Round Two in RCN Bidding

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The auction for cable overbuilder RCN entered the second round, with several companies submitting bids including Verizon Communications and possibly Comcast.

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.

According to an industry executive familiar with the auction process, bids for RCN have come in from several private-equity firms, Comcast and Verizon, the latter of which is pursuing its own video, voice and data strategy through the deployment of its fiber-optic-based FiOS service.

Initial bids, the executive said, have come in around 10-12 times 2006 cash flow, or $1.5 billion-$1.8 billion. At that level, RCN’s 424,000 cable customers would be valued at $3,500-$4,200 apiece.

Comcast vice president of corporate communications D’Arcy Rudnay and Verizon executive director of media relations Bob Varettoni both declined to comment.

RCN senior VP of strategic and external affairs Richard Ramlall could not be reached for comment.

Verizon has been one of the more aggressive telephone companies in the video space. Since announcing its $18 billion, five-year FiOS buildout plan 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 -- and it has about 118,000 video subscribers.

But those launches have primarily been in suburban areas like Keller, Texas, and in certain communities in Long Island and Westchester County in New York. 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.

Although executives close to Comcast denied that a bid for RCN has been made, the cable company’s interest in RCN is not totally out of the question. RCN’s biggest properties are in eastern Pennsylvania, Chicago, Boston and Washington, D.C. -- all Comcast strongholds -- and in New York City, close to Comcast clusters in New Jersey. However, other cable executives have said that if Comcast 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.

While there is still a way to go in the auction process -- it is expected to last at least until January -- there is a question as to whether a Comcast or Verizon buy of RCN would pass regulatory muster.

While there could be antitrust issues surrounding an RCN deal, other cable operators have been allowed in the past to buy overbuilders in markets where they were the dominant cable company. However, those deals also involved much smaller overbuilders.

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