Tacoma moves from courtship to consumation of deal to sell muni broadband system. Maybe

by Steve Blum • , , ,

Good to be the king

The Tacoma city council unanimously approved a plan to lease its municipal cable system, called Click, to a relatively small local Internet service provider. After years of study and negotiation, the choice came down to turning over the struggling system to one of two locally based companies: Wave Broadband, which has a growing footprint of cable and telecoms operations in California, Oregon and Washington, and Rainier Connect, which operates primarily as a reseller in the Tacoma area.

The winner, according to staff, the Tacoma public utilities board and CTC, a consulting firm, was Rainier. The Tacoma city council agreed, and passed a resolution authorising formal contract negotiations with Rainier. The final agreement is expected to be completed by the end of June.

Or not.

Based on what I’ve been reading, which I’ll cheerfully admit is only what’s been made public and doesn’t offer much of a peek behind the scenes, there’s a good chance the deal with Rainier could collapse as the city does its due diligence research and tries to craft an agreement that will withstand full financial scrutiny.

The council resolution contains a helpful table that outlines the differences between the proposals made by Rainier and Wave. Overall, Rainier simply promises to give the city more – more money, more control, more perks – but, according to the CTC report, only appears “to have the capability to scale up operations to meet its proposed obligations” which are considerably greater than the promises made by Wave, which already operates at the necessary scale.

Wave vs rainier 26mar2019

A key difference is the annual lease payment. Wave proposed paying $1 million a year, while Rainier offered an annual payment that begins at $2.5 million and grows to $3 million in year five. Both companies say they’ll upgrade the system to gigabit capacity but, here too, Rainier makes the bolder promise.

To meet these commitments, both companies need access to capital to cover upgrade costs and to finance lease payments to the city, while they turn around a business that’s in the red and make it profitable enough to stand on its own in a three-way competition with Comcast and CenturyLink. It’ll be up to city staff and outside financial advisors to dive into the numbers and decide whether 1. Rainier’s offer is based on a plausible business case and 2. if Rainier has the assets, management and credibility necessary to convince lenders and investors to carry its losses while it tries to execute it.

Wave already competes as the third wireline provider in other communities, and has a bigger balance sheet than Rainier. Despite being headquartered in the Puget Sound area, it’s not locally owned – its corporate parent is a private equity company that paid $2.4 billion for it last year – so its less generous offer might be the result of higher internal return on investment requirements and/or debt servicing needs. But it could also reflect hard won experience over small business hope. The City of Tacoma has until the end of the month to figure out which it is.

More documents regarding the City of Tacoma and Click are here, and more blog posts are here.