RCN Corp. (Princeton, NJ) has closed a $1.65-billion investment from Vulcan Ventures Inc., the investment organization of Microsoft co-founder Paul G. Allen. Vulcan will receive mandatorily convertible preferred stock, which is convertible into RCN common stock at a price of $62 within seven years. The deal increases Allen's stake in the company from 4.5% to 27% and represents one of Vulcan's largest private investments.
The deal brings RCN's cash balance to nearly $4 billion, which, according to Timothy Stoklosa, RCN's chief financial officer, "allows us to maintain our buying plan of starting construction only in markets that we can bring to profitability with cash on hand....With this cash, we will be able to bring all of the current East and West Coast cities where we deliver services, as well as our new cities, to profitability."
"The cash injection is a huge boost for RCN," says Todd Truitt, communications analyst for StreetAdvisor.com, noting that the company was already doing well with greater-than-expected revenues for 1999. "This investment has positioned RCN for a successful 2000 and beyond and placed the firm in the upper echelon of CLECs [competitive local exchange carriers]," Truitt says. "The company can now concentrate primarily on operational execution, since it is fully funded through its current business model."
According to RCN, it is the only company completely committed to building a brand-new Internet-based network to the home, as opposed to retrofitting existing networks designed to deliver only one service. RCN's local fiber-optic networks target densely populated areas comprising 44% of the U.S. residential communications market spread over just 6% of its geography. The company has recently reached agreements with NorthEast Optic Network Inc., Level 3 Communications Inc., Qwest Communications, and Southern California Edison to allow more rapid expansion into local markets on the congested East and West Coasts.
RCN's network employs SONET ring backbone architecture, with localized nodes built to ensure fiber travels to within 900 feet of RCN customers. The network currently uses only 15% of its capacity to deliver services to its customers, holding 85% in reserve for future applications. To date, RCN has built over 3,800 miles of fiber in its markets and is approaching one million customer connections.