Adelphia Moves to Trim Its Leverage - Multichannel

Adelphia Moves to Trim Its Leverage

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Adelphia Communications Corp. has taken steps to reduce its leverage, including an expected spin-off of its troubled Adelphia Business Solutions Inc. unit. It should also be able to announce the sale of some nonstrategic systems in the next six months.

A spinoff of the competitive local-exchange carrier, also known as ABIZ, has been expected for weeks. Many analysts considered it a positive move because it would effectively eliminate about $1.4 billion in debt from the MSO's books.

Spinning off the unit also would remove the cable parent's obligation to fund ABIZ, which had put downward pressure on its stock in the past.

In announcing that it would jettison the unit, Adelphia said it may provide ABIZ with up to another $100 million in credit support. But in a conference call with analysts to discuss third-quarter earnings, chief financial officer Tim Rigas said that commitment would likely be the Coudersport, Pa.-based MSO's last.

"As we effect the spinoff with as little cash as ABIZ has, we're only enhancing the credit available," Rigas said during the Nov. 9 call. "It is a minimal amount of risk for Adelphia. It gives ABIZ six months to look for other sources of funding. The board is clear to the extent of credit support it is looking to do."

Adelphia owns about 79 percent of ABIZ. The MSO said it will distribute the shares no later than March 31, 2002.


Rigas said that the ABIZ spinoff, coupled with the planned sale of nonstrategic systems with about 770,000 subscribers, should lower Adelphia's leverage — once among the highest in the industry — to about 6.5 times cash flow. The cable company's leverage is currently about 7.5 times cash flow.

A year ago, Adelphia had announced that it would sell the non-strategic systems. It did not identify candidates, aside from a 150,000-subscriber system in Puerto Rico.

Rigas still wouldn't name the systems for sale, but said deals should start to roll in over the next six months. Adelphia is looking for a price between 11.5 times and 14 times cash flow for the properties, he added.

"We expect to have them completed over the next six months," Rigas said. "We're confident we will get the funds we need from the asset sales."

In a research note, UBS Warburg LLC cable analyst Tom Eagan valued the systems at about $3,000 per subscriber. At that price, the properties could fetch Adelphia about $2.3 billion.

In a research note, Goldman Sachs & Co. analyst Richard Greenfield said he believes that Adelphia's focus on deconsolidating ABIZ held back the system sales. With that out of the way, he said, the transactions can go forward.

"While the asset sales have been delayed several times, we believe this is due to the fact that management had been focusing on ABIZ," Greenfield wrote. "With [the Nov. 12] announcement that [Adelphia] plans to spin out ABIZ by the end of Q1 2002, we believe management can refocus on the system sales."

Adelphia began hinting about the ABIZ spinoff last month in a pubic filing for about $500 million in debt. According to that Oct. 24 Securities and Exchange Commission document, Adelphia said that if it did not deconsolidate ABIZ within 180 days of the debt offering, it would pay a higher interest rate.

ABIZ has been a drain on Adelphia's stock price for the past year, as the bottom dropped out of the competitive local-exchange carrier market and investors worried about future funding commitments for the CLEC subsidiary.

Adelphia has already substantially reduced its funding commitments for ABIZ. In 2000, Adelphia said it would reduce ABIZ funding from $675 million to between $450 million and $500 million.

In February, Adelphia bought some network and telecommunications assets of ABIZ for $88.5 million and purchased rights for 63 million shares of ABIZ stock for $461 million.

The telecom unit also scaled down its expansion plans. It projected it would be in 80 markets by the end of the year, up from its existing 75. ABIZ had earlier planned to be in between 175 and 200 markets by the end of 2001.


For the third quarter, Adelphia's net loss was $267.2 million, or $1.54 per share — more than its year-ago loss of $145.4 million, or $1.06 per share. Revenue rose 11.3 percent and cash flow was up 11.2 percent, in line with expectations and fueled mainly by growth in digital and data subscribers.

The company added 178,000 digital-cable subscribers in the period. It ended with 1.7 million digital customers and is on track to reach its goal of 1.8 million digital customers by year-end.

High-speed data subscribers rose by 60,000 in the period to 315,000 customers. Adelphia restated its target of 375,000 data customers by year-end.

Basic-cable subscribership rose about 0.8 percent to 5.6 million customers.

Eagan reduced his subscriber growth estimates for the company from 1.4 percent to 1 percent, citing Adelphia's decision to lower its year-end basic-growth guidance from a range of 1.5 percent to 1.9 percent. It now stands at 1.1 percent to 1.5 percent.