Hicks Muse Wires $250M into RCN Corp. –

Following the trend of buyout firms diversifying their repertoire with public-market strategies, Hicks, Muse, Tate & Furst Inc. last month bought $250 million in senior convertible preferred stock of communications provider RCN Corp. The equity commitment has been buttressed by a $1 billion bank loan arranged by Chase Securities Inc.

Hicks Muse’s most recent move in the public markets comes on the heels of several other buyout firms, including Apollo Advisors, The Blackstone Group and Thomas H. Lee Co., making similar minority investments through convertible preferred shares (BUYOUTS March 22, p. 1).

Two weeks ago, Princeton, N.J.-based RCN secured service rights in San Francisco and was granted preliminary approval to build a network in San Mateo, Calif. RCN is the nation’s largest single-source provider of communications services, including Internet service, cable television, and local- and long-distance phone service, to the residential market.

“Raising capital from an alternative source is healthy for them and their business,” said Michael J. Levitt, a partner at Hicks Muse who will join RCN’s board. “They thought our experience with growing companies would be helpful.”

The terms of the deal, which is expected to close on Wednesday, stipulate an annual dividend rate of 7% payable quarterly in cash or additional preferred stock, at the option of RCN. The conversion price of $39 per share is a 20% premium to the closing price on March 17, the day the deal was signed. The new shares cannot be called for redemption for four years and are convertible into RCN common stock at any time.

Part of the Flock or a Stand-Alone?

Mr. Levitt said the investment was based on the faith Hicks Muse had in RCN’s management and growth potential and was “not an investment made to enhance the value of our other media assets.”

Among the media assets which Hicks Muse controls or formerly controlled are Chancellor Media and LIN Television. Although Mr. Levitt insisted that “RCN stands on its own merit,” he said the company would give more flexibility to his firm’s portfolio.

“Like everybody else in our business, there may be some dialogues that arise in relation to our other media properties,” he said. “It makes a great deal of sense to look at other markets and find opportunities that work together.”

RCN’s target markets are high-density areas with heavy telecommunications usage. The company is currently devoting its fiber build-out to two corridors. On the East Coast, RCN has a presence in major markets between Washington, D.C., and Boston. The company seeks similar penetration between San Diego and San Francisco.

As part of the 1996 Telecommunications Act, cable systems as of last month no longer have their subscription rates regulated by the government. The provision was made on the belief that by 1999, the cable industry would encounter competition from either satellite providers or full-service communication providers. To date, the industry has faced little competition.

Might a company like RCN capitalize on an unregulated cable industry?

“We do not view this as a cable investment, we view this as a telecom investment,” Mr. Levitt said.