Adelphia Bulks Up with Va. Cable Buys


Adelphia Communications Corp. continued to snap up small systems last week with a deal to buy two MSOs in the Virginia area totaling 155,000 subscribers for $836 million in cash.

The bulk of the systems will come from GS Communications Inc., a Frederick, Md.-based MSO with roughly 120,000 subscribers in Maryland, Virginia, West Virginia and Pennsylvania. Adelphia would not identify the other company.

The deal works out to about $5,300 per subscriber, above the industry average of between $4,500 and $5,000. Adelphia expects the systems to have revenue of $110 million and operating cash flow of $55 million for the first full year of operations after closing.

Although the price may seem a little high-less than $100 per subscriber off the record $5,400 per customer Cox Communications Inc. paid for Media General Inc., also in the Virginia area-Adelphia vice president of finance Jim Brown said the systems were worth it.

"They're in a pretty high-growth area, they've virtually completed their rebuild, over one-third [of total subscribers] are digital subscribers and they grew basic subscribers by 5 percent," Brown said. "They're pretty much ideal."

UBS Warburg executive director and senior telecommunications and cable-television analyst Aryeh Bourkoff said that while the price Adelphia paid was higher than average, it wasn't unreasonable, given the condition of the systems.

"Obviously, it is a price that is relatively high, given the public market, but I don't think it is unreasonable for good-quality plant," Bourkoff said. "Companies like Adelphia had been paying $5,000 per subscriber for systems when they needed substantial upgrades."

GS has spent about $43 million upgrading most of its properties to 550-megahertz capacity on a 750-MHz frame, making future upgrades to 750 MHz easier.

Brown said the GS systems are near existing Adelphia systems in the area, and nearly 95 percent of them can be interconnected to Adelphia's existing network backbone.

GS' largest system, in Fredrick, is located in the Maryland biotechnology corridor, and boasts an average annual income higher than the national average and a large number of computer users, which should bode well for new services.

According to a press release, Adelphia said the systems would have 36,000 digital subscribers and 5,000 high-speed-data subscribers at closing.

Brown said the sellers most likely wanted the transaction to be all in cash, hence the absence of any Adelphia stock in the deal. Although Adelphia usually likes to do stock-and-cash transactions, especially for bigger deals, Brown said, the company was not averse to paying all cash for the right properties.

Bourkoff added that the price also indicates that cable-system valuations are still strong, particularly during a time when the public-market valuations of cable stocks are at one-half that value.

But he said Adelphia's decision to pay cash for the properties is also a result of depressed cable-stock prices.

"The equity markets are trading cable stocks at such low levels that it puts more pressure on debt," Bourkoff said. "This could be a leveraging event for Adelphia."

Moody's Investors Service Inc. also felt the same way, putting Adelphia under review for a possible credit downgrade June 14, the day after the deal was announced. Moody's said in a press release that the deal "is additive to Moody's prior concerns over Adelphia's significant appetite for acquisitions, at high cash-flow multiples, and management's propensity to finance the same predominantly with debt, at least initially."

Despite that given the cash flow from the new systems expected in 2001, the deal works out to be below other deals-at 15 times cash flow, as opposed to 20 to 22 times-Moody's feared that the deal "suggests that the company may be reversing course in its efforts to reduce leverage and simplify the capital structure by removing the complexity embedded in its corporate structure."

The deal will boost Adelphia's Virginia cluster to more than 700,000 subscribers.

This is the second acquisition Adelphia has made in the Virginia market this year. In January, it agreed to purchase Prestige Cable TV Inc., which has 175,000 subscribers. That deal is expected to close in July.

GS, owned by The Great Southern Printing and Manufacturing Co., went on the block in April. The company is also looking for a buyer for its newspaper holding, the Frederick (Md.) News-Post.

Because of their condition and proximity to the Washington, D.C., area, the GS systems were expected to attract several interested buyers, including Comcast Corp., which operates a large cluster in Baltimore and Washington. However, Adelphia was apparently willing to part with the most cash.

Adelphia said it expects to close the GS deal by the first quarter of 2001. Waller Capital Corp. advised GS, while Daniels & Associates said it advised Adelphia.