Adelphia Moves Spur Sale Speculation


Adelphia Communications Corp. continued to pare down its bank debt last week, fueling some speculation that the company might be for sale.

The Coudersport, Pa.-based MSO raised about $1.5 billion through a debt and equity offering last week. It also completed the spin-off of competitive local-exchange carrier subsidiary Adelphia Business Solutions Inc. to shareholders.

On Jan. 16, Adelphia said it had sold 40 million newly issued shares at $25.50 each — 6 percent lower than its Jan. 14 closing price — and raised $1.02 billion. It also sold another $500 million worth of 7.5 percent preferred stock.

Proceeds would be used to pay down Adelphia's bank debt, the company said.

Adelphia stock initially took a beating that day, as investors worried about further dilution of their holdings. The stock dropped $1.72 per share, or 6 percent, to $25.53 each in early trading last Wednesday, but rebounded to recover most of those losses by day's end, closing at $26.81 per share, down 44 cents.

Couple that with the $1.4 billion savings the company will get from the spinoff of Adelphia Business — also known as ABIZ — and Adelphia could pare nearly $3 billion in debt from its balance sheet.

Adelphia has been one of the industry's most highly leveraged cable operators, with a debt-to-cash flow ratio in the 10 times range. These three deals reduce that ratio considerably.

Lehman Bros. high-yield analyst Oren Cohen said that the deals bring down Adelphia's leverage from 6.9 times cash flow to 5.9 times. Adjusting for convertible stock that the company is obligated to pay by May 2003 and $500 million in ABIZ debt that the company has guaranteed, that leverage rises to about 6.5 times.

The big reduction in leverage has re-energized the rumor mill, however. Several analysts now speculate that Adelphia is prettying up its balance sheet to look more attractive for a takeover.

Adding fuel to the speculation was a somewhat peculiar move by Adelphia chief financial officer Tim Rigas at the Salomon Smith Barney Inc. Global Media and Entertainment conference in Scottsdale, Ariz. earlier this month. As part of his presentation, Rigas put up four slides of maps in which Adelphia's systems were overlaid with those of Comcast Corp., Cox Communications Inc., AOL Time Warner Inc. and Charter Communications Inc.

To some attendees, those slides were shown to point out how well Adelphia systems would fit with other MSOs. "The only thing they forgot was the 'For Sale' sign," said one MSO executive.

Rigas did not return phone calls seeking comment.

Insight Communications Co. executive vice president and chief operating and financial officer Kim Kelly, who saw the presentation, said it shouldn't be taken seriously.

"I thought it [the slide presentation] was pretty tongue-in-cheek," Kelly said. "There are going to be a lot of rumors following the Comcast-AT&T deal, not only from those who won, but from those who lost out. I don't really know of anything happening [with Adelphia]."

Last month, Comcast and AT&T Broadband agreed to a $72 billion merger that would create the largest MSO in the country with 22 million subscribers.

The MSO executive, who asked not to be named, added that the slide presentation could be a move to show analysts that Adelphia stock should have a take-over premium embedded in its price. Adelphia had traded as high as $85 per share in 1999, at the height of industry consolidation. It closed at $26.81 on Jan. 16.

Cohen said speculation surrounding an Adelphia sale is unwarranted and usually pops up after a major deal is made, like the AT&T Broadband-Comcast merger.

The equity offering leads Cohen to think Adelphia will remain independent, he said.

"I think they're builders," Cohen said. "Why would they sell equity at a low price?"

The MSO executive who asked not to be named agreed, adding that in most cases, a company that is going to sell would not issue equity, especially to pay down debt.

"Normally, you would not do that," the executive said. "Normally, you keep it all for yourself. If you're going to sell, you leverage and try to get your shares to the absolute minimum so you get more per share."