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Cable Operators

Debt-Light, RCN Explores Sellout Options

9/15/2006 8:05 PM Eastern

The last of the big cable overbuilders could soon be no more.

RCN Corp., which stormed onto the scene in 1997, attracted some very high-level investment and then suffered the ups and downs of a fiercely competitive market, has hired two investment bankers to advise it on “strategic alternatives,” including possible sale, several executives in the cable financial community said last week.

Overbuilder Prices
RCN Corp. might be selling assets at a time when even competitive cable providers can claim decent prices. The two most recent major overbuilder sales:
Source: Paul Kagan Associates and UBS Securities.
Date Buyer Seller Location Subscribers Price Cash-FLOW Multiple
02/06 Wave Division Holdings Millennium Digital Media Wash., Ore., Mich. 70,000 $187 million 8.9
12/05 Avista Capital WideOpenWest Mich., Ill., Ohio 345,000 $842 million 8.2

The nation’s largest overbuilder — with about 418,000 subscribers, including a substantial presence in the New York City and Chicago markets — RCN recently hired investment bankers Waller Capital Corp. and The Blackstone Group as advisers, those executives said.

Officials at Blackstone and Waller declined to comment. “Our company policy is not to comment on market speculation, and we view this as market speculation,” RCN senior vice president for strategic and external affairs Richard Ramlall said through a spokesman.

According to several executives in the cable financial community, RCN is pursuing a dual-track strategy — it is also investigating buying other small phone companies, in case a sale doesn’t materialize.

Those same executives said the overbuilder, at least for the time being, is leaning toward an outright sale.

Also according to those executives, RCN would like to sell everything or not sell at all, rather than offer the company up piecemeal. Of late, RCN has sold off smaller, nonstrategic markets to consolidate its footprint, mainly in the Eastern part of the country.

Aside from the Chicago area, RCN’s biggest markets are in Eastern Pennsylvania, New York City, Boston and Washington, D.C. It sold 18,000 subscribers in San Francisco to Astound Broadband for about $45 million earlier this month.

If RCN is sold — and an information package about the systems went out to prospective bidders last week — it could capitalize on the relatively high prices that have been paid recently for cable operations that compete against wireline cable incumbents.

Earlier this year, WideOpenWest, the Denver-based overbuilder with about 325,000 customers, was sold to private-equity group Avista Capital Partners for an estimated $800 million, or 9 to 9.5 times annual cash flow.

At that multiple, RCN could fetch $1.1 billion to $1.2 billion.

Some analysts believe it could go higher. WOW had strong cash flow, but did not have a presence in such major markets where RCN operates — New York, Chicago and Washington, D.C.

Miller Tabak & Co. media analyst David Joyce estimated RCN could sell for $30 per share, or about $1.1 billion. While RCN has attractive markets, it’s unlikely to fetch a premium valuation because other cable companies aren’t natural bidders, he said. “In a sales scenario, a cable company that has an overbuilder in some of its markets is not going to be interested in all of the assets if they’ve got some of the same infrastructure in place.”

Joyce said RCN should draw strong interest from private-equity groups, though. It went through a Chapter 11 reorganization in 2004, shedding about $1.2 billion in debt, and as of June 30 had only about $152 million in debt. “Because of the strong balance sheet, it can be levered up a lot,” Joyce said. “That’s what private-equity does: they look for leverage equity returns.”

RCN closed at $26 on Sept. 12 and rose more than 8% ($2.16) on Sept. 13, closing at $28.16, after Bloomberg News reported RCN was considering a sale. That’s a far cry from the $72 the stock once sold for in 2000, but a lot better than the 15 cents its shares claimed before the Chapter 11 reorganization.

RCN burst on the scene in 1997, a spin-off of Midwestern telephone company C-TEC Systems. Under then-CEO David McCourt, its marketing was often brash and capitalized on its underdog status against big incumbent phone and cable companies. One well-remembered poster in New York City used a bust of Lenin to compare those incumbents with past failed empires.

In 2000, it caught the eye of Microsoft Corp. co-founder and Charter Communications Inc. chairman Paul Allen, who invested $1.65 billion through his Vulcan Ventures personal investment vehicle. Allen has since dramatically reduced his holdings in RCN. RCN made its largest acquisition – the $500 million purchase of 21st Century Telecom, an overbuilder in Chicago with about 35,000 subscribers then – in 2000.

Companies like WINFirst, Digital Access and WideOpenWest were attracting billions of dollars in investment in early 2000 but fell on hard times in 2001 when the bottom fell out and many overbuilders significantly scaled back ambitious expansion plans. By 2004, aside from RCN, only WideOpenWest remained.

September