Overbuilders Feel Cash Crunch

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As many cable operators have predicted with a touch of wishful thinking, the days of easy financing for overbuilders may be over.

The latest example: Short of capital, American Broadband Inc. officials said last week they will pull back from plans to overbuild Adelphia Communications Corp. in the Buffalo, N.Y., area.

The company's explanation was a straightforward one based on dollars and cents. ABI decided to break off franchise talks in the city and surrounding communities after a second round of financing failed to yield the company's goal of $450 million in new capital.

"We didn't think it was fair to leave [local-franchising authorities] on the hook forever," said ABI vice president of government and public affairs Donna Garofano.

The upstart was talking about spending $125 million in the Buffalo area. Adelphia has more than 80,000 subscribers in the city, part of a broad cluster of more than 465,000 customers.

For months, cable operators have predicted that overbuilders would run short of cash to finance their costly endeavors, as telecom stock values fall and lenders and investors become more gun shy.

Major-league overbuilder RCN Corp. recently curtailed plans to expand beyond its existing markets. The ABI announcement could be one of many similar stories to emerge from privately owned cable competitors in coming months.

John Mansell, a cable analyst with Paul Kagan Associates, said it's no surprise that smaller firms in the so-called broadband-service provider category would fall short of capital.

"How long it lasts will depend on the market," he said in reference to capital availability. "But in the short term, I wouldn't be surprised to see more of this."

Digital Access Inc., another start-up that raised $450 million to build networks and market triple-play packages of phone, cable and Internet access in four key markets, recently said it wouldn't proceed with its Kansas City-area projects. The company blamed harsh franchise terms for its decision, but noted that its capital resources were "not unlimited."

Garofano also said ABI's initial investor, Boston-based Great Hill Partners, put a hold on what's left of the $50 million in seed money it put up to get the company off the ground in October 1999.

Garofano said that was typical of what ABI found when it went searching for investment capital.

"Most of the venture-capital firms we've talked to have invested a lot of money in telecommunications ventures and have stepped back because of the state of their investments," Garofano said.

The company hopes to eventually proceed with a project in Baltimore County, Md., where it has a provisional franchise, as well as in Rhode Island, where it has been granted authority to serve most of the state.

Since ABI formulated its Rhode Island plans, Cox Communications Inc. announced it would expand its network into Bristol County, the only location in Rhode Island it doesn't already serve.

Bala Cynwyd, Pa.-based Digital Access said it was unable to negotiate desirable franchise terms with Kansas City-area municipalities. As a result, the company has ceased construction in Lenexa, Kan., where it had won a franchise.

A Jan. 9 letter sent by Digital Access CEO Joseph Cece to officials in the area said some local cities took a "very reasoned approach" to franchise terms. But others that Digital Access approached in an effort to build a metropolitan clusters "sought to impose onerous franchise conditions" on the company.

Cece's letter did not specify the onerous conditions. But he told The Kansas City Star
that some officials asked his company to build excess capacity that could be resold to other telecommunications providers, so further construction to lay fiber could be kept to a minimum.

Given the franchise terms, "we cannot justify using our capital resources, which are not unlimited, to build a network in Lenexa and the Kansas City area," said the letter.

The company had said it wanted to build a Kansas City cluster to add to franchises it has amassed in Milwaukee, Indianapolis and Nashville.

Meanwhile, in Lenexa, Kan., Everest Connections Corp. has begun offering a package of cable, Internet and local and long-distance telephone services to consumers currently served by Time Warner Cable and Southwestern Bell Telephone.

It expects to reach 25 percent of the community's 15,000 residents by the end of the first quarter.

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