Adios, Public

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Another publicly traded cable company might exit the category’s battered ranks, as Insight Communications Co.’s controlling shareholders laid out a $650 million plan to buy out public shareholders and take the MSO private.

Insight, public since 1999, watched Cox Enterprises Inc. take MSO Cox Communications Inc. private for $8.5 billion last year and decided to follow suit. Chairman Sidney Knafel and CEO Michael Willner, backed by private investors The Carlyle Group, said on March 7 they plan to buy the other 86% of Insight shares for $10.70 apiece.

<p>Do Not Disturb</p>

• Cox Enterprises Inc. got the privatization ball rolling last August, proposing to buy the 38% of MSO Cox Communications Inc. it didn’t own for $32 per share, or $7.9 billion. The price rose to $34.75 per share, or $8.5 billion, by the time the deal closed in December.

• Insight Communications Co. co-founders, frustrated by a low stock price and hassle-filled reporting requirements, initiate a buyout proposal for $650 million, backed by private-equity firm The Carlyle Group.

• Mediacom Communications Corp. could go private for under $500 million — but lacking a clear exit strategy and with a decidedly rural footprint, would private-equity players play along?

That’s a 7% premium to Insight’s $9.68 trading price on March 4. But, as often happens in such circumstances, the stock quickly leapfrogged the offering price, closing at $11.63 on March 10. So, as happened with Cox, the prospective buyers can expect to have to offer more cash.

Knafel and Willner said they would not consider other offers for their stakes in Insight. Their combined 14% equity interest translates to 62% of share votes.

“This proposal represents an opportunity for Insight’s public shareholders to realize liquidity at a price higher than the shares have traded over the past 12 months,” Knafel said in a statement. Two independent directors — Oxygen Media chairman and CEO Geraldine Laybourne and David Lee, senior managing director of specialty finance and advisory firm LLJ Capital — will evaluate the proposal.

Citigroup Smith Barney cable analyst Niraj Gupta estimated Knafel and Willner might go as high as $12.16 per share, or about 9 times estimated 2006 cash flow.

The offer, which requires shareholder approval, would not affect Comcast Corp.’s 50% interest in Insight. If the transaction goes through, Willner and Knafel will own 14% of their half of the assets, and Carlyle will own 86%.

In fact, Comcast’s half-ownership provides Carlyle with a built-in exit path: Both Comcast and Insight have the right to trigger the dissolution of their partnership beginning on Dec. 31. It’s been speculated Comcast would buy the rest of Insight and absorb its 1.3 million subscribers.

Insight would not comment beyond a prepared statement. But a source close to the company cited increasing frustration with a low stock price and the additional reporting requirements of publicly traded companies in the aftermath of the federal Sarbanes-Oxley Act of 2002, which added several layers to accounting functions.

According to the source close to the company, those reporting requirements became an increasing burden to Insight — possibly $1 million more than the year before.

THRILL WAS GONE

Given that Insight has no immediate need to tap equity markets, the allure of being a public company had faded.

“The question became, are they better off having that [reporting] overhead and the obligations of being a public company and getting little benefit for it?” the source said.

Like many of its peers, Insight has been hammered since it went public in July 1999 at $24.50 per share. It rode on the Internet bubble — hitting $31.88 in September 1999 — but has languished in a range of $8 to $10 for several months.

Insight also looks to accelerate capital spending in 2005 and 2006, behind new products like Internet telephony. Wall Street these days is looking for cable to scale back capex and deliver free cash flow.

“We’re in a very rapidly changing environment,” the source close to the company said. “The ability to be flexible and do things that build up equity values over the long term are sometimes in conflict with the short-term review of public companies on a quarter-by-quarter basis. This was the right time to go back to their roots.”

MEDIACOM PROSPECTS

Given the structures of most publicly traded MSOs, analysts believe remaining viable candidates for privatization are Mediacom Communications Corp., controlled by founder, chairman and CEO Rocco Commisso, and Charter Communications Inc., controlled by Microsoft Corp. co-founder and billionaire Paul Allen.

Commisso, who founded Mediacom in 1995 and took it public five years later, has a small equity position, but controls 80.4% of votes.

Allen, who took Charter public in 1999, controls 52% of equity and 93% of votes.

With a market capitalization of $496.8 million, Allen could take Charter private relatively inexpensively, but he’s had little appetite for Charter stock. Analysts and investors alike have pressured him to tap his estimated $21 billion personal fortune to swap debt for Charter equity to help reduce its industry-high $19 billion in leverage. So far, Allen hasn’t bit.

Mediacom could be a more likely candidate, because of Commisso’s voting control and a relatively low market cap of $563 million. But Credit Suisse First Boston cable analyst Bryan Kraft — who figured Mediacom could be taken private for under $500 million — pointed out that, unlike Insight, Mediacom lacks a clear exit strategy. Its rural footprint and fundamentals are a harder sell.

“However, we cannot rule it out completely because, similar to Insight, Mediacom’s capital structure is conducive to such a transaction and the actual cost of taking it private is relatively small (under $500 million) due to high financial leverage,” Kraft wrote.

Commisso did not return a call for comment.

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