Mediacom Communications Corp. chairman Rocco Commisso has spent the past six years in relative obscurity, quietly building a small-market MSO by acquiring secondary-market systems at what some would call bargain prices.
That may change now, or at least the part about obscurity. Mediacom last week engineered the biggest deal in its history: the $2.2 billion acquisition of systems in Iowa, Illinois, Georgia and Missouri from AT&T Broadband.
Mediacom acquires about 840,000 subscribers through the transaction, more than doubling its customer base to 1.6 million subscribers. It rises to the No. 8 spot on the domestic MSO list.
Mediacom bought the systems for a cost of about $2,600 per subscriber, or 12 times 2000 cash flow. That's considerably lower than the $5,000 to $6,000 per-subscriber levels some bigger deals have commanded over the last couple of years.
Although Mediacom's average acquisition cost before this deal was $1,734 per subscriber, Commisso said the systems he is acquiring are more than worth the price.
AT&T had put these systems on the block because they were in markets that were non-strategic and secondary to the big MSO, but they give Mediacom access to cities it has never had before.
And, for the first time, Mediacom is able to create fairly significant clusters in line with its ultimate strategy of consolidating headends wherever possible, thus keeping down the cost of delivering new services.
"This deal is really a transformation of the company," said SG Cowen Securities Corp. analyst Gary Farber. "This has gone beyond what they originally envisioned the size of the company would be."
As part of the deal, Mediacom gains 500,000 subscribers in Iowa, including 103,000 in Des Moines; 65,000 in Quad Cities; and 40,000 in Cedar Rapids. Mediacom becomes the second-largest operator in Illinois through the addition of systems in Springfield. Other cities the company picks up include Columbus, Ga., and Jefferson City, Mo.
KUDOS FROM PEERS
And though those cities were too small for AT&T, to Mediacom each is a virtual metropolis.
"To them [AT&T], this is their rural divestiture strategy," Commisso said. "To us, they're jewels."
Several cable operators also cheered the deal.
Comcast Corp. executive vice president and treasurer John Alchin said the deal was a good one for both Mediacom and AT&T.
"It makes an awful lot of sense," Alchin said. "For Rocco, this is not only the type of market that he focuses on, but suddenly it takes Mediacom into another league in terms of its ability to negotiate with programmers and suppliers."
Insight Communications Co. president Michael Willner added that by surpassing the 1 million-subscriber mark, Mediacom could change Wall Street's perception of the company.
"I have the utmost respect for Rocco Commisso as a financial engineer and a cable operator," Willner said. "Anytime you go from 800,000 subscribers to 1.6 million subscribers, it's going to have an impact on the way people perceive him. I think it was a very good deal for him."
Commisso also has big plans for the systems. He'll upgrade the 50 percent that are under 550-megahertz capacity to between 750 MHz and 860 MHz, and will continue to roll out digital-cable and high-speed-data services to subscribers.
Commisso said those upgrades wouldn't cost that much, averaging about $140 per subscriber, or about $300 million over the next two years.
NO EXIT SIGN?
Mediacom went public in February 2000 at $19 per share and raised about $380 million. But since that time, the stock has faltered, ranging from as low as $7 per share to $22.50 per share before the AT&T deal was announced. That apparently has prevented Mediacom from using stock as a deal currency-one of the catalysts for going public in the first place.
After the AT&T acquisition was announced on Feb. 27, investors pumped the stock up $1.25 per share to $19 each. The stock retreated to $18.69 on Feb. 18, but rose another $1.06 each to $19.75 on March 1.
One thing the acquisition appears to do its substantially alter any exit strategy for Mediacom, if there was one. Although Morris Communications owns about 47 percent of the company, Commisso owns 31 percent of the stock and has 82 percent voting control.
Most observers don't believe that Commisso and Morris are in a rush to cash out.
"It probably changes what the exit strategy was," Farber said. "It may push it out. Along the way from where he stood to where he is, there were always points to exit, but he didn't.
"This changes how they view the company. He's doubled the size of the company and the connotation could be that it's somewhat of a different ball game for him."
This deal could be the defining moment for Commisso, an industry veteran who, despite turning in consistent numbers, has not enjoyed the level of respect of some of his larger MSO counterparts.
Commisso formed Mediacom in 1995, after serving nine years as chief operating officer of CableVision Industries Inc. After CVI chairman Alan Gerry sold the company to Time Warner Inc. in 1995 for a then-record $2.8 billion, Commisso decided to return to his entrepreneurial roots-he owned a successful disco in the Bronx in the 1970s-and started to build a cable company.
Commisso was no novice. Prior to his stint at CVI, he had worked in the banking industry, engineering cable deals for Chase Manhattan Bank and Royal Bank of Canada.
In building Mediacom, Commisso started off small. His first acquisition, in 1996, was an 11,000-subscriber system in Ridgewood, Calif. But he stuck to his original business plan of buying systems for low prices that could be upgraded efficiently.
Commisso also has run a tight ship. Mediacom has reported consistent double-digit cash flow growth for 12 consecutive quarters and has kept its leverage ratio below six times operating cash flow.
While the AT&T deal will likely raise that debt ratio to eight times cash flow, Commisso is not worried about raising the money.
'DIDN'T BUY EVERYTHING'
Mediacom has about $900 million in unused credit lines. It recently completed a high-yield bond deal for $500 million and its bank debt leverage is less than 1 times cash flow. That gives the company substantial access to bank loans.
"There are three things that determine your success in this business: How you buy, how you operate and how you finance," Commisso said. "I didn't go out and buy everything that was available. The whole industry is trying to cluster up, but what's the use if you only end up with systems that don't work? That's the difference."
While Commisso has a reputation for buying cheap, he is not afraid to spend money to upgrade his systems when it's needed. Last year, capital expenditures were $185.3 million in 2000, up from $140 million in the previous year.
At the end of the year, 74 percent of Mediacom's systems were served by 550-megahertz or 750-MHz plant; 77 percent of those systems were two-way capable.
Mediacom has also rolled out digital cable through its relationship with AT&T Broadband's Headend in the Sky. It ended the year with 40,000 digital customers, up from 28,000 the year before.
High-speed data services-offered through Excite@Home Solutions-were available to 464,000 homes and had 12,000 subscribers.
Along with those upgrades have come some substantial rate increases. But while other large cable operators have had to weather a huge consumer backlash for any rate increase above 6 percent, Mediacom has remained relatively unscathed, even in markets where rate increases have been 10 percent or higher.
The difference is that Mediacom apparently has been successful in explaining those hikes to consumers. It's also tied them to significant increases in channel capacity, driving down the total cost per channel.
That's not to say the AT&T systems don't need work. Although half are upgraded, cash flow margins are at about 40 percent-significantly lower than the 48 percent to 49 percent in Mediacom's present systems. Some of the former AT&T properties also face competition from overbuilders McLeod USA Inc. and Knology Inc.
Farber said it shouldn't be that hard to bring the AT&T systems up to speed.
"They're at 40 [percent] now, they should easily get to 43 [percent]," Farber said.
The acquisition of the AT&T systems will lengthen Mediacom's upgrade schedule, but most analysts are unconcerned.
"This will push it back a bit, but in buying systems from AT&T, that was inevitable," Farber said. "These were noncore, nonupgraded systems. It's a work in progress."
