RCN’s Strong 4Q May Spur Dividend


Overbuilder RCN reported a strong fourth quarter Thursday and said it would spread that good fortune to shareholders, possibly through a special dividend.

Revenue in the fourth quarter rose 13% to $158 million and cash flow increased by about 54% to $34 million despite a slight increase in total customers to 425,000 in the period versus 424,000 in the third quarter. For the full year, total customers rose by 6,000, reversing a loss of 6,000 subscribers in 2005.

Driving those increases were gains in high-speed-data customers -- RCN added 6,000 data customers during the period, while video and voice subscribers fell by 1,000 each. RCN’s average revenue per customer rose to $107 from $103 in the same period in 2005.

The company said it would return $350 million-$400 million -- most likely in the form of a dividend -- to shareholders at a later date. RCN will fund that initiative through cash on hand and additional borrowings. As a result, its total indebtedness would rise to $500 million from $202.8 million in 2006, or about four times fourth-quarter-2006 annualized cash flow.

RCN had not previously issued dividends to shareholders.

While RCN said it would initiate the debt offering next week -- most likely in the form of a first-lien credit facility -- its board will determine the size, form and timing of the potential return of capital at a later date.

Given the fact that the operator has about 42.3 million shares -- including bonds that could be converted into 5 million shares -- the dividend could be as large as $8.21-$9.38 per share.

Chief financial officer Michael Sicoli said on a conference call with analysts that while those bonds are not callable until November, it is still too early to tell whether that debt will be converted to stock or if RCN will make a tender offer for them.

“That should be clearer in the next couple of weeks,” he added.

The issuance of the dividend seems to counter RCN’s plan last year to sell the company. While that auction is ongoing, according to executives familiar with the process, the number of interested bidders appears to have dwindled to a few private-equity investors.

In addition to the additional debt, RCN chairman James Mooney said the overbuilder would continue to invest in expanding the business. On the conference call, Mooney said RCN could build out its network to an additional 400,000 homes within its licensed footprint for $500 per home or less.

The company said it would raise its 2007 capital-expenditures guidance by $10 million-$20 million, to $100 million-$110 million, for the expansion. In addition, RCN said it expected 2007 revenue to be $620 million-$630 million (versus $585 million in 2006) and cash flow to be $140 million-$150 million (compared with $118 million in 2006).

RCN shares were down $1.07 each in afternoon trading Thursday to $26.95 per share.