Broadband Provider RCN Finally Gets Its Buyout Deal


RCN (RCNI), a U.S. cable and broadband company, has periodically been the subject of buyout rumors. Four years ago, the buzz was that a deal could come at nearly $30 per share. RCN even hired the Blackstone Group (BX) to explore strategic alternatives.

Well, a deal has finally happened, but the price tag is much more modest: $15 per share. If you include the debt load, the value of the deal comes to roughly $1.2 billion. The transaction is expected to close in the second half of this year.

The buyer is private-equity firm ABRY Partners, which focuses on media deals and has completed $21 billion in transactions since 1989. The firm has secured fully committed financing from SunTrust Robinson Humphrey, GE Capital (GE) and Societe Generale.

So far in today's trading, the shares of RCN are slightly above the buyout price. In other words, there may ultimately be a higher bid or a rival suitor that comes to the table.

A Victim of the Dot-Com Bust

RCN got its start because of the path-breaking 1996 Telecom Act, which opened the telecommunications market to competition. The company built a sophisticated infrastructure -- which involved metropolitan fiber rings -- to deliver bundled services: phone, cable and Internet. Yes, it was the concept known as the "triple play."

Of course, this strategy required huge amounts of capital -- but gaining access to that was fairly easy during the frothy 1990s. RCN raised billions of dollars from junk bonds, public offerings and major investors like Paul Allen.

Even though RCN built a strong footprint in such lucrative markets as Chicago and Boston, the company could not get to profitability. And then when the telecom industry imploded in 2001, the situation got worse and worse. By 2004, RCN had to file for Chapter 11.

Still a Tough Market

As of now, RCN is in much better shape. In its latest quarterly report, the company posted a 3% increase in revenues to $187 million, and EBITDA came to $56.4 million, up 12%. The company's capital expenditures were reasonable at $34 million. Moreover, the base of residential and small/medium size businesses it serves increased by roughly 2,000 to 430,000 in the quarter.

Such results are impressive in light of the slow economic environment. Then again, RCN has made some tough decisions to realign its cost structure. At the same time, the company has continued to offer new services, such as HD channels, video-on-demand libraries and so on. It has also been making targeted efforts to get more business customers.

Despite all this, RCN still faces a tough competitive environment. Rivals include major companies such as Verizon (V), Comcast (CMCSA) and Time-Warner (TWC). However, by being a private company, RCN can focus on long-term strategies, while also benefiting as its core businesses continues to generate nice cash flow.