Comcast, Verizon Out of RCN Race

The auction for overbuilder RCN, once expected to wrap up in January, will likely bleed into later months now that two potential suitors have dropped out of the running.

According to several cable executives familiar with the auction, Verizon Communications and Comcast -- once thought to be looking closely at the Herndon, Va.-based overbuilder -- are no longer involved in the process.

Also, two private-equity firms that had been looking closely at RCN’s 424,000 subscribers backed out of the auction, people familiar with the process said. The identity of those two private-equity investors could not be determined by press time.

RCN spokesman Michael Houghton declined to comment. “We do not speculate on rumors,” he said.

Comcast was not considered to be a serious suitor for RCN, and executives close to the company denied its participation privately. Other cable executives familiar with the auction, though, said Comcast showed at least some preliminary interest in the overbuilder, mainly to get a look at RCN’s books.

Several other private-equity firms could be in the running for RCN, but it’s unlikely that a deal will be reached before the end of the month. Now, people familiar with the auction said, a decision on whether to proceed with a sale probably won’t be made until February or March.

According to some cable executives familiar with the situation, the auction has not entered the final-bid stage yet.

RCN put itself on the block in September, hiring Blackstone Group and New York cable investment banker Waller Capital as advisers. At the time, the company was said to be pursuing a dual-track strategy -- an outright sale or, if bid prices came in too low, pursuit of smaller telephone companies to add to its portfolio.

It was thought that Verizon -- which is rolling out its own video, voice and data product, FiOS, in several markets -- could get a jump-start in its triple-play offering by acquiring RCN. While Verizon said it had about 118,000 video customers through its FiOS offering in the third quarter -- expected to grow to 175,000 customers by the end of 2006 -- they have mostly been in secondary markets. RCN’s largest markets are in New York, Chicago, Boston and Washington, D.C.

But Verizon must have had a change of heart. According to people familiar with the auction, prices of bids in the second stage have come in around $1.2 billion-$1.3 billion. That would value RCN at about $2,830-$3,066 per subscriber.

Miller Tabak cable analyst David Joyce, while not having any specific knowledge of the auction process, said it makes sense if Comcast backed off, mainly because RCN would not provide much of a strategic advantage.

“Comcast doesn’t need that kind of infrastructure,” Joyce said. Comcast does not provide cable service in New York City and already has a large presence in other RCN markets like Boston, Chicago and Washington, D.C.

RCN has been showing strong growth for the past several quarters, so a sale is not critical to its overall financial health. But a run-up in RCN’s stock price the past few months was largely due to deal speculation. RCN is up about 18% ($4.69 per share) since news that it was considering a sale broke in September.

“They’re in fine shape as a stand-alone,” Joyce said of RCN. “But the stock will fall if a deal doesn’t materialize soon.”