Adelphia Fate Settling In?

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Adelphia Communications Corp. appeared to be getting its ducks in a row last week, proposing to settle fraud claims by two federal agencies in a move that could signal the up-for-sale MSO is moving closer to resolving its ultimate, post-auction fate.

On March 24, Adelphia said in a securities filing that it proposed a $725 million payment to settle claims by the Securities and Exchange Commission and the U.S. Dept. of Justice, stemming from the massive accounting scandal that sent the MSO into bankruptcy in 2002 and led to last July’s conviction of two former executives on conspiracy and fraud charges.

That proposal came on the heels of the March 21 announcement by Time Warner Inc., one of the front-runners in the bidding for Adelphia, that it had finalized a $300 million settlement agreement with the SEC regarding accounting irregularities at its America Online division. (See story, page 66.) That paves the way for Time Warner to issue stock without the threat of disapproval by the SEC.

News of the Adelphia settlement was first reported in The Wall Street Journal last week. In the filing, the MSO said negotiations with Justice and the SEC are continuing.

An Adelphia settlement could clear up some issues, but it’s likely to push beyond March 31 the informal deadline the company set for deciding whether to sell or emerge as a new entity.

According to one source familiar with the situation, no one should expect a deal to be announced this week.

“They’ve always anticipated this would take a fair amount of time,” said one source familiar with the auction process. “But there’s no way of knowing if this [settlement] clears some of the underbrush to get to a conclusion sooner, or if they’re just grinding through [the process].”

Adelphia spokesman Paul Jacobson would not comment directly on the time frame for a decision, but said the March 31 date was never set in stone.

“We’ve previously identified the end of the first quarter as a goal for announcing the future disposition of Adelphia’s assets, and although that remains a goal, it is not, nor has it ever been, a deadline,” Jacobson said in a statement.

Adelphia put itself on the auction block last April, splitting its 5.4 million subscribers into seven geographic clusters. While more than 50 parties expressed interest in all or part of the MSO, most observers believe that a joint bid from Time Warner and Comcast Corp. — estimated at about $17.6 billion — would emerge as the ultimate winner.

Some observers called clearing up the SEC issues a sign that Adelphia could be close to a resolution.

“From an outside observer, when you settle a major fraud claim with the federal government, it sounds to me like that’s a good sign that you’re actually making strides toward coming out of bankruptcy,” said Carren Shulman, a bankruptcy attorney with Heller, Ehrman, White & McAuliffe LP.

According to the source familiar with the auction process, while it’s nice that Adelphia may be able to clear up its SEC problems soon, it wasn’t absolutely critical to have a settlement in place before a deal is struck.

According to the source, who requested anonymity, potential buyers would be acquiring Adelphia assets, not the corporate entity, so any SEC or Justice Department claims would not transfer to the new owners.

More important could be Time Warner’s ability to issue stock in a possible deal. Although details of the Time Warner-Comcast bid have not been made public, most observers believe that it will include some component of Time Warner stock. However, Time Warner was reluctant to issue shares while the federal investigations were ongoing.

With the settlement in place, the media giant is free to issue shares for an acquisition with little fear the SEC would not approve it.

Cleaning up the SEC and DOJ claims could also clarify one of the sticking points in negotiations with potential buyers of Adelphia’s assets — properties owned by the Rigas family.

As part of Adelphia’s complicated ownership structure, about 225,000 subscribers in systems scattered throughout the country — including Carlsbad, Calif.; Coudersport, Pa.; and areas around Atlanta — are owned by entities controlled by the Rigases, but managed by the MSO. While Adelphia made bidders aware of the ownership structure from the start — and believes it should gain full control of the properties because of the Rigases’ fraud — the ultimate status of those systems remains unclear.

According to a report in The Wall Street Journal last week, the Rigases are reluctant to give up the cable properties — valued between $700 million and $900 million — unless the government drops its claims against the family. Late last year, federal prosecutors asked the court to enter a $2.5 billion judgment against the Rigases.

Complicating the situation: Some of the cable properties are linked to Rigas family members who were not part of the fraud.

The settlement proposal stems from an SEC civil enforcement action made on June 24, 2002, against Adelphia and certain members of its founding Rigas family, alleging various securities fraud and improper books and records claims arising out of the alleged fraud perpetrated by the Rigases.

Last July, two family members — former chairman John Rigas and former chief financial officer Timothy Rigas — were convicted in federal court on 18 counts of fraud and conspiracy, stemming from a scheme to loot hundreds of millions of dollars from the company for their personal use.

John and Timothy Rigas are scheduled to be sentenced on April 18 and face up to 30 years in prison.

Former executive vice president of operations Michael Rigas was found not guilty of conspiracy and wire fraud in July, but the jury was deadlocked on 15 counts of securities fraud.

Michael Rigas is scheduled to be retried on the securities fraud charges on Oct. 24.

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