News

Carving Adelphia

8/29/2004 8:00 PM Eastern

Cable M&A experts might have a whole new definition of Labor Day after next week, when the long-awaited auction of Adelphia Communications Corp.’s 5.4 million cable subscribers is expected to begin.

According to MSO spokesman Paul Jacobson, Adelphia is on track to start the auction immediately after the holiday, starting with the distribution of memoranda of information and confidentiality agreements to prospective bidders.

Once those confidentiality agreements are in hand, Jacobson said, bidders would get access to an “electronic data room” — a secure online database chock full of detailed financial information on Adelphia systems from which to conduct their due diligence.

The auction is expected to be a live one — it could generate between $17 billion and $20 billion. And it could be one of the most open processes in recent memory, because the ultimate decision will be made by a U.S. Bankruptcy Court. Adelphia filed for Chapter 11 bankruptcy protection in June 2002.

The auction is expected to be run by UBS Investment Bank and Allen & Co., which Adelphia hired in August. The bankruptcy court hasn’t approved that selection yet — a hearing is set for Sept. 14 — but Jacobson said they can still participate in the auction process.

The bidding is expected to be dominated by the nation’s top two cable companies, Comcast Corp. and Time Warner Cable, likely to concentrate on Adelphia’s larger clusters in Los Angeles (846,868 subscribers), Florida (829,048 subscribers) and Virginia (541,754 subscribers). Adelphia’s largest cluster is in the Pennsylvania-Ohio-New York (PONY) area, with 1.1 million subscribers.

Due diligence is expected to take at least a month, and Jacobson said bids are expected in the October-to-November time frame.

The entire bidding process is expected to wind down by the end of December, with the company making its final decision in the beginning of 2005.

ELECTRONIC 'BOOKS’

But the real work will begin once the so-called “books” are out on the systems. While Adelphia has regularly filed monthly consolidated financial reports with the bankruptcy court, those results are unaudited. And it is likely that the more-detailed financials available to prospective bidders in the electronic data room also will not be audited.

Jacobson said he could not be specific as to the data that will be available to bidders, but said it would be comprehensive.

“It will have just about any information a prospective buyer would want to have,” Jacobson said.

Oppenheimer & Co. cable analyst Tom Eagan said that while detailed financials are important, bidders might want to dig a little deeper.

“Buyers will have to do some serious due diligence on the plant as well,” Eagan said. “An important part of the bid is the state of the plant. You can imagine that they would want to get their technicians and engineers down to the actual plant.”

That could drag the bidding process well past the target date of Dec. 31. And though Adelphia insists it will find a buyer or buyers by the end of the year, other members of the financial community doubt that is possible.

“I will take the over and give you five-to-one odds,” said one member of the financial community who asked not to be named. “There is no way they get a deal done that quickly.”

SMALLER CLUSTERS

While Time Warner and Comcast are expected to fight it out for the larger properties — Comcast is likely to be interested in the Florida systems; Time Warner in New York, Ohio and New England; and both MSOs in Los Angeles — sources in the financial community said the field could be even wider if Adelphia breaks up the process to include several smaller clusters.

According to one source in the cable M&A community, Adelphia had initially wanted to offer between two and four separate clusters in the sale, each with more than 1 million subscribers. That, the source said, would limit the bidding to only the largest MSOs.

Offering smaller clusters of about 300,000 subscribers apiece alongside the larger blocks would also open the deal to more bidders, like Charter Communications Inc. and private-equity players.

“Some of the stuff they own isn’t going to draw a big crowd,” said the source in the investment community. “The art to this is making sure that stuff gets paired with stuff that you know will get done so that you’ve got every piece completed. Selling Florida is easy, selling West Virginia isn’t.”

It has not yet been decided how the systems will be packaged, said Jacobson, but Adelphia is considering an offer of certain clusters and the matter should be resolved shortly after Labor Day.

“Our investment bankers and management are looking at the whole cluster question with an eye toward structuring it in a way that will create the most robust possible auction and the most return to our bankruptcy constituents,” Jacobson said. “They’re examining all the issues related to that, and I’m sure the number of clusters is certainly a key issue they are examining and they will look at it with an eye toward creating maximum value. But those determinations are not final yet.”

'PONY’ QUARTERED

But looking quickly at Adelphia’s coverage map, it is easy to see where some of those smaller clusters could be.

It is likely that Los Angeles, Virginia and Florida would remain intact, but the PONY cluster itself could be broken into at least four pieces — Western New York (500,000 customers); Western Pennsylvania (311,000 subscribers); Eastern Pennsylvania (225,000 subscribers); and Ohio (633,000 subscribers). Rounding out the list are New England (766,000 customers) and Colorado Springs (113,000 customers).

The subscriber numbers were culled from Adelphia’s 1999 annual report (the latest detailed information available) and could actually be smaller.

Another wrinkle in the auction is the status of the systems owned by Adelphia’s founding Rigas family. Former chairman John Rigas and former chief financial officer Tim Rigas were found guilty on 18 counts of fraud and conspiracy in federal court in July, relating to their scheme to loot the MSO for their personal gain.

And though the Rigases were stripped of their Adelphia stock and are no longer connected to the company, they still own systems managed by Adelphia with about 231,000 subscribers.

Those systems are located in smaller markets, but some are key to larger clusters, like Hilton Head, S.C.; Coudersport, Pa.; and Carlsbad and Desert Hot Springs, Calif.

Adelphia has claimed that it is entitled to the Rigas-owned systems — they are dependent on Adelphia-owned infrastructure and the MSO is on the hook for their debt — but the ownership issue has not yet been resolved.

GOING AFTER RIGASES

Adelphia tried to address the situation in a filing in bankruptcy court last week, where the MSO claimed the Rigas family owed it $3.2 billion, the amount of debt the family incurred for which Adelphia is liable. According to the suit, Adelphia would accept the systems as partial payment for what it is owed.

Jacobson would not say whether the Rigas-owned systems would be included in the offer sheets sent to prospective bidders.

“We deal with that issue in the information memorandum to prospective bidders, but that memo is confidential and I cannot disclose its contents,” Jacobson said.

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