Microsoft Corp. co-founder Paul G. Allen said yesterday that he will invest $1.65 billion in RCN Corp., a company that provides a bundle of residential communications services--including telephone, cable TV and high-speed Internet access--through partnerships such as its Washington area Starpower venture with Potomac Electric Power Co.
RCN said the investment, coming on top of $4.6 billion the company has raised in debt and equity over the past two years, provides enough capital to fund the company's network expansion and continuing operations through early 2003. The company said it has enough capital to connect more than 4.5 million homes to its fiber-optic network--or about a third of the customers in the high-density East and West coast markets it has chosen to serve.
At the same time, RCN announced its participation in a joint venture with Allen-owned Vulcan Ventures Inc. and a network of companies he has put together--Charter Communications International Inc., Go2Net Inc. and High Speed Access Corp.--to develop high-speed Internet portal services that could bring an array of communications services into customers' homes through either personal computers or a television set. RCN will also participate in a joint venture with Charter Communications, a cable company, to provide telephone services in Los Angeles.
RCN Chairman David McCourt said Allen's investment "serves as a major vote of confidence in RCN's business plan." RCN, based in Princeton, N.J., owns Internet service provider Erols Internet Inc. and is building local fiber-optic networks in markets on the East Coast from Boston to Washington and on the West Coast in the San Francisco-San Diego corridor. Initially the network will deliver telephone, cable and Internet services to RCN's customers, but McCourt said that those services will use only about 20 percent of the system, leaving plenty of spare capacity for new services.
The areas in which RCN is marketing represent about 40 percent of the U.S. communications market, concentrated in just about 6 percent of the nation's landscape, according to McCourt. He said that the investment won't make any short-term difference in how soon the services of its Starpower joint venture become available across the Washington area.
Starpower plans to offer its services through the District and surrounding areas. The service is already available in parts of the District and Gaithersburg, and the company has reached agreements to build its network and serve customers elsewhere in Montgomery County and in Falls Church.
McCourt said Allen's investment is an important financial boost that gives RCN the ability to forgo trying to raise capital during unfavorable market conditions. "We now have the funding risk out of our business," he said.
Allen's investment can be converted to RCN common stock at a price of $62 a share over the next seven years. Along with the 4.5 percent of RCN stock Vulcan already owned, the investment would give Vulcan approximately 27.4 percent ownership in RCN. But RCN said that Vulcan is limited to owning no more than a 15 percent interest in the voting shares.
The companies said that, assuming no antitrust or other regulatory objections, the deal is expected to close in the first quarter of next year.
RCN shares rose $7.65 5/8, to $45.71 7/8, on the Nasdaq Stock Market.
CAPTION: Paul Allen's investment would give him 27.4 percent ownership in RCN.