Bankruptcy Looms

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The specter of bankruptcy loomed larger for Adelphia Communications Corp. last week, after the NASDAQ exchange said it would delist the company on June 3, a move that could possibly force the troubled Coudersport, Pa.-based MSO into default on more than $1.4 billion in bonds.

News of the NASDAQ delisting came amid a very public fight between Adelphia's interim CEO, Erland Kailbourne, and newly elected director Leonard Tow.

News of the pending delisting initially sent Adelphia stock down, although the company's shares gained 13 cents each, to $1.29, in morning trading last Friday. Adelphia's stock is down about 90 percent since late March.

Last Thursday, Tow — who owns about 12 percent of Adelphia stock through personal and family holdings — fired off a letter to Kailbourne, taking issue with published reports that said Adelphia was close to hammering out a deal to sell systems with 1 million subscribers in Los Angeles and in the Southeast to Charter Communications Inc. chairman Paul Allen.

Tow, who was named to Adelphia's board May 28 along with colleague Scott Schneider, took issue with the MSO's negotiating to sell systems without his input. In his letter, Tow said selling systems now at bargain prices could devastate the MSO.

"Such a sale would strip the company of its ability to conduct an orderly and profitable disposition of the remainder of the company's cable assets, when and if it is necessary," Tow wrote.

Kailbourne wasted no time with his response, claiming that Adelphia was not in serious talks about any asset sale, and that Tow would be briefed on any negotiations at a scheduled June 1 board meeting. Kailbourne also seemed perturbed that Tow had approached Leslie Gelber — an Adelphia board member and chairman of a special committee of independent directors that is now essentially running the MSO — and requested that he be named chairman of the company.

"I certainly hope that your letter is, and your participation as a member of the board, will be directed towards what will benefit all of the company's shareholders, and not in pursuit of a separate agenda," Kailbourne wrote.

CRAWFORD BACKS TOW

Making Tow chairman of Adelphia is not a new idea. Influential media investor Gordon Crawford — who owns 11 million shares of Adelphia stock, or about 4.8 percent of outstanding shares, through his Capital Research Management and Capital Guardian Trust funds — has been pushing for Tow to run the company for weeks. Last week, Crawford said Tow is still the best man for the job.

"I'm hoping the board does the right thing," Crawford said. "There is no [cable] management there."

Crawford has been assembling shareholders to force changes at Adelphia for weeks. Last week, according to sources, he made some preliminary moves to begin organizing bondholders.

According to sources familiar with the matter, Crawford held a conference call with bondholders last Thursday to solicit those who hold at least $75 million in Adelphia bonds to join an informal committee to protect their interests in the event of a bankruptcy.

Adelphia is experiencing a power vacuum, after the resignations of its top four officers and directors — co-founder John Rigas and his sons Timothy, Michael and James — amid growing evidence that the Rigas family used Adelphia like a personal bank account.

While Tow was not involved in the self-dealing arrangements with the Rigas family, he is not without his own baggage.

Tow became chairman of Citizens in 1990, about a year after purchasing 900,000 shares of Citizen stock for $48 million from then-chairman Richard Rosenthal and two company board members. But his first few years on the job were rocky ones.

According to a 1993 report in The New York Times, Tow came under fire after the board — which included his wife Claire and several close associates — approved a compensation package worth $21 million for him, millions more than the salaries of the top five telecom executives at that time.

Around that same period one of Citizens's largest shareholders — the California Public Employees Retirement System — fired off a letter to the company's directors comparing them to "pigs at the trough."

The Times
article also accused Tow of shifting cash between Citizens and his MSO, Century Communications Corp., which Citizens later denied. In a statement after the Times
article was first published, Citizens said that any transactions between it and Century were done at "arm's length."

OREN COHEN'S VIEW

Merrill Lynch & Co. high-yield debt analyst Oren Cohen said he doesn't believe that convertible noteholders would force Adelphia into bankruptcy — they are too subordinate and would likely end up with nothing in a Chapter 11 process. But he does believe that the company is closer to a bankruptcy filing than ever before.

"I'm sticking to my guns here," Cohen said. "The delisting triggers a default on the convertible notes and those are subordinated. The subordinated noteholders are very junior in the capital structure.

"My sense is that it is not the convertible noteholders that are going to push this thing into bankruptcy — it's either going to be the banks or the bondholders," he said. "If Paul Allen does not come through with a last-minute, 11th-hour, white-knight deal to give this company liquidity, they're headed for bankruptcy, plain and simple."

Sources told Multichannel News
the talks with Allen were never really that serious, a notion Kailbourne seemed to support in his letter to Tow. Published reports Friday said talks with Allen broke down because Adelphia was asking too much for the systems.

But asset sales would help Adelphia raise desperately needed cash, on the heels of a May 24 securities filing that revealed a startling amount of self-dealing transactions between the Rigas family and the MSO they founded.

Several press reports last week said Adelphia was negotiating a deal to sell Allen 450,000 subscribers in the Los Angeles suburbs, as well as another 550,000 in Georgia, North Carolina and South Carolina, for $3.2 billion to $3.3 billion.

Left out of the deal — at least for the time being — would be another 800,000 subscribers in Los Angeles jointly owned by Adelphia and AT&T Corp.

AT&T owns about a 25 percent stake in those systems, but has approval rights on any sale.

The Adelphia-owned properties are mainly in outlying areas such as Palmdale, Thousand Oaks, El Monte and Ventura. The real money is in the properties inside the AT&T partnership, including such affluent Los Angeles neighborhoods as Pacific Palisades, Brentwood, Bel Air, Manhattan Beach and Redondo Beach.

Although a Charter deal appears to be unlikely now, several sources said that AT&T Corp. also is trying to work out a deal to unwind a joint venture with the company outside of Los Angeles.

Adelphia also was said to be negotiating with private equity investors Blackstone Group, Providence Equity Partners, Texas Pacific Group, Cypress Group and Apollo Group about a $1 billion investment in the MSO.

According to sources in the financial community who asked not to be named, AT&T is considering buying out Adelphia's 66.7 percent interest in a joint partnership for systems in Buffalo, N.Y., Erie, Pa. and parts of Ohio. AT&T owns a 33 percent interest in that partnership, which was formed in 1998 by AT&T predecessor Tele-Communications Inc.

While the Buffalo system was not part of the package of systems Adelphia put on the block in April, some observers said an AT&T deal makes sense.

Although not one of its largest properties, Buffalo is one of the Rigas family's most prized systems. Home of the National Hockey League's Buffalo Sabres — a Rigas family holding — Buffalo is only a few hours' drive from Adelphia's Coudersport, Pa. headquarters.

The city also is the site of a major Adelphia real estate project. The MSO had planned to build a $130 million national operations center on the Buffalo waterfront, consolidating customer-service operations from several states.

But according to reports in the Buffalo News, Adelphia's waterfront development plans are likely on hold, in light of the fiscal crisis. Groundbreaking was originally expected for the fall.

Adelphia and TCI formed the Buffalo partnership in 1998, when Adelphia contributed 298,000 subscribers in Western New York and Lorrain, Ohio. AT&T contributed its Buffalo system, as well as properties in Ashtabula and Lake County, Ohio, with about 171,000 subscribers.

"AT&T is sniffing around about effectively buying Adelphia out of its partnerships with them," a source in the financial community said. "They can do it fast because they don't need FCC [Federal Communications Commission} approval. And AT&T needs to spend $700 million quickly."

An AT&T Broadband spokeswoman declined comment.

AT&T is under pressure to buy systems that could cancel out the capital-gains tax implications of its sale of 320,000 subscribers in Montana, Wyoming and parts of Colorado to Bresnan Communications Inc. for $720 million. Although the Bresnan acquisition doesn't officially close until the end of the third quarter, sources said that AT&T may want to line up a deal before then.

With about 470,000 subscribers in the Buffalo partnership, buying out Adelphia's 66.7 percent would amount to about $780 million, given a 10-times multiple on annual cash flow of $250 per subscriber.

CASH RUNNING OUT

Despite the rumors, one thing is very clear: Adelphia needs cash and it needs it fast.

Although the MSO dodged a bullet on Thursday when its bank lenders gave it an extension on interest payments on about $7 billion in debt, sources said last week that the company will run out of cash shortly. Adelphia normally burns through about $1 billion a year just to run its operations.

So far, Adelphia has missed about $50 million in interest payments. It has another big interest payment due on June 15.

While those deadlines are looming, there is no indications that the banks won't give Adelphia additional extensions, Cohen said.

"The banks are doing what banks do in these situations — they've put [Adelphia] on an extremely short leash and they're waiving violations now, week-to-week," Cohen said. "The point is, don't get obsessed with firm deadlines. There is no such thing as a firm deadline in the real world; everything is negotiable."

But as Adelphia's board determines its options, the long-awaited May 24 filing revealed — without the help of the Rigas family — a tangled web of self-dealing partnerships that funneled money between Rigas-owned entities and supplied funds for the family to purchase stock. Among the revelations in the filing:

  • Adelphia purchased about $12.7 million worth of office furniture and equipment and interior decorating services in 2001 from two companies — Eleni Interiors and Dobaire — that are controlled by Doris Rigas, the wife of former Adelphia chairman and co-founder John Rigas;
  • It purchased 50 automobiles from a car dealership — Preston Motors — in which John Rigas had a material interest;
  • It spent $13 million to build an 830-acre golf course — The Golf Club at Wending Creek Farms — on Rigas property;
  • Wending Creek received $2 million from the MSO for maintenance, including snow removal and landscaping;
  • It gave $100,000 to Rigas-family members and entities for office and warehouse rent payments;
  • And in 2001, Adelphia paid Ellen Rigas Venetis $50,000 for "community-service and public-relations consulting services."
  • The Rigas family obtained margin loans that were backed up by Adelphia equity and debt. The family has made $241.2 million in payments tied to the margin calls since January 2001.
  • The committee is investigating whether former vice president of finance Jim Brown received a $700,000 loan from Adelphia.
  • Adelphia paid Niagara Frontier Hockey LP, which owns the Sabres, $744,000 for luxury suites and tickets for employees.
  • The committee is investigating whether Adelphia's ACC Operations subsidiary spent $26.5 million for timber rights on land owned by the Rigas family, and whether the deal represented the fair market value of the rights.
  • Adelphia funds may have been used by the Rigas family to construct, acquire or maintain condominiums in Beaver Creek, Colo., and Cancun, Mexico, Adelphia said. Real estate records show that former Adelphia chief financial officer Tim Rigas bought a $2.4 million condo in Beaver Creek in 1997 and that he received a $2.6 million mortgage to purchase another Beaver Creek condo in December 1998.
  • Adelphia helped finance two motion-picture companies owned by John Rigas's daughter, Ellen Rigas Venetis, and sank $3 million into her last production, a feature film titled SongCatcher.
  • Adelphia committed to making a $65 million investment in Praxis Capital Management, a New York venture capital firm that in which Rigas son-in-law and Adelphia board member Peter Venetis is a managing director. Adelphia also paid Venetis's salary of $1.3 million in 2001.

Most surprising about the 8-K filing, according to some cable executives, was that it showed that the Rigases's self-dealing has been going on for years. Some were startled at the pettiness of some of the transactions.

"At first I wondered whether the [Rigas] boys had just become a little more aggressive in their financial dealings and that John was unaware of what was happening," said one cable executive, who asked not to be named. "But after looking at the 8-K, there was no way he [John Rigas] was caught unawares. The surprising thing is that all this is pretty petty on a relative scale. These are really not huge numbers here."

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