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ALLENS WIRED WORLD Billionaire Vows to Pursue MSOs Beyond Marcus

Paul G. Allen has more on his agenda than just Marcus CableCo. L.P.

The newest money entering the cable industry comes from theMicrosoft Corp. co-founder, who last week agreed to buy Marcus for $2.8 billion.Evenbefore he closes the deal for Marcus' 1.1 million subscribers, Allen wants to buymore, and is shopping, aides say.

"We plan to continue to invest in this market, lookingboth for ways to grow the existing Marcus business and for opportunities to bring excitingtechnologies into the cable area," he said last Monday at a Dallas press conferenceto announce the deal, which represents his largest personal investment to date.

An investment banker who represented Allen in the dealadded that the billionaire would like to buy big operators, if they're available:

"We don't feel any financial limitations in termsof what we want to do," said the banker, NationsBanc Montgomery Securities seniormanaging director Michael Yagemann. "I would look for him to do additionalacquisition. Some could be very significant -- we're looking at a number rightnow."

He added that Allen plans "to be particularly delicateand diplomatic" in deciding where he fits into the close-knit cable world. His firstgesture: a $2 million donation, with Marcus chairman Jeffrey Marcus, to the National CableTelevision Center and Museum in Denver.

Other operators said they're happy to have him aboard.

"The only disappointment I have is Paul Allenisn't partnering in a deal with us," Century Communications Corp. presidentBernard Gallagher said. "Maybe we'll be partners in future deals."

The sale price is about half cash and half assumed debt,Marcus officials said. It amounts to about 11 times annualized system-level cash flow,after pending sales and acquisitions are finished and at the time the deal closes(probably in the third quarter of the year).

Assuming 1.1 million subscribers at closing, down from thecurrent 1.2 million, the price also is more than $2,500 per subscriber. Both benchmarksare at the high end of recent private sales.

But Allen's aides warned not to necessarily read anyhidden Microsoft message into the Marcus deal.

"There should be a big difference in everyone'smind between the Microsoft-Comcast deal and the Paul Allen-Marcus deal," said WilliamSavoy, Allen's chief investment advisor.

The deal worked out perfectly for Jeffrey Marcus, who willremain chairman, CEO and general partner while his limited partners sell their intereststo Allen. They include Goldman Sachs & Co., roughly 36 percent; Hicks, Muse, Tate& Furst, 16 percent; Freeman Spogli & Co., 16 percent; Jeffrey Marcus and otherinsiders, 14 percent; Greenwich Street Capital Partners, 8 percent; and Marcus Cable, 6percent.

Jeffrey Marcus will retain an undisclosed piece of thecompany. The management team, which also includes chief operating officer Lou Borrelli andchief financial officer Tom McMillin, remains in place. Marcus confirmed he has athree-year contract, and said other managers will be covered under it as well, he said.

Allen, whose fortune is estimated at $20 billion, alsobrings massive amounts of capital to help Marcus Cable introduce new digital services.What Allen doesn't choose to spend, after writing a check for $1.4 billion forMarcus, he can easily raise.

"Paul Allen brings total financial power to the MarcusCable family," Marcus said.

Allen also adds another strong endorsement of cabletelevision as the leading broadband pipeline into the home.

For the past 15 years, Allen has been amassing aninvestment portfolio weighted toward entertainment and interactive content, includingpieces of companies like DreamWorks SKG and Starwave Corp. He talked last week aboutwanting to deliver to people "immediate access to information and resources aroundthe world," and said Marcus Cable finally provides wires for his dreamed-of"Wired World."

Savoy noted that Allen was an early investor in satelliteventures, starting with the failed venture SkyPix and including a $20 million stake inU.S. Satellite Broadcasting Inc. This investment dwarfs the USSB deal.

"What you see in this transaction is a recognitionthat cable is the best way to reach consumers at home," Savoy said. "Whereeveryone else talked about the problems of the future, cable went out and invested themoney in hard assets."

Mitch Scherzer, the Goldman Sachs vice president who runsthe worldwide cable TV practice within investment banking, said the price is a newbenchmark. What's more, "having a technologist effectively buy theseassets" adds another vote cast for "the opportunities this [platform] has tooffer."

But unlike a similar endorsement from Microsoft last June,when it announced it would pump $1 billion into Comcast Corp., the Allen-Marcus dealbarely made a ripple in cable stock prices. MSO executives were puzzled by that.

Analysts said the price, at a described 11 times cash flow,might not have impressed investors. Factoring in corporate overhead, several said, the"real" multiple would be higher -- 12 or 13 times cash flow.

"I think the multiple has been understated, and Ithink the multiple is higher" than 12 times cash flow, Bear Stearns & Co. cableanalyst Raymond Katz said.

Salomon Smith Barney analyst Spencer Grimes said the marketmay have shrugged off a transaction involving around 1.1 million subscribers, adding,"I don't think anyone suspects an outsider is going to come in and take atop-five MSO at a 15- to 20-percent premium."

Several analysts said a continuation of cable stocks'yearlong run-up rests on results, not further affirmation -- in other words, more proofthat new services can be delivered and marketed successfully.

Marcus announced on March 9 that the partners had retainedGoldman to explore strategic alternatives, including a possible sale.

Marcus said last week that he decided to explore thoseoptions after two undisclosed entities offered to buy the entire company after it listedfor sale about 200,000 subscribers in noncore systems.

Allen, he said last week, was the first to make a seriousoffer after that process began. On March 25, he said, he shook hands on terms with Allenand Savoy in Los Angeles.

Marcus and others involved in the deal said a small clusterof other bidders also made bids, which were very close in valuation among themselves andwith Allen's bid. Allen's was slightly higher, though, and won Marcus'endorsement, they said.

"He was there first -- but not by much," Marcussaid. "It was a deal that we found acceptable. And with respect to the managementgroup, which sort of got us all where we are today, it was the best outcome."

Goldman, which bought into Marcus in 1990, also will earn acommission on the deal for representing Marcus. NationsBanc Montgomery Securitiesrepresented Allen.