Another Adelphia Monkey Wrench

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Adelphia Communications Corp., battling with creditors as it tries to win approval of its bankruptcy reorganization plan, received another setback last week after its partner in a 50-50 joint venture in Puerto Rico said it has lined up a buyer for those systems, led by cable veteran James Vaughn.

Adelphia’s reorganization plan, filed in February, has come under harsh criticism from several constituencies in the bankruptcy case, including committees representing unsecured creditors and equity holders. Each has called for an outright sale of the company.

Now the latest complication comes from ML Media Partners, which filed documents in bankruptcy court in New York April 5, asking the court to force Adelphia to open its books for the Puerto Rico systems. ML Media claims Adelphia is attempting to sabotage the sale by refusing to provide the information necessary for the Vaughn group to perform due diligence. No hearing date has been set.

Adelphia, in its response filed April 8, said it has offered to provide substantial information to the Vaughn group, but only after the parties agree to sign a standard confidentiality agreement. So far, only Vaughn has signed the agreement, according to court papers.

In court documents, Adelphia said that once those agreements are signed, it will make available any and all information the Vaughn group desires.

According to the ML Media complaint, Vaughn and his partners — private-equity funds M/C Venture Partners and Wachovia Capital Partners — have agreed to pay $625 million for the Puerto Rico systems. Those systems had about 140,000 subscribers in San Juan and Levittown as of Dec. 31.

Vaughn, reached last week, said he could not comment. Officials at M/C Ventures and Wachovia Capital did not return phone calls seeking comment.

VAUGHN TIES

M/C Venture Partners and Wachovia Capital have a long history with Vaughn — both backed his earlier cable venture FrontierVision Partners, which was sold to Adelphia for $2.1 billion in 1999. Both were also involved with Vaughn’s later venture, overbuilder Western Integrated Networks (WINfirst).

Vaughn, who would run the systems if the deal goes through, has been under the radar ever since WINfirst filed for bankruptcy in March 2002. Last July it sold its assets to Sacramento, Calif., telecom provider SureWest Communications for $12 million — a fraction of its original value.

Adelphia filed for Chapter 11 bankruptcy protection in June 2002 and submitted a plan of reorganization in February. As part of that proposal, the Puerto Rico systems — and several other joint-venture partnerships — would be folded back into the company.

For months, Adelphia has said it would prefer to keep its systems intact and emerge from bankruptcy by the end of the year, instead of trying to find a buyer for all or part of its systems.

ROCKY PARTNERS

Adelphia and ML Media have had a contentious relationship almost from the start. Adelphia inherited the partnership in its 2000 purchase of Century Communications Corp. Century had formed the ML Media partnership in 1992.

In 2000, shortly after the Century deal was completed, ML Media made moves to dissolve the partnership, culminating in a lawsuit filed that same year.

Although ML Media received an order from New York State Supreme Court that required Adelphia to cooperate in the sale, the auction process failed, producing a high bid of $465 million, which both parties believed was too low.

In December 2001, ML Media executed an agreement under which Adelphia would buy out its interest in the partnership for $279.8 million, a deal which Adelphia rejected.

“It’s safe to say it has been a difficult relationship in Puerto Rico,” Adelphia spokesman Paul Jacobson said.

The size of the Vaughn group offer appears to bring into question Adelphia’s own valuation of the entire company.

At $625 million, the Vaughn group offer works out to be $4,464 per subscriber, about 35% higher than the $3,300 per subscriber Adelphia placed on its entire operation.

But some sources in the investment community said that the price could turn out to be lower — as part of the agreement, the Vaughn group would back out any upgrade costs from the purchase price.

POTENTIAL SEEN

Still, some in the cable investment community said that Puerto Rico has potential mainly because it has had historically low penetration rates.

“One thing about Puerto Rico, the penetrations are typically about half of what everybody else has,” said one source in the investment community. “Everybody always said that there was upside because if it ever got to 50% or 60% it could be a lot. In San Juan, the densities are supposed to be phenomenal.”

According to Adelphia’s 1999 annual report — the latest information available — the Puerto Rico systems had about 44% penetration. Other Adelphia systems in the U.S. ranged from 55% to 80% penetration.

Another possible upside is the potential for further consolidation of the Puerto Rico market. The two other large operators on the island are Centennial Communications Corp. and Liberty Media Corp.

According to Centennial’s 2003 annual report, it has 78,200 cable subscribers in Puerto Rico.

In 2002, it rebuilt the Puerto Rico systems to digital and has deployed high-speed data service as well. Liberty, according to its 2003 annual report, has 123,500 subscribers in Luquillo, Arecibo, Florida, Caguas, Humacao, Cayey, Barranquitos and 30 other communities in Puerto Rico. It fully rebuilt the systems to 550-Megahertz capacity in 2003.

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