Comcast, Verizon Might Peek at RCN
Equity Firms Also In Bidding For Overbuilder
By Mike Farrell -- Multichannel News, 11/19/2006 7:00:00 PM
The auction for RCN could be decided early next year, with at least two high-profile companies expressing interest in the cable and telephone overbuilder — Verizon Communications and Comcast.
According to an industry executive familiar with the process, bids for RCN have come in from several private-equity firms, multiple-system operator Comcast and Verizon, which is building a nationwide video, voice and data network.
Verizon executive director of media relations Bob Varettoni declined to comment. Executives close to Comcast also deny that a bid for RCN has been made.
| Snapshot: RCN |
|---|
| Competitive provider of video, voice and Internet services |
| * Nine months ending Sept. 30, 2006 ** As of 11:30 a.m., Friday, Nov. 17 SOURCE: Multichannel News research |
| Headquarters: Herndon, Va. |
| Revenue*: $434.9 million |
| Operating loss*: $69.2 million |
| Share price: $30.22** |
| Customers: 424,000 |
| Markets served: Boston, New York, Eastern Pennsylvania, Washington, D.C., and Chicago |
LOOK AT BOOKS
But the No. 1 U.S. cable company’s interest in RCN is not totally out of the question. Herndon, Va.-based RCN’s biggest properties are in Chicago, Boston and Washington, D.C. — all Comcast strongholds. However, other cable executives have said that if Comcast has made a bid, it would be either to get a peek at RCN’s books or to keep the properties out of Verizon’s hands.
Miller Tabak & Co. media analyst David Joyce said that an RCN deal would make sense for either Verizon or Comcast.
“I would think those companies have to be involved, even if they don’t fully intend to go through with it, at least from a competitive information-gathering standpoint,” Joyce said. “There is more than one way to look at how these assets could be valuable. And it wouldn’t be terribly expensive for either Verizon or Comcast to digest.”
Initial bids, the executive familiar with the auction said, have come in around 10 times to 12 times 2006 cash flow, or between $1.5 billion and $1.8 billion. At that level, RCN’s 424,000 cable customers would be valued at between $3,500 and $4,200 per subscriber.
RCN put itself on the block in September, after hiring private-equity giant The Blackstone Group and New York cable investment banker Waller Capital to investigate its strategic alternatives, including a sale.
At the time, RCN was said to be exploring a two-track strategy: an outright sale or, in the event bids came in too low, pursuit of smaller telephone companies to add to its portfolio.
An outright sale is not imminent. The auction is expected to last at least until January — and whether a Comcast or Verizon purchase of RCN would pass regulatory muster is in question.
A purchase by Verizon or Comcast could be viewed as anti-competitive and as an antitrust violation. In the past, other cable operators have been allowed to buy overbuilders in markets where they were the dominant provider. However, those deals involved much smaller overbuilders.
Verizon has been one of the more aggressive telephone companies, in terms of getting into the video business. Since announcing its $18 billion, five-year FiOS buildout last year, Verizon has secured video franchises in nine states and has launched service in seven — California, Florida, Massachusetts, Maryland, Texas Virginia and New York. At the end of September, it said it had 118,000 video subscribers.
But those launches have primarily been in suburban areas like Keller, Texas, and in certain communities in New York’s Long Island and Westchester County. Acquiring RCN could give the phone company a big boost in the video marketplace in some major cities. While Verizon is expected to remain committed to its FiOS plans, being able to provide video, voice and data service through RCN would give the phone company an expanded base that could eventually be rolled over to FiOS once the network is fully built out.
READY FOR LEVERAGE
RCN’s low debt — about $92 million net of cash on hand, as of Sept. 30 — also would make it highly attractive to private equity firms. Joyce estimated that a private-equity buyer could raise RCN’s leverage by $800 million to $900 million
However, Joyce believes that the prices being bandied about may be too rich. At 12 times 2006 cash flow, RCN would be valued at about $41 per share, an unheard of premium to its current trading value of about $29 per share, or 8.8 times cash flow.
Joyce said that a $41 per share deal would be highly unlikely, given the negative response it would generate on Wall Street. However, he said that RCN could reasonably sell for between $34 and $35 per share, putting its total value at about $1.3 billion.
According to executives familiar with the auction process, bidders are now in the due diligence stage and will later submit their final bids. RCN could make a decision on the winning bidder as early as January.
RCN stock, which had traded as high as $72 per share in 2000, fell as low as 15 cents per share in 2004. That was also the year that RCN filed for Chapter 11 bankruptcy protection, emerging on Dec. 21, 2004, reducing its debt by about $1.2 billion in a debt-for-equity swap.
Coda
11/08/2009Round Two in RCN Bidding
11/15/2006RCN Adds V-me To Its Lineup In Four Markets
11/19/2009Comcast, Verizon Out of RCN Race
01/26/2007
