Los Angeles -- RCN Corp. will move into the country's No. 2
television market with its acquisition of telecommunications provider 21st
Century Telecom Group Inc. in Chicago.
Also, the company is continuing informal discussions with
the city of Los Angeles regarding the possibility of expanding its service base into
selected franchises there.
RCN announced that it will pay $500 million -- payable in
RCN stock and assumed debt -- for 21st Century, which provides residential and
business telephony, high-speed-data and video services to users in the so-called Gold
Coast area of Chicago. The city's Area 1 franchise stretches along Lake Michigan from
Evanston, Ill., to the Hyde Park community.
The Chicago company's stockholders will receive 4.7 million
shares of RCN common stock, subject to adjustments. RCN will also exchange 62 million
shares of its common stock for 21st Century's outstanding exchangeable
preferred stock, and it will offer to buy 21st Century bonds for $250 million
in cash.
21st Century began operations in 1998. It is
building a $250 million fiber optic plant that will ultimately pass 350,000 housing units
and 450,000 businesses. To date, 200,000 homes have been passed, and the company has
activated about 250 miles. The area is studded with multiple-dwelling units, and
executives said they have accessed 600, with agreements pending for another 300.
The company competes head-to-head with AT&T Broadband
& Internet Services and, in telephony, with Ameritech Corp. The latter had approached
Chicago regulators about expanding its Ameritech New Media video operation into three of
the city's five cable franchises before SBC Communications Inc., which is acquiring
Ameritech, decided to freeze video expansion.
A $1.65 billion investment by Vulcan Ventures Inc. aided
RCN in its acquisition. That connection put the CEO of Vulcan-controlled Charter
Communications Inc. on the spot during the Western Show here last week.
"We've never been a member of the cable club,"
Charter president and CEO Jerry Kent said. "The entrepreneurs who started it are
mostly out of the business. It is clear that RCN is a competitive operator. There is still
business to be done between the operators."
Kent added that Charter hasn't received a lot of flak from
other cable operators regarding Vulcan's investment in RCN, and he said Vulcan was not
alone in its pursuit of the competitive local-exchange carrier.
"Paul [Allen] was not the only cable interest that
looked at RCN," Kent said. "There were other companies." He declined to
elaborate.
Executives, in a prepared statement, said that when
adjusted for the 21st Century deal, RCN still has $3.6 billion in cash and
available capital for further expansion.
Los Angeles may be one possible new beachhead, local
regulators confirmed, although talks are very preliminary.
"RCN has approached us," said Paul Janis, acting
general manager of the Los Angeles Information Technology Agency. No formal presentations
have been made, nor has the company indicated which of the 15 franchises it would pursue.
The majority of the city is currently served by AT&T
Broadband, Time Warner Cable and Century Communications Corp. The latter is being acquired
by Adelphia Communications Corp.
Century has had the weakest customer-satisfaction record,
although it has made improvements through upgrades during the past few years. But because
of those problems, it may be the most vulnerable to an overbuilder. If that happens,
Vulcan may vicariously overbuild a company, Century, that it once tried to acquire.
RCN in the Los Angeles market "will be great,"
one local executive said of the competitive threat.
"Bring 'em on. It will take them two years to get
their act together They should pick an area where the operator is not doing
aggressive reinvestment," said Bill Rosendahl, vice president of operations for
Adelphia's Southern California region.
Los Angeles is a tough market to build, with lots of hills
and valleys -- "a lot tougher than they know," he added.
Mike Farrell contributed to this story.
