Adelphia Sends Signal on CLEC Funding

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Adelphia Communications Corp. is taking steps to strike competitive local-exchange carrier subsidiary Adelphia Business Solutions Inc. from its books.

Such a move could relieve pressure from Adelphia's stock by signaling that the parent company is limiting its exposure to funding the CLEC. It also would remove about $1.4 billion in debt now attributed to the parent company.

Adelphia owns about 78.5 percent of the CLEC, which has its own publicly traded stock. ABIZ closed last Thursday at 93 cents, well off its 52-week high of $10.12 — one of many CLECs to take a pounding in the past year.

Adelphia revealed the "deconsolidation" plan in a prospectus filed in conjunction with the sale of about $500 million in high-yield debt.

In the prospectus, filed on Oct. 24, Adelphia said the interest rate on the bonds would be 10.25 percent per year. That rate would increase to 10.75 percent "if we do not deconsolidate the operations of our Adelphia Business Solutions subsidiary for financial reporting purposes within 180 days of the date of original issuance of the notes. That increased rate would continue unless and until such time as we deconsolidated our Adelphia Business Solutions subsidiary."

Adelphia added the clause after Moody's Investors Service on Oct. 22 said it would review Adelphia's credit rating and might downgrade the debt, Banc of America Securities Corp. cable analyst Doug Shapiro said.

"It doesn't mean that it legally binds them to deconsolidate [ABIZ]," Banc of America Securities Corp. cable analyst Doug Shapiro said. "But it certainly suggests that they wouldn't be writing those kinds of clauses into prospectuses unless the company felt pretty confident it would do that."

Deconsolidating the debt wouldn't make a huge financial difference. Most analysts don't include the ABIZ debt when forming models for the cable company, anyway.

But it would remove some uncertainty surrounding future funding of the CLEC, which has weighed on Adelphia's share price.

Adelphia is down about 51 percent this year, from $50.31 in January. It closed at $24.76 on Oct. 25.

"The subtext of [the deconsolidation] is a message that they will never be funding ABIZ again," Shapiro said of Adelphia.

In a research note, Goldman Sachs & Co. analyst Richard Greenfield said the separation would have little effect on Adelphia's valuation, but "psychologically we believe this would be very positive for the stock."

Shapiro also said the CLEC wouldn't necessarily lose its life support. He said ABIZ still has a funding gap, but can scale down its capital expenditures in response.

"It doesn't necessarily mean that ABIZ is destined for bankruptcy," said Shapiro.

ABIZ has already cut back. It now plans to add five markets to its existing 75 this year, down from the earlier objective of getting up and running in 175 to 200 markets by year-end.

RIGASES BUY STOCK

Separately, Highland 2000 — a holding company of the Rigas family, who control Adelphia — completed a $417 million purchase of Adelphia stock and convertible notes tied to an earlier equity offering.

Adelphia said the Rigas family bought 5.8 million shares of Adelphia Class B supervoting stock at $42.96 each and $167.4 million in convertible notes on Oct. 22, the due date for the purchase.

Analysts had worried that Highland — which includes Adelphia chairman John Rigas, chief financial officer Tim Rigas, executive vice president for operations Mike Rigas and executive vice president for strategic planning James Rigas — would not be able to raise the cash.

Highland has another obligation to buy notes worth $400 million on January 22. Though the company has been mum on plans to meet that obligation, analysts said the Rigases have hinted that Adelphia would pay off the debt early to demonstrate confidence.

Adelphia officials did not return calls seeking comment last week.

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