Debt-sensitive Adelphia Communications Corp. appears to be backing out of a planned $750 million acquisition of a Maryland cable operator, filing a lawsuit that could result in the deal's termination.
Back in June, Adelphia announced its planned purchase of systems with about 155,000 subscribers-including 115,000 customers from Fredrick, Md.-based GS Communications Inc.-for $836 million in cash.
Although Adelphia didn't break out the GS numbers, UBS Warburg high-yield cable analyst Aryeh Bourkoff estimated the purchase price for the GS systems at about $750 million.
The deal raised some eyebrows because of its high valuation-about $6,500 per subscriber-but analysts that justified the price cited GS' well-upgraded plant and its proximity to wealthy residents.
GS' largest system, in Fredrick, is located in the Maryland biotechnology corridor and boasts an average annual income that's higher than the national average, as well as a large number of computer users.
GS Communications, owned by the Great Southern Printing and Manufacturing Co., has other cable systems in Virginia, West Virginia and Pennsylvania. Adelphia said in June that the deal would boost its Virginia cluster to about 700,000 subscribers.
The transaction was expected to close in the first quarter of this year. But according to a Securities and Exchange Commission filing last week, that may never happen.
In the SEC document filed Jan. 23, Adelphia said it filed suit in York County (Pa.) Common Pleas Court on Jan. 8, claiming GS failed to meet certain deal covenants. Adelphia is seeking a court declaration stating that it has met its obligations under the agreement and "because GS has not complied with its covenants, [Adelphia] is not immediately obligated to close on the transaction."
GS filed a countersuit on Jan. 19, disputing Adelphia's claims. It's asking the court to force Adelphia to close the transaction and for unspecified damages. GS' petition to have the case moved to U.S. District Court for the Middle District of Pennsylvania was granted last week.
In the SEC filings, neither Adelphia nor GS specified which covenants are in dispute. Officials at both companies did not return phone calls seeking comment.
Bourkoff speculated the deal went sour for one of three reasons: the systems were not as upgraded as originally thought; Adelphia is trying to renegotiate the price; or the MSO is trying to delay the closing until some of its other financings close.
Adelphia recently announced a $1.5 billion debt-and-equity offering to help refinance its debt. It's also mulling the sale of 900,000 subscribers in nonstrategic markets to trim its obligations.
"Adelphia has done a phenomenal job recently, demonstrating an ability to deleverage using the equity markets and potential subscriber sales," Bourkoff said. "But some of those transactions haven't closed yet, and I think before they close any other transactions like GS, they'd want to have that cash on hand."
A big part of that deleveraging ability was Adelphia's announcement late last year that it would pare down 2001 capital expenditures for its Adelphia Business Solutions Inc. (ABIZ) business-telephone subsidiary, which many believed to be a drain on the company. In December, Adelphia said it would cut capital spending at ABIZ to between $450 and $500 million, rather than $675 million.
Were the deal to be terminated, Bourkoff added, it could be good news for Adelphia in that the company could use the money to further pay down debt.
He said: "155,000 subscribers is not necessarily critical for a company with over 5 million subscribers."