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Adelphia's 'Bear Bait'

3/21/2004 7:00 PM Eastern

With opposition to Adelphia Communications Corp.'s bankruptcy reorganization plan continuing to grow, speculation that another MSO could step in soon with a bid to buy the No. 5 MSO is growing as well.

A key date in the process: April 26. That's when the bankruptcy court is scheduled to hear arguments on some bondholders' attempt to terminate the period in which Adelphia management has exclusive rights to file a reorganization plan.

Ending that exclusivity would allow other creditors to file competing reorganization plans — and could open the door for outright bids for Adelphia's 5.3 million cable customers.

Already several names have been bandied about as possible "bear-hug" suitors for Adelphia, including Comcast Corp., Time Warner Inc. and Cox Communications Inc.

But Comcast — the king of unsolicited cable takeover bids — already has such a play for The Walt Disney Co. on the table, which Disney rejected. So it's seen as unlikely that Comcast would move on Adelphia until that issue is resolved.

Time Warner Inc., parent of the No. 2 U.S. MSO, wants to add cable systems, but needs to resolve a Securities and Exchange Commission investigation into accounting practices at its America Online Internet unit. That could hinder its ability to get involved in a big deal anytime soon.

Less encumbered is Cox, which would also like to grow in cable.

According to sources in the financial community, Cox is already looking seriously at a bid for Adelphia, though it hasn't made any formal approach.

"Cox is in the running," said one source in the financial community.

COX: NOTHING BREWING

Cox spokeswoman Laura Oberhelman said that while the Atlanta MSO is open to doing deals, none are currently in the works.

"We would certainly look at any cable properties that were similar to our systems in things like upgrade status, cluster size and scale," Oberhelman said. "But there are no such properties for sale at this time."

Adelphia spokesman Paul Jacobson would not comment on any possible sale of the company. But in the past, Adelphia management has said the most value could be realized through the MSO's emergence from Chapter 11 status as a whole entity.

"Adelphia will continue to move the Chapter 11 process forward and to communicate with the various bankruptcy constituencies about their concerns, knowing that by its very nature the Chapter 11 process will not please everyone," Jacobson said in a statement. "We believe Adelphia's proposed plan of reorganization and the company's emergence as an independent company with solid assets and a strong balance sheet continue to be in the best long-term interests of Adelphia's bankruptcy constituencies, its customers and its employees."

Many analysts have said any attempt to acquire Adelphia would likely wait until the MSO emerged from bankruptcy.

But one source in the investment community said that making a run for Adelphia now might be more sensible.

"If the company emerges with a new publicly traded stock, you would have to offer a premium to that stock," said the source in the investment community, who asked not to be named.

By going after Adelphia in bankruptcy, a suitor wouldn't have to offer a premium to a public market price, just a premium to a $17 billion value, the source added.

Still, making a bid for Adelphia would require approval from the bankruptcy court and about two-thirds of creditors. And once a bid is made, there is no guarantee that competing offers won't follow.

With so few cable properties on the market and so many established MSOs looking to increase scale, it might be worth taking the risk and making an Adelphia bid now, the investment source said.

"If you look at the acquisition candidates out there, Adelphia is the prettiest girl at the dance," the investment source said.

Adelphia management's reorganization plan — which included an $8.8 billion bank exit facility, one of the largest in history — has come under fire from several creditors since it was filed Feb. 25.

Unsecured creditors and bondholders would be paid off mainly with equity in a newly emerged company.

But several bank creditors object to being paid from a litigation trust that might not get funded for years.

Some bondholders, including New York City investment banker The Blackstone Group, have also become involved, claiming Adelphia's $17 billion valuation is too low.

Those bondholders see Adelphia as worth more like $20 billion, which could be realized through an outright sale.

Any bid for Adelphia would have to be for at least $18 billion and possibly closer to $20 billion, which would value the MSO at between $3,400 and $3,800 per subscriber.

But one MSO source who asked not to be named said that Cox could justify the price because of the inherent value in turning around the systems.

"On a multiple-of-cash-flow basis, the valuation they came up with is pretty reasonable," said the executive, who requested anonymity. "But if you factor in the fact that the margins are as low as they are, and that almost anybody could make some improvements in their sleep on that, the valuation starts to look pretty cheap."

According to its January operating report, Adelphia has cash-flow margins (cash flow as a percentage of revenue) of about 22% — half that of its MSO peers and not far from what AT&T Broadband generated before it was sold to Comcast in 2002.

Cox currently has about 6.3 million subscribers and has systems near some major Adelphia properties like Los Angeles and Cleveland. Adelphia also has a strong presence in Virginia, North Carolina and New England, other Cox strongholds.

With 5.3 million subscribers, Adelphia is the fifth-biggest U.S. MSO.

BIG SCALE MOVE

Were Cox to acquire Adelphia, it would increase its scale to 11.6 million customers, vaulting it to No. 2, behind Comcast Corp.'s 21.5 million subscribers.

Cox also has low leverage — its debt-to-cash flow ratio is about 3 times, one of the lowest in the industry — and its stock has been trading at around $3,800 per subscriber.

That would give the Atlanta-based MSO, which lost the auction of AT&T Broadband to Comcast, leeway in raising money for an Adelphia buyout.

Snapshot: January Results
Basic Customers 5.4 million
Source: Adelphia
Digital Customers 1.9 million
High-Speed Internet Customers 1.05 million
Monthly Revenue $313.4 million
Monthly Cash Flow $69.7 million
Locations 30 states

 

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