After months of waiting, the horse race for Adelphia Communications Corp.’s 5.4 million cable subscribers is about to begin.
Adelphia, which said in April it would seek an outright sale of the company in conjunction with its plans to emerge from bankruptcy as a whole entity, said last week that it has selected Swiss banking giant UBS Investment Bank LLC and media investment banker Allen & Co. as its financial advisers for a possible sale.
New York-based law firm Sullivan & Cromwell LLP was selected as Adelphia’s legal advisers in the sale process.
Adelphia chairman and CEO William Schleyer said in a statement this was the first step in the sales process.
“Under the leadership of this advisory group, we will continue to prepare the company to be sold,” Schleyer said in a statement. “Once court approval for their retention is obtained, we will launch the official sale process.”
Adelphia spokesman Paul Jacobson said it is unclear when the auction will begin.
“Now we can start to look at a timeline,” Jacobson said.
While it is expected that Adelphia will attract a number of interested buyers — Time Warner Inc., Comcast Corp. and Cox Communications Inc. are the top three contenders — there are still some outstanding questions for potential buyers.
First is the relatively high price Adelphia could be expected to fetch — between $17 billion and $20 billion.
At $20 billion, Adelphia would be valued at about $4,000 per subscriber, lower than the heady valuations made during the consolidation craze of the late 1990s, but far above current cable valuations.
Sanford Bernstein & Co. cable and satellite analyst Craig Moffett estimated that Comcast, the largest MSO in the country with an average cash flow margin of about 40%, is trading at about $3,100 per subscriber. Cox, the No. 4 MSO, is trading at about $3,500 per subscriber.
“It is going to be awfully hard to make the case that Comcast will be best served to use its deal currency to buy cable systems from Adelphia at $3,500 per subscriber with 25% cash flow margins,” Moffett said.
Time Warner is likely the most logical buyer, Moffett said.
“There are two things you have to bank on: First is that you can extract more revenue from existing subscribers, which means pushing through advanced services.” Moffett said. “Pretty much anybody can do that. Second, you have to find operational cost savings. That favors Time Warner Cable, because their clustering is much better than anyone else in the business.”
A Time Warner purchase also could benefit Comcast, while allowing a vehicle for Time Warner to take its cable division public without requiring Securities and Exchange Commission approval, Moffett said.
Time Warner had proposed an initial public offering of its cable assets last year, but scrapped that plan after announcing an SEC investigation into accounting practices at its Internet-service provider unit, America Online. By merging its cable unit into an existing public company (Adelphia), Time Warner could take those assets public without needing SEC approval.
An Adelphia purchase also could allow Comcast to unwind its 21% interest in Time Warner’s cable assets.
By swapping some Adelphia systems of equal value for the interest, Comcast could avoid a tax hit of as much as $1 billion, Moffett said.
The naming of advisers should ease the path toward a sale, a process that Cox CEO Jim Robbins called “a mess” at an industry conference last month.
Adelphia had looked at several bankers during the three-month selection process, which dragged on because the company had to avoid any possible conflicts of interest with whichever bank they chose.
Among investment banks that were said to be in the running were giants like Merrill Lynch & Co., Morgan Stanley and Lazard Frères & Co. LLC and boutique houses like Jefferies & Co. and Quadrangle Group.
Late last month, as reported earlier in Multichannel News, several sources in the investment community said Adelphia was close to choosing UBS and New York investment banker Quadrangle Group as financial advisers.
But according to one source familiar with the process, Adelphia discovered that selecting Quadrangle might not pass muster with the bankruptcy court.
“Initially, Adelphia thought there would only be a few conflicts [with Quadrangle],” said one source familiar with the process. “They found a lot more.”
Quadrangle has been a major player in some large cable deals — it was involved in Comcast Corp.’s acquisition of AT&T Broadband in 2002 and Comcast chairman and CEO Brian Roberts at one time served on Quadrangle’s advisory board. Quadrangle is also a large investor in Cablevision Systems Corp., and managing principal Steven Rattner serves on the Cablevision board of directors.
Adelphia would not comment on Quadrangle. Rattner did not return phone calls for comment.
Adelphia is getting a pair of heavy hitters in UBS and Allen & Co. Although Adelphia would not identify which individual bankers will be overseeing the process, it is likely that UBS media division chief Jeffrey Sine and Allen & Co. executive vice president and managing partner Nancy Peretsman will be closely involved in the deal.
Sine has had a hand in some of the largest media mergers of the past few years. While he was at Morgan Stanley, he led that firm’s work on Time Warner Inc.’s acquisition of America Online Inc. in 2001, the Viacom Inc.-CBS Corp. merger in 2000 and Seagram Ltd.’s 2000 merger with Vivendi S.A.
Peretsman has major presence in the cable industry and is currently on the board of directors of Charter Communications Inc.
While she headed up the media division of Salomon Smith Barney (now Citigroup Smith Barney), Peretsman was involved in Cox Enterprises Inc.’s $2.3 billion purchase of Times Mirror Cable and several other high-profile cable deals.
Allen & Co. has its own connections to the media world. President Herbert Allen’s annual media retreat in Sun Valley, Idaho, is attended by virtually every major media mogul and Allen and his firm have been involved in such major media mergers as The Walt Disney Co.’s acquisition of Capital Cities/ABC Inc. in 1995 and represented King World Productions Inc. in its $2.5 billion sale to CBS in 1999.
On the smaller side, Allen & Co. was an adviser in the sale of RCN Corp.’s 30,000-subscriber Carmel, N.Y., cable system to Susquehanna Communications Inc. for $120 million earlier this year.