RCN Corp., which provides cable TV service along the lakefront from Hyde Park to Evanston, said it would file for Chapter 11 bankruptcy protection as soon as it reaches an agreement with its creditors.
The company said it has a March 1 deadline to reach a deal with its lenders on what is called a “prepackaged” bankruptcy, in which creditors and the company agree to cooperate. RCN said its customers would not be affected by the filing.
Like other telecommunications businesses, Princeton, N.J.-based RCN tried to use its cable connections in homes to offer bundled telephone service and Internet access. It tried to compete with well-established cable firms in Chicago, Boston, New York, Philadelphia, San Francisco, Los Angeles and Washington.
“They had a very ambitious goal, and they spent a lot of money,” said Michael Hodel, an analyst with Morningstar. “It wasn’t clear they would attract enough customers.”
Hodel said RCN’s goal was to build its own network of fiber-optic cable, rather than leasing from a competitor.
“The amount of money they pumped into their networks cost them a huge amount of debt,” Hodel said.
RCN said that it failed to make a $10.3 million interest payment due Saturday and that it owes $1.7 billion.
Terry Barnich, president of New Paradigm Resources Group, a Chicago-based telephony consultancy, said RCN suffers from the same problems afflicting other companies that offer cable TV, telephone service and Internet access. The industry has seen billions of dollars disappear in a wave of bankruptcies in recent years.
“The bottom line is they were beset by overcapacity,” Barnich said of the industry. “They engaged in a lot of price wars.”
Cable and telephone companies laid many thousands of miles of fiber-optic cable during the late 1990s, anticipating a vast leap in demand for bandwidth. That demand never materialized and much of the cable has never been used.
RCN is termed an “overbuilder” in cable jargon. That means it competes with an incumbent cable operator, Comcast Corp. in the case of Chicago. It also must compete with giants like America Online for Internet subscribers, SBC for landline telephone customers and Verizon for wireless.
The company’s pending bankruptcy was announced in an unusual fashion.
On Saturday, shortly before 11 p.m., RCN issued a news release bearing the headline “Holding Company Continues Financial Restructuring Negotiations.”
Only in the third paragraph did RCN say that it “expects any financial restructuring to be implemented under chapter 11,” with the word “chapter” not capitalized as is customary.
“They have always been, for lack of a better word, secretive,” said Chris Roberts, director of research for Tejas Securities Group. “They stopped having quarterly conference calls about a year ago. They would wait to announce earnings until the very last day.”
RCN denied that it was trying to downplay its pending bankruptcy.
“We were trying to be as honest and communicative as possible,” said Barak Bar-Cohen, a spokesman for RCN.
The City of Chicago is not downplaying RCN’s plight, either.
“We have been very concerned with the way RCN conducts business for quite some time,” said Connie Buscemi, spokeswoman for the city’s Department of Consumer Services.
Buscemi said RCN still owes CAN TV, Chicago’s local cable access network, $215,000 due under its franchise agreement with the city. The company also is $19,000 past due on its franchise fee, though that debt is covered by a large letter of credit and bond.
“They seem to have difficulty with keeping their word,” Buscemi said.
RCN says customers will not be affected, but bankruptcy experts say it is a certainty that shareholders will get hit.
“Oftentimes, creditors will get equity in the new company and the old shareholders will see their shares wiped out,” said Eric Brunstad, a vice chairman of the American Bar Association and a professor at Yale University.
RCN seems to be saying that is what will happen here.
“RCN has said that the restructuring will likely result in a conversion of a substantial portion of its outstanding senior notes into equity and an extremely significant, if not complete, dilution of current equity,” the company said in a statement.
That means bondholders would get all or nearly all of the company through issuance of new stock. The old stock would become worthless.
Most shareholders have already abandoned RCN’s stock. Shares traded above $70 in February 2000. Tuesday, the stock closed at 49 cents, down 31 cents.
