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Small potatoes, big dreams

AT&T system deal helps Mediacom, Charter goals 3/04/2001 07:00:00 PM Eastern

By unloading some stepchildren, AT&T Broadband is helping two other cable operators achieve long-held dreams.

The biggest effects from the $3.5 billion in systems sales AT&T cut last week will be felt by Mediacom Communications, which will double in size and graduate from serving cast-off rural systems to bigger towns and small cities. The buyer of a separate group of systems, Charter Communications, will fulfill a long-held desire to control virtually all the cable subscribers in St. Louis, which is its home market.

Rural cable operator Mediacom agreed to pay $2.2 billion for its package. The systems were afterthoughts to AT&T Chairman Michael Armstrong, serving small cities and towns in Georgia, Illinois, Iowa and Missouri. But Mediacom Chairman Rocco Commisso has built his company over the past five years by stitching together systems in many truly rural areas. The new buys give him small cities, including Columbus, Ga.; Moline, Ill; and Des Moines, Iowa-places that have higher home densities than other Mediacom markets.

Those are sub-prime markets to AT&T, which is focused on major markets like San Francisco and Chicago. "To me, these are crown jewels; to them, it's a rural divestiture strategy," said Commisso. The deal comes to $2,600 per subscriber and around 12-times running-rate cash flow; it doubles Mediacom's size to 1.6 million subscribers.

After years of trying to dominate its home market of St. Louis, Charter Communications Chairman Jerry Kent scored, landing AT&T's half of the area in a wide-ranging $1.8 billion system deal.

St. Louis-based Charter and its predecessor company, Cencom, have owned systems in the suburbs serving 260,000 subscribers for years, but Kent has longed for the 245,000 subscribers in the city owned by AT&T and its predecessor, Tele-Communications Inc. Kent will now have more than 90% of the market. Charter also gets 156,000 subscribers in Nevada, most notably Reno, and 147,000 in Alabama.

Charter will cover about 60% of the $1.8 billion price with cash. Kent is paying up to $500 million in Charter Common stock and trading away systems in Miami Beach and Sebastian, Fla.-markets where AT&T has nearby cable operations. Kent was enthusiastic, even though it may push his leverage to a precariously high 7.8-times annual cash flow.

The deal comes to $3,100 per subscriber and around 16-times cash flow. That's less than the huge $5,500-$6,000 per sub and 20-times-plus deals from last year, but those were for high-growth properties, and not all of these systems are in as strong markets.

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