Cellular telephones were a luxury in 1987 when Barclay Knapp figured out a way to broaden the market by leasing the $2,000 phones, making them more affordable.
Such smart marketing helped him and his partners grow Ohio's Cellular Communications Inc. (CCI) into one of the largest independent U.S. cellular operators before it sold for $2.5 billion in 1996 to a predecessor of California-based AirTouch Communications Inc.
Now, they plan to use two less-than-promising Chicago companies -- financially ailing USN Communications Inc. and tiny Internet service provider MegsInet Inc. -- to jump-start their latest venture, New York-based CoreComm Ltd., a CCI spinoff.
Their ambition: to build a national franchise selling bundled telephone, wireless and Internet services to homes and businesses.
``What we're really building is the telephone company for tomorrow,'' Mr. Knapp, CoreComm's 42-year-old CEO, told analysts and investors last week.
His claim echoes those of dozens of upstart telecom companies tackling entrenched giants in deregulated markets.
Indeed, MegsInet and USN had similar goals. Now awash in red ink, USN filed for Chapter 11 bankruptcy protection on Feb. 19, concurrent with the CoreComm sale agreement, which must win Bankruptcy Court approval.
Yet investors and financiers are watching Mr. Knapp and
his New York-based partners, George Blumenthal and William Ginsberg, with more than passing interest.
Mr. Knapp is also CEO of another CCI spinoff: New York-based NTL Inc., a highly leveraged operator of British cable and telephone systems that's raised some $5 billion in debt and equity to finance a network and acquisitions.
``These guys know how to market and how to consolidate a market,'' says Alan Snyder of San Francisco-based Snyder Capital Management L.P., a value investor with a 14.9% stake in CoreComm.
Since taking NTL public in 1993, they've gobbled competitors, acquiring franchises to provide service to 22% of homes in the U.K.. With revenues of $727 million last year, NTL is the United Kingdom's No. 3 operator of cable and local telephone systems behind Cable & Wireless plc and Telewest Communications plc, both based in London.
``They've put all the pieces together in NTL,'' says Salvatore Muoio of New York's S. Muoio & Co. LLC, a telecom value investor with stakes in NTL and CoreComm.
Their investors have made a bundle. Stockholders who bought Ohio's CCI for a split-adjusted $5 a share when it went public in 1986 were bought out at $55 per share a decade later.
If they kept the shares of spinoffs -- including what are now CoreComm and NTL -- they hold the combined equivalent of more than $140 for each original CCI share.
Says Mr. Snyder: ``Every one has been a home run.''
`Localism and focus count'
Nonetheless, CoreComm's success is far from assured.
The company plans to combine MegsInet's budding 57-city national network with USN's business customers and CoreComm's operations in Ohio, where it sells telephone, wireless and Internet services to homes and businesses.
CoreComm initially will focus on the Midwest. ``We aren't going to overextend ourselves,'' Mr. Knapp says. ``We know that localism and focus count.''
CoreComm is hardly alone in aiming to build a network to deliver one-stop shopping.
``There are a lot of companies attempting to implement the same strategy,'' notes David Kronfeld of Chicago venture capital firm JK&B Capital. Competitors range from giant New Jersey-based AT&T Corp., which is buying Colorado's Tele-Communications Inc., to private independents such as Chicago's 21st Century Telecom Group Inc., which recently agreed to buy Enteract LLC, a locally based Internet service provider.
Like CoreComm, dozens of competitive local carriers are buying or building pieces of networks -- telephone switches, gateways, fiber loops -- rather than simply reselling an incumbent carrier's service. USN's failure illustrated the difficulty of surviving on slim resale margins (Crain's, Feb. 15).
To succeed, CoreComm must persuade USN's small and mid-sized business customers to give up the reliability of a regional Bell carrier's resold service for an untested newcomer's network.
Most competitive local carriers ``haven't fully appreciated how difficult it is to get a residential or small business customer to switch,'' says Mr. Kronfeld.
Mr. Knapp's admirers say he and his now-seasoned management team will succeed because they combine marketing savvy with proven back-office and systems capabilities developed in Britain and Ohio.
Financial savvy
The name of the game is ``management, management, management,'' says investor Mr. Snyder.
Add to that financial smarts and the ability to tap capital markets.
CoreComm Ltd. was spun off in August with $150 million in cash from CoreComm Inc. (Puerto Rico's leading cellular provider and an earlier CCI spinoff) plus $150 million in bank debt.
CoreComm Ltd. agreed to pay up to $85 million in cash plus CoreComm warrants for USN. The MegsInet transaction is an estimated $55-million cash-and-stock deal, with just $18.5 million of that in cash.
Says Mr. Knapp: ``We have a good feel for customers and customer service, a good feel for technology and the financial acumen to apply a lot of capital to a good opportunity.''
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