Cable Operators

RCN: We’re In D.C. for Good

10/24/2004 8:00 PM Eastern

RCN Corp., still winding through a prepackaged Chapter 11 bankruptcy, said last Tuesday it will acquire the remaining interest it doesn’t already own in its Washington, D.C., cable operations for about $29 million.

The overbuilder is buying the 50% stake from partner Pepco Communications, a wholly owned subsidiary of Potomac Electric Power Co.

RCN and Pepco originally teamed up on the D.C.-area operations in 1999 under a partnership called Starpower Communications LLC. Starpower has about 48,000 subscribers and passes about 180,000 marketable homes in the region.

LOCAL MARKETS

RCN said it exercised a right of first refusal for the Washington operations, opting to match a third-party offer for the systems. RCN did not identify the third party. The Washington operations offer cable, high-speed Internet access and local and long-distance telephone service to downtown Washington, D.C.; Bethesda, Chevy Chase, Gaithersburg, Silver Spring, and Takoma Park, Md.; and Falls Church, Va.

“This is an important strategic move for us,” RCN chairman and CEO David McCourt said in a statement. “We will now have full control of our operations and state-of-the-art network in one of the country’s most important markets as we continue to roll out more products and services to our customers. We remain committed to this market and look forward to continuing to develop our relationship with our customers and the local communities throughout the Washington metro area.”

RCN said it has already launched HDTV, video on demand and subscription VOD in several markets. It plans to launch digital video recorder service in several areas, including Washington, D.C., during the next several months. Princeton, N.J.-based RCN expects the deal to close before the end of the year.

Spokesman Jim Downing said the decision to buy the rest of Starpower is another indication RCN plans to stay in the cable business for the long haul.

“For us, it helps from a customer view. It reinforces the perception for people that we are committed to serving the D.C. market and are looking forward to continuing to serve them,” Downing said.

Pepco has been trying to exit Starpower for months. In January, Pepco said it was looking to unload the stake and in August it said it had found a buyer, which it would not identify.

RCN had a right of first refusal to match that third-party offer.

Starpower had big plans, building a fiber-optic network to compete with video and telephone offerings from incumbent providers Verizon Communications Inc., Comcast Corp. and Cox Communications Inc.

Those plans went by the wayside after the bottom fell out of the telecom market and RCN had to regroup.

“The company had to prudently manage the cash we had,” Downing said.

Pepco appears to have taken a significant loss on Starpower. According to securities filings, Pepco said the book value of the stake was about $141 million, but that impairment charges over the past few years had slashed that value to $28 million.

ADDING SUBS

Despite adverse publicity from its bankruptcy filing and the desire of its partner to exit, Starpower has grown its subscriber base in the D.C. area by 7% to 10% according to some published reports.

“There has been moderate growth,” RCN’s Downing said. “That’s a testament to the employees in the D.C. area.”

RCN expects to emerge from bankruptcy protection in the fourth quarter and Downing said with a cleaner balance sheet RCN could boost its presence in the D.C. market.

“The company in general had to prudently manage the cash we had to get through this period,” he said. “We are going to emerge this quarter with a cleaner balance sheet that gives us more room to expand in the D.C. market, roll out services and get out there like we wanted.”

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