fyi, 46.1% of RCNC is owned by Level 3 Communications (LVLT), a spinoff of Peter Kiewit and Sons, CEO is Jim Crowe, formerly CEO of MFS.
LVLT has just started to plan and build a series of fiber rings around major metro cities (similar to what MFS did) but this time will connect them with backbone and internationally so customers will be able to have fully integrated local, long distance, and international communications. Lots of speculatation on that one - George Soros just bought a large position at $10 less than market in exchange for deal assistance in foreign markets.
Below the dotted line in this note is info from Kiewit's latest 10K where the LVLT investment in RCN is described (edited to remove extraneous info). Keep in mind that the stock share numbers are pre-split.
The almost 50% investment by LVLT in RCN shows the potential for LVLT using RCN's fiber network to enhance its own building efforts. However, on its own it's hard to see how RCN will make a profit. It just bought Erols Internet a few months ago, one of my two ISPs. RCN said they loved Erol's high retention rate. Yeah, well, let me briefly show how this works.
Erols pushed contracts where residential customers get unlimited access for 2 or 3 years in exchange for prepayment of the full amount for the term of the contract. For the 3 year deal that worked out to $9.50 per month for unlimited access. Even accounting for the time value of money it could never be profitable to do this. They were doing it in order to raise cash to pay for the buildout of their network to generate enough size...for a buyout! As soon as the growth stopped they'd be dead. Erols successfully sold to RCN before the pyramid collapsed.
All of these companies - dialup internet guys, CLECs - can be considered as "players to be named later" whose main concern is not income but customer and revenue growth, so as to create an asset base that will be attractive to the largest telecom players. It still holds true that size matters a great deal in the long term in the telecom industry.
CLECs had a huge runup early this year, but about 50-75% of the runup has evaporated. Internet service providers have done much better, especially those focused on business. RCN stock seems to be OK but don't be surprised if it consolidates further over the next few months. And keep an eye on LVLT.
Phil
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From Peter Kiewit's 10K filed 3/31/98:
Ownership of the C-TEC Companies. In connection with the
restructuring and as a result of the conversion of certain shares
of C-TEC held by Level 3, Level 3 now holds 13,320,485 shares of
RCN common stock. Such ownership represents 46.1% of the outstanding common stock of RCN.
Accounting Method. Since the ownership by Level 3 of the
equity and voting rights of each of RCN, Cable Michigan and
Commonwealth Telephone at the end of 1997 was less than 50%,
under generally accepted accounting principles, Level 3 uses the
equity method to account for its investments in each of these
companies. Under the equity method, Level 3 reports its
proportionate share of each of Commonwealth Telephone's, RCN's
and Cable Michigan's earnings, even though it has received no
dividends from those companies. Level 3 keeps track of the
carrying value of its investment in each of the C-TEC Companies.
"Carrying value" is the purchase price of the investment, plus
the investor's proportionate share of the investee's earnings,
less the amortized portion of goodwill, less any dividends paid.
Level 3 purchased its C-TEC Companies shares at a premium over
the book value of the underlying net assets. This premium is
being amortized over a period of between 30 to 40 years. At
December 27, 1997 the carrying value of Level 3's Commonwealth
Telephone shares was $75 million, RCN shares was $214 million and
Cable Michigan shares was $46 million.
Description of the C-TEC Companies. RCN is developing
advanced fiber optic networks to provide a wide range of
telecommunications services including local and long distance
telephone, video programming and data services (including high
speed Internet access), primarily to residential customers in
selected markets in the Boston to Washington, D.C. corridor.
For more information on the business of each of RCN, Cable
Michigan and Commonwealth Telephone, please see the individual
filings of Annual Reports on Form 10-K for each of such companies
as filed with the Securities and Exchange Commission. |
