Rhythms weighs its options

On the verge of being delisted from the Nasdaq Stock Market and with its unsecured debt suffering from junk status, Rhythms NetConnections announced that it has hired investment bank Lazard Freres & Co. to explore the company’s strategic options.

According to a Rhythms press release, “these options include, but are not limited to, a sale of the company, a strategic transaction, a joint venture or a partnership with a financial, strategic or industry partner or other similar transaction, a debt and/or equity financing or restructuring, a public or private sale of debt or equity securities or assets, and/or an acquisition, merger, consolidation, reorganization, recapitalization or other business combination.”

The company said it has enough cash and lease financing to operate through January 2002.

“To me, what this announcement looks like is almost a ‘For sale’ sign in the front yard,” said Adam Guglielom, DSL analyst with TeleChoice. “I would see it as being pretty difficult to believe that they are going to get too much more funding from capital markets.”

Prospective buyers would be companies looking for a nationwide last-mile network, he said.

The troubles Rhythms is experiencing are reflective of much of the data local exchange carrier [DLEC] niche.

A year ago, the three largest DLECs--Rhythms, NorthPoint Communications and Covad Communications--were riding high with solid stock prices and the common plan of wholesaling DSL service.

Troubles with deadbeat customers, uncooperative incumbents and unproven business plans--among other problems--have driven all three to hard times.

Last month, for example, the sale of NorthPoint’s assets to AT&T was approved in bankruptcy court. In November, Covad replaced its CEO and announced a restructuring of its business plan.

Much of the problem in the niche, said Guglielom, was the rapid commoditization of DSL service.

“These guys weren’t differentiating their services very much, so the only way you could differentiate was by price,” he said. “The RBOCs matched their prices & [the DLECs] weren’t able to sign up as many customers.”