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RCN Spells Out Reorg

8/29/2004 8:00 PM Eastern

Troubled overbuilder RCN Corp. made it official last week, filing a reorganization plan with the U.S. Bankruptcy Court for the Southern District of New York that would give control of the company to bondholders in a debt-for-equity swap.

RCN filed a prepackaged Chapter 11 plan on May 27. This reorganization plan, while strikingly similar to the one it filed in May, contained more detailed information.

Overbuilder’s Assets
RCN Corp. properties at a glance:
Source: RCN 2003 annual report
MARKETS: Boston (including 18 surrounding communities); New York City; Chicago; Lehigh Valley, Pa.; Philadelphia suburbs; San Francisco (pictured); Carson and Gardena, Calif. (Los Angeles suburbs); Washington, D.C. (50% partnership with Starpower Communications LLC)
2Q REVENUE: $121.3 million
2Q NET LOSS: $71.6 million (75 cents per share)
NETWORK CONNECTIONS (12/31/03): Phone, 246,711; Cable TV, 370,187; High-Speed Internet, 174,898; Total: 791,796.

RCN plans to reduce its debt by about $1.2 billion to $480 million, mainly by exchanging debt for equity in a newly formed company.

Secured debtors — mainly banks — will receive payment in full and in cash through a $479.6 million credit facility the company plans to secure upon emergence.

Unsecured creditors — owed about $1.2 billion — will either receive stock in the newly formed RCN or cash equal to 25% of their claim up to $12.5 million and stock.

HEARING COMING

The plan, which was approved by RCN’s creditors committee, still needs to be approved by the bankruptcy court. A hearing on the plan is expected sometime in September. RCN said it expects to emerge from bankruptcy in the fourth quarter.

“It’s basically consistent with everything we’ve been saying all along, that it’s a consensual plan, it was jointly filed and we anticipate emerging next quarter,” RCN spokesman Barak Bar-Cohen said.

Current RCN shareholders will receive warrants for 2% of the new company’s outstanding shares, but there is a catch. The warrants are exercisable within two years after emergence, but at a strike price of $34.16 per share. RCN last traded in the $34 range in 2000.

In addition, the warrants would vest once RCN’s enterprise value reached $1.66 billion, compared to the company’s estimated enterprise value of $1.1 billion to $1.3 billion upon emergence.

“It’s out of the money,” Bar-Cohen said. “But we wanted to make sure there was something for existing shareholders.”

Shareholders are typically left with little or nothing once a company emerges from bankruptcy, so the RCN plan shouldn’t be a shocker.

ALLEN’S LOSS

But one investor who could stand to lose a substantial amount of money is Microsoft Corp. co-founder and Charter Communications Inc. chairman Paul Allen.

Allen invested about $1.65 billion in RCN in 1999, becoming one of the overbuilder’s largest individual shareholders, with 25% of its equity. Late last year, Allen dumped about 40% of his holdings for $2 million in cash, swallowing a substantial loss from his original investment.

Based on his initial investment, Allen lost about $650 million in making that sale.

According to Securities and Exchange Commission filings, Allen still owns about 16.1 million shares (valued at $805,000 based on RCN’s closing price of 5 cents per share on Aug. 24), or about 14.5% of RCN’s outstanding stock.

In its disclosure statement filed with the bankruptcy court, RCN said it would issue about 36 million shares upon emergence.

According to its disclosure statement filed with the bankruptcy court, RCN estimates its new equity will be valued at $620 million to $820 million.

RCN chairman and CEO David McCourt called the plan a “win-win” for the company and its creditors.

“We have worked very closely with the Committee, banks and other constituents to develop and file this plan,” McCourt said in a statement.

“This plan of reorganization is a win for all of us. As many telecom companies have done before us, we are restructuring our debt so we can remain a strong and innovative competitor in the marketplace.”

NO NEW CEO YET

In July, McCourt announced that he would step down as CEO — but remain as chairman — once RCN emerged from Chapter 11. That search is continuing.

September