Adelphia Communications Corp. declared itself a
"significant consolidator" with last Tuesday's deal to buy FrontierVision
Partners L.P. for about $2.1 billion.
Adelphia will acquire 702,000 subscribers, moving it up to
about 3 million owned or managed customers and making it the ninth-largest MSO. It paid
some $3,000 per subscriber, which is about the recent average for sizeable deals.
The price was about 14.5 times FrontierVision's 1998 cash
flow -- also around the current norm, analysts said.
Adelphia chairman John Rigas called FrontierVision's
systems "the largest group of cable systems located within our Northeast region of
operations that were likely to come up for sale."
Rigas -- who's often asked by analysts what price he would
take to sell the cable business that he cofounded in 1952 -- also made a point of saying
that the deal "helps to further establish Adelphia as a significant consolidator and
long-term player in the cable industry."
Wall Street analysts took that mainly as an affirmation of
the obvious: that Rigas (who has three sons active in the company) and his family like the
cable business, and that they are happy to remain in it. On the other hand, a bigger,
better-clustered operator has more strategic value to other buyers in a consolidating
"I think that Adelphia was just trying to show that
the company believes in the cable business and all of the new services, and that it
intends to be active," CIBC Oppenheimer Corp. high-yield analyst Aryeh Bourkoff said.
"I don't know if they would look to expand from here, although the company is not a
seller of [its] properties right now."
The deal also reflects the success that Adelphia and other
publicly owned cable operators have had in driving up the value of their stocks, which can
then be used to make strategic acquisitions without loading on too much additional debt.
Adelphia's share price was $61.38 the day before the deal
was announced -- up 34 percent from $45.75 at the end of 1998 and up 82 percent from
$33.63 Aug. 21. Adelphia's current market value is about 11 times analysts' estimates of
1999 cash flow. At that level, it's not too much of a stretch to use stock to pay about 13
times 1999 cash flow in a private-market transaction.
Before cable stocks took a hit along with the market in
general last week, the cable group was trading at about 15 times 1999 cash flow estimates,
according to Goldman Sachs & Co.
Adelphia will issue 7 million new shares to FrontierVision,
worth about $430 million at last Monday's closing price. It will also pay $550 million in
cash and assume $1.1 billion in debt.
To raise the cash, Adelphia will sell $750 million in
convertible preferred and class A stock to the public and to members of the controlling
Rigas family. The other $200 million will repay debt.
From the sellers' perspective, now is a great time for both
long-term owners and financially oriented, short-time owners -- like the investment banks
that backed FrontierVision -- to cash in.
Even though FrontierVision has only been in business since
1995, its systems were mostly bought before prices started booming in the past year.
FrontierVision's systems are a good fit for Adelphia's
clusters in New England and in Virginia and West Virginia, where 310,000 FrontierVision
subscribers reside. The other 392,000 subscribers comprise a new Ohio-Kentucky cluster --
in some ways an extension of Adelphia's holdings in the Buffalo, N.Y., to Pittsburgh
FrontierVision built itself into a top-20 operator through
about 30 separate transactions since it was formed by president James Vaughn and chief
financial officer John Koo in 1995. Key financial backers include J. P. Morgan & Co.
and Brown Bros. Harriman & Co., which each own about 50 percent equity, according to
FrontierVision. First Union Capital and Olympus Partners are other key equity owners.
J.P. Morgan investment bankers advised on the deal, with
help from Waller Capital Corp., while Daniels & Associates Inc. represented Adelphia.
The deal grew out of discussions about possible system
joint ventures, which were initiated last year by Daniels CEO Brian Deevy on Adelphia's
behalf. Ultimately, "they simply decided that consolidation made more sense,"
Adelphia is also better positioned to make the investment
in plant upgrades that are needed to reap new revenues from Internet access, telephony and
digital compression, Koo said. "They really have the resources and the synergy to
take our systems up to the next level, and that's their plan," he added.
Morgan Capital Co., the J. P. Morgan unit that owns about
25 percent of FrontierVision equity, will get about 1.7 million Adelphia shares. Through
that stock, "we think of us as still being in the game," Morgan Capital managing
director John Watkins said.
Watkins added that Morgan might make other cable
investments, but not with the same approach -- buying undervalued cable systems -- that
FrontierVision took in 1995.