RCN stock soared 23% ($2.89 per share) in a flurry of trading Friday on news that the Herndon, Va.-based overbuilder would be acquired by Boston private equity giant ABRY Partners in a deal valued at about $1.2 billion.
RCN shares rose as high as $15.22 each after the deal was announced Friday, before settling back slightly to close the day at $15.15 per share, up $2.89 each or 23.6%. More than 16.2 million shares of the usually lightly traded stock changed hands on March 5. By contrast, only 68,344 shares of RCN stock were traded on March 4.
The surge appeared to erase the premium ABRY has agreed to pay for the stock -- the private equity giant will pony up $15 per share in cash for the company and will assume about $737 million in debt.
Debt financing will be provided by SunTrust Robinson Humphrey, GE Capital, Societe Generale, and certain of their affiliates.
Miller Tabak media analyst David Joyce said the early surge in the stock may have been due to investor hopes that a better deal was coming -- the agreement includes a 40-day period where RCN can go out and seek another buyer. But he added that the pullback in the price since then indicates that investors are changing their minds.
"There is an opportunity to get a higher price, but I would be surprised if they hadn't already been discussions with strategic or financial buyers other than ABRY so far." Joyce said.
The deal, which will take RCN private, is expected to close in the second half of the year.
The sale brings RCN full circle -- after a period of aggressive expansion in the early part of the decade, RCN filed for Chapter 11 bankruptcy in 2004, emerged with a stronger balance sheet in 2005 and focused its efforts on a handful of strategic markets, including New York, Washington, D.C., Chicago, Boston, Philadelphia and Lehigh Valley Pennsylvania. In 2006, RCN hired Waller Capital and Blackstone Group to look for buyers, but scrapped those plans after bids came in too low.
The company had about 430,000 residential and small/medium business customers as of the third quarter. Revenue and cash flow for the first nine months of the year were about $573 million and $164 million, respectively.
Joyce said that RCN has been considering expanding its RCN Metro, high capacity fiber optic transport business for large enterprise customers, and that could have spurred its desire to investigate going private.
"As a private company you have the luxury of time," Joyce said, adding that he expected ABRY to split the company into two areas -- residential and RCN Metro.
Joyce estimated that RCN could fund the Metro expansion entirely through its own free cash flow. The overbuilder was expected to generate about $44 million in free cash follow in 2009.
ABRY is no stranger to cable or overbuilders. It is currently an investor in Atlantic Broadband, a cable operator with about 285,000 customers in Florida, Maryland/Delaware, South Carolina and Central Pennsylvania. It had been a past investor in overbuilder WideOpenWest and Avalon Cable.
RCN's advisers for the deal included Deutsche bank Securities and Waller Capital Partners. SunTrust Robinson Humphrey acted as exclusive financial advisers to ABRY.