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Mediacom's Founder Drops Buyout Offer

 This is a repost of an old entry from my investing blog made on September 4 2010.


The WSJ just reported Mediacom's founder/chairman Rocco Commisso pulled his offer to take the cable company private after its bid being rejected by its board twice (link here).  Mr. Commisso's initial bid of $6 was rejected by a special committee of the board established to evaluate this buyout proposal.  Rumor says that the latest offer was a price of $7.35 before he decided to back out.  The board was, according to the journal, looking for a price of at least $9 for share for Mediacom stock, which have been trading below $5 for the most part of last year before the going-private proposal emerged.

 

The stock fell to a low of $5.80 on the news, a 35% of discount to the price sought by the board.  I've always thought it was an interesting to see an insider/mgmt offer to buy out the minority public shareholders, so I decided to stop and take a look at this situation.  At $6, Mr. Commisso was offering to buy out the company at 6.5x of its $540 million EBITDA.  As a comparison, the last time I saw an M&A deal in the cable space, it was Cablevision buying Bresnan at 8.5x EBITDA.  Mediacom generated about $100 million in free cash flow in 2009, so Mr. Commisso was trying to buy his company at 4x P/FCF, what a steal!  To put the upside in perspective, if Mediacom was to be taken out at the same 8.5x EBITDA multiple as Bresnan, the price per share would have been $18-$20 depending on whether you choose to use the trailing or forward EBITDA.

 

The several analyst reports I have access to have estimates of free cash flow in the range of $120-130 million this year, which puts Mediacom stock at around only 4x FCF.   As you put growing cash flow towards deleveraging (which is what the company publicly said they're going to do), a magical thing happens.   First of all, every dollar used to reduce the debt directly increases the value for the shareholders.   Not only that, your leverage ratios (Debt/EBITDA) goes down at a fast rater with the double effects from a increasing numerator and a decreasing denominator.  I calculated Mediacom could easily lowers its Debt/EBITDA ratio to 3x before the most of the maturities happen.  With a higher EBITDA, cash flow and lower debt ratio, the company could trade at a higher multiple.   I estimate, under that scenario in a year or two, the stock could worth well above $20 with a 8x EBITDA multiple in line with the industry.   There's also an overwhelming fear the "cord-cutting" risk given the state of the economy and concerns about the rapidly growing programming cost, both of which I think are quite overblown.  Rational investors should take advantage of such fears to buy.  I believe Mediacom is actually a better play on the cable space due to its rural focus, as there is much less competition due to the lack of FIOS/U-Verse buildout by the telcos in its coverage regions.

 

The most likely catalyst in the short term is Mr. Commisso returns with a better offer to take the company private, as he clearly understood the value of the company and tried to steal it before the market realizes it.


Full disclosure: Long MCCC.  This is not a recommendation to buy or sell the stock.  I may make changes to my portfolio without providing any update.