Adelphia Heads to Stage Two

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As bidding for Adelphia Communications Corp. heads into the second stage of development, it’s an opportunity for the Denver-based MSO to separate the wheat from the chaff in what could be a lengthy bidding process.

Preliminary bids — offers that will allow participants to advance to the second stage of the auction — are due by the end of October. Adelphia has said it wants to wrap up the auction by early 2005.

So far, more than 50 interested parties — up from more than 40 a week ago — have signed confidentiality agreements with Adelphia. They’ve received a 230-page confidential information memorandum with general financial information about the systems.

Those who make a preliminary bid will receive access to more detailed financials, including access to an electronic data room.

The MSO will screen real from unreal preliminary offers in order to advance to the next round. “There will be a test for legitimacy and viability,” Adelphia spokesman Paul Jacobson said.

According to sources, neither Time Warner Inc. nor Comcast Corp. has signed confidentiality agreements yet.

Though it’s getting down to the wire for either Time Warner or Comcast to make a bid, according to some people familiar with the process, both MSOs are likely to be involved in the auction. That means the time frame for finishing the process could be extended.

“What will happen here is that deadlines may end up slipping,” a source familiar with the auction process said. “Some of these deadlines that have been established are pretty artificial.”

TALKING BARRED

That’s mainly because the two cable giants are mulling whether to bid jointly on the systems. Parties that sign the confidentiality pacts are not allowed to speak to each other about the Adelphia systems.

One source familiar with the situation said that the confidentiality agreement also bars potential bidders from talking to Adelphia bondholders.

Sources said last week it was likely Time Warner had held talks with bondholders, whose support is seen as crucial for winning bids.

The bondholders’ committee is one of the most powerful creditor groups involved in the Adelphia bankruptcy — it helped push Adelphia into sale mode in April. Any plan to buy the systems would require the blessing of bondholders.

“It makes all the sense in the world,” said one source familiar with the matter. “You’ve got to know what they [bondholders] are thinking, what makes them tick and what would be acceptable to them.”

According to bankruptcy court documents, Adelphia’s largest bondholders include Blackstone Group, W.R. Huff Asset Management, Franklin Advisors and Fidelity Management & Research.

Attorneys for the bondholder committee did not return calls for comment.

Time Warner and Comcast declined comment.

Time Warner has acknowledged one way to snare Adelphia would be through a reverse merger of its Time Warner Cable subsidiary into Adelphia’s already publicly traded stock.

Such a move would allow Time Warner Inc. to take its cable assets public without having to seek Securities and Exchange Commission approval, and would create a currency to buy out Comcast’s 21% interest in Time Warner Cable.

Adelphia bondholders also would get a stake in a publicly traded entity with about 16 million subscribers — and a far stronger balance sheet.

At least one person familiar with the bondholders’ thinking said they would be open to a Time Warner stock deal, depending on how the equity would be distributed.

“From a bondholder perspective, the thought is that taking shares could be more attractive than taking cash,” the source said.

Earlier this month, Adelphia was considering a bar on joint bids for the systems, and discussed the matter at a previously scheduled board meeting Oct. 6 and 7.

Although Adelphia would not comment on the meeting, sources said no decision regarding blocking a joint Time Warner-Comcast bid was reached, but that the matter was still under consideration.

Sources said Adelphia’s motivation was to maximize the price it would receive for its systems.

But the concern was that such a blocking maneuver could indicate a reluctance by Adelphia management to sell the company.

Adelphia has denied it’s not motivated to sell, and has said it is conducting the process in the best interests of all its constituents.

In September, Adelphia offered its properties in seven separate clusters to widen the field of potential bidders.

It is expected that the systems could attract bids as high as $17 billion to $20 billion.

HARD TO LIMIT BIDS

Prohibiting a class of potential bidders, especially the two largest MSOs, could be difficult for Adelphia to justify.

“It’s hard to say anything categorically, but there is a fiduciary duty on the part of the board to maximize the recovery,” said bankruptcy attorney Robert Feinstein, of the New York law firm Pachulski, Stang, Ziehl, Young, Jones & Weintraub. Feinstein is not involved in the Adelphia bankruptcy case.

“They should be making decisions with that in mind,” Feinstein added. “Without knowing the facts, if there is a joint bid being proposed by people that is not a collusive bid between two bidders who might otherwise bid up the asset, and that they are only prepared to proceed on that basis, then you would welcome the bid.”

Feinstein said there are restrictions in the bankruptcy code regarding collusive bidding — a secret agreement to limit the purchase price of the assets — but such an action is hard to prove.

The surefire way to prove collusion is if the bid is unusually low. And neither Time Warner nor Comcast has submitted a bid yet.

Feinstein added the bidders in the Adelphia auction are extremely sophisticated and it is highly unlikely they would risk collusion.

“One would expect that people wouldn’t be so foolish as to enter into a collusive bidding agreement,” Feinstein said. “So, a joint venture may well be just what it is — an aboveboard effort by two parties to buy an asset together that neither one of them might have been prepared to buy individually.”

Most analysts expect Comcast to get involved in the auction through Time Warner — perhaps not submitting a bid of its own, but agreeing to surrender its stake in Time Warner Cable for either systems, cash or a combination of both.

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