Live Deals: Hicks Muse Hears Returns in Rhythms –

Hicks, Muse, Tate & Furst this month invested $250 million in Rhythms NetConnections Inc., a provider of digital subscriber line (DSL)-based, high speed Internet access and networking solutions. Chase H&Q acted as financial adviser to Rhythms and Credit Suisse First Boston acted as financial adviser to Hicks Muse on the transaction. The deal will give Hicks Muse approximately 8% of Rhythms’ outstanding common stock and one seat on the company’s board of directors.

In addition, Hicks Muse has recently made major investments in other broadband companies such as Telegent and Globix Corp. and RCN Corp. So far Hicks Muse has invested a total of $780 million in the broadband sector.

Based in Englewood, Colo., Rhythms is a nationwide provider of high-speed local access networking service, using DSL technology, to businesses. The company had annual revenue of approximately $5.6 million.

Dan Blanks, senior managing partner at Hicks Muse, said Hicks Muse was “invited” into the deal by the company. “This is not our first investment in this area,” Blanks said. “Opportunities in telecom have been our focus here since Fund III, which we invested three or fours years ago. This is the latest investment in a large commitment that we have made in Fund IV to this sector. This is a logical additional investment for us.”

This investment is one of many for the Hicks Muse in the broadband sector. In November 1999, Hicks Muse invested a total of $280 million in Teligent and Globix Corp., two Nasdaq-traded broadband service providers (BUYOUTS November 22, 1999, p. 1). The firm also purchased $250 million in convertible preferred stocks in RCN Corp., a communications service provider to residential markets (BUYOUTS April 5, 1999, p. 12).

50% to 100% Booms

Blanks said that for a company like Rhythms with potential revenue growth of 50% to 100% per annum, there isn’t a specific revenue goal to be reached. “We just want them to take advantage of whatever opportunities are out there,” he said. “We think we’re able to help them find customers, future rounds of financing, and perhaps to exploit their technologies in other geographies.

“We think they’re on the right track in increasing their share of the broadband market,” Blanks said. “They’re different economics and capabilities for each of the different broadband technologies. The market is segmented to a degree [that] there is room for all of them in an exploding demand environment.”

Hicks Muse invested the equity in Rhythms Series E Convertible Preferred Stock that is due 2015. The deal structure enables Hicks Muse to convert the preferred stock to common stock at any time and Rhythms reserves the right to call the security for redemption after five years. The terms of the security call for an annual dividend rate of 8.25% to be paid on a quarterly basis. The conversion price of $37.50 represents an approximate 20 percent premium over the previous 30-day average closing price on the date of the agreement.

In addition, Hicks Muse received the rights to invest up to an additional $280 million in Rhythms’ common stock over a multi-year period.

“We are definitely looking for opportunities in the broadband areas,” Blanks said. “We’ve positioned ourselves to be right in the middle of the deal flow by virtue of all these [tech] deals and a number of smaller, earlier stage investments as well.

DSL investments are also popular with other buyout firms. The Carlyle Group paid $37 million for a 20% stake in North Point Communications Group Inc., a provider of DSL service and E.M. Warburg Pincus & Co. has an unspecified stake in North Point’s competitor, Covad Communications Group Inc. Texas Pacific Group this month agreed to purchase a 20% stake in FirstWorld Communications Inc., a business-to-business DSL provider. And not to be left out of the DSL arena, Kohlberg Kravis Roberts & Co. in January agreed to invest $200 million in equity in Intermedia Communications Inc., a provider of DSL technology to businesses and government agencies.

Hicks, Muse, Tate & Furst was formed in 1989 and has invested more than $2.5 billion in the media and technology sectors.