Mediacom Plans Outlays for Upgrades, Subs

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Mediacom Communications Corp. plans to spend $193 million in cash this year to acquire 100,000 subscribers in systems adjacent to its existing properties, and it will invest an additional $35 million for plant upgrades in 2000.

Mediacom, based in Middletown, N.Y., has about 720,000 subscribers, mainly in rural and secondary markets across the country. In a press release, the MSO said it completed two acquisitions in April for systems with a total of 11,000 subscribers for $16 million, and it has two pending acquisitions of cable systems with 6,500 customers for an aggregate price of $12.5 million.

Mediacom said it has several letters of intent to purchase systems with another 82,500 subscribers, for an aggregate purchase price of $164.5 million. That works out to about $1,930 per subscriber-well below the industry average of $3,500 to $5,000.

The acquisitions should generate between $18 million and $19 million in cash flow in 2000, the company said.

Mediacom chairman Rocco Commisso said in a conference call with analysts that while these systems may not be in the same shape as those that sell for higher prices, they could be as valuable with a minimal investment.

"Our feeling is that these assets are not as quality [as higher-priced systems], but with $500 or $600 [per subscriber] of capex [capital expenditures], they will get there," he said. "They could generate $200 of cash flow [per subscriber] per year. In three years, we will have a much more valuable asset on our hands."

For its first quarter ended March 31, Mediacom's pro forma revenue increased by 8.8 percent to $77.4 million and pro forma earnings before interest, taxes, depreciation and amortization rose 13.1 percent to $36 million.

Digital subscribers nearly doubled from 5,300 to 10,000 in the period, and high-speed-data subscribers increased 17 percent from 5,100 customers to 6,000. Total basic subscribers rose 1.6 percent in the period.

The company plans to step up expenditures for upgrades in 2000 to $175 million. It had originally planned to spend $140 million this year.

As a result, Mediacom will have 77 percent of its network upgraded to capacity of between 550 megahertz and 750 MHz by December, compared with 57 percent as of December 1999. In addition, 50 percent of its existing homes passed will be two-way-capable by the end of the year, compared with 11 percent as of December 1999.

Mediacom went public in February, raising about $380 million. The company's stock has been hit hard lately, mainly as part of an overall downturn in the market.

The stock was down 75 cents per share in afternoon trading May 3 to $12.25. At that level, Mediacom is trading at $6.75 below its initial-public-offering price of $19.

While market reaction has been tepid for the stock, Goldman, Sachs & Co. analyst Barry Kaplan believes Mediacom is a bargain, and he reiterated his "recommended" rating on the company.

Kaplan wrote in a research report that Mediacom is trading at a discount compared with its MSO peers-at about 11.5 times operating cash flow, as opposed to 12.5 times operating cash flow for the sector and 15 times for industry leaders Comcast Corp. and Cox Communications Inc.

"We believe the discount is unwarranted, given Mediacom's strong cash-flow growth (which should approach 20 percent by year-end) and its proven ability to make accretive acquisitions," Kaplan wrote in his report.

Kaplan set a $30 year-end price target for the stock-about 130 percent above its current trading value.

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