgrade systems and expend the capital needed to do that on a timely basis," Bourkoff
said.
Mediacom plans to upgrade the Triax systems to provide
digital and high-speed Internet services. The company said about 30 percent of the Triax
properties would be fully rebuilt by the end of the year.
"This was a typical investor-based MSO, where the
investors buy the asset and then starve it on the investment-capital front," Stephan
said.
"These assets are in great markets where we know how
to operate," he added.
Mediacom said it has a plan to substantially reduce the
number of Triax headends.
The Triax systems are actually more tightly clustered than
Mediacom -- which operates in 14 states -- is used to. Mediacom's systems are mostly
in the Southeast, while Triax's systems are in Arizona, Illinois, Indiana, Iowa,
Michigan, Minnesota and Wisconsin.
Gaining scale also gives Mediacom some newfound clout when
negotiating telephony deals with AT&T Corp., as well as high-speed Internet-access
deals with other carriers. The company is currently providing its own branded Internet
services in California to about 5,200 subscribers.
"This definitely puts us in another league,"
Stephan said. "Size has its benefits."
Chase Securities Inc. advised Mediacom in the transaction,
while Daniels & Associates Inc., Donaldson, Lufkin & Jenrette Inc. and Veronis,
Suhler & Associates Inc. represented Triax.
