Mediacom LLC, the Middletown, N.Y.-based MSO, has reached
an exclusive 10-year deal with SoftNet Systems Solutions Inc., parent company of turnkey
Internet-service provider ISP Channel, to provide high-speed Internet access to more than
The deal will boost SoftNet's total homes passed to nearly
3 million, making it the third-largest data-over-cable-service provider in the nation,
behind Excite@Home and Road Runner.
Mediacom will get about 13.7 percent of SoftNet's stock, or
some 3.5 million shares, and Mediacom chairman and CEO Rocco Commisso will become a
SoftNet director, ensuring preferred treatment for his "anchor tenant" MSO.
Commisso said he had been fielding offers from several
different Internet-access companies, but he decided on SoftNet because it would allow him
to control the deployment of services to his company.
"With @Home having so many homes and ISP having so
few, we can upgrade the systems at a much faster pace," Commisso said. "This
allows us to accelerate the cable-modem introduction."
As part of the deal, Mediacom has committed to delivering
150,000 upgraded subscriber homes to SoftNet every six months.
Mediacom primarily operates in second-tier markets, and the
company's systems are generally in need of upgrades. However, the addition of the SoftNet
stock -- valued at $112 million based on SoftNet's closing price of $32 per share July 7
-- will help to ease that financial burden.
The SoftNet deal requires Mediacom to upgrade its systems
to two-way capability within three years.
In return, SoftNet increases its homes passed by more than
50 percent immediately, and it gains access to a customer base that is apparently hungry
for advanced services. Mediacom has been offering its own branded high-speed Internet
service to about 5,200 customers in California. SoftNet sees that installed cable-modem
base expanding rapidly as more systems are upgraded during the next three years.
"Over the term of this agreement, we expect to see
cable-modem-penetration rates reach 20 percent to 30 percent, giving ISP Channel as many
as 300,000 additional cable-modem subscribers," SoftNet chairman Lawrence Brilliant
said in a prepared statement.
The deal also ensures that Mediacom will not have to
compete for resources with much larger cable companies.
This could have been an issue if the company partnered with
Excite@Home or High Speed Access Corp., a Littleton, Colo.-based Internet-access provider
that is heavily beholden to big investor Paul Allen, who controls Charter Communications.
"[SoftNet] is the only company owned and run by the
stockholders," Commisso said. "@Home is controlled by the cable companies, and
HSA is controlled by the cable companies. This creates more of a level playing
Commisso said he was also "very impressed" with
SoftNet's management team, led by Brilliant and president Ian Aaron.
In addition, the deal could sweeten a possible initial
public offering by Mediacom in the future. Speculation has it that the MSO could launch an
IPO before the end of the year.
But CIBC Oppenheimer Corp. cable and telecommunications
analyst Aryeh Bourkoff said that while the deal could make an IPO more attractive,
Mediacom has a few other things to do first.
"The company needs to have upgraded its plant a lot
further along before issuing an IPO," he said. "[The SoftNet deal] gives it an
immediate incentive to upgrade its plant as soon as possible."
Still, Bourkoff added, the deal is a good one for both
Mediacom and SoftNet. It provides capital resources for Mediacom to finish its upgrades,
and it gives SoftNet some added clout in negotiating with other smaller MSOs.
"This is [SoftNet's] biggest contract," Bourkoff
said. "The exclusive nature of the contract is essential to having a window to offer
Commisso added that as one of the larger remaining MSOs,
Mediacom does have some influence in the cable industry.
"Now [SoftNet] has its anchor tenant," he said.
"I do carry some weight around."
Mediacom had been on an acquisition tear earlier in the
year, agreeing to purchase Triax Telecommunications Co. L.L.C. in May for $740 million.
The Triax deal, which will add 340,000 subscribers to the
Mediacom fold, is the company's largest acquisition to date.