Battered Into Bankruptcy

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Adelphia Communications Corp. took the first step toward righting its battered finances, with its highly anticipated Chapter 11 bankruptcy filing June 25.

The Coudersport, Pa.-based MSO had been expected to file for Chapter 11 a day earlier, but had problems finalizing a $1.5 billion debtor-in-possession financing from a consortium of banks. Late on June 25, those kinks were worked out and the DIP financing — led by J.P. Morgan Chase and Citigroup USA Inc. — was secured, paving the way for the filing.

Adelphia will initially receive $500 million from the DIP, obtaining the rest when it reaches certain milestones, such as filing a business plan and bringing on new management.

Adelphia's board of directors — now just four people — was expected to meet over the weekend to start the arduous process of formulating a new business plan for the troubled MSO. Although that new plan is not due to the court for another four months, company chairman and interim CEO Erland Kailbourne would like to have a chief operating officer with cable experience in place before that date, according to published reports. He is also recruiting new board members with expertise in cable, finance and corporate governance.

Adelphia hired Christopher Dunstan as CFO and Steven Teuscher as senior vice president and chief accounting officer — jobs formerly held by Timothy Rigas — in May. But Dunstan, a former CFO of a consumer products company, and Teuscher, who worked at a construction firm near Adelphia's home base of Coudersport, have little cable experience.

KAILBOURNE'S VISION

Tapped to head up the company after chairman and founder John Rigas resigned, Kailbourne said he intends to remain chairman for two to three years, or as long as it takes to get the company through Chapter 11 and restructured.

Kailbourne is looking at individuals both inside and outside Adelphia to fill management ranks decimated after the Rigas family was ousted and other managers jumped from the sinking ship. In an interview, he seemed to be leaning toward existing employees to fill management gaps.

Although the pool of available cable management has grown over the past few years in the wake of the consolidation craze, Adelphia may be hard-pressed to find management willing to join a company as tainted as it has become.

But for now, Adelphia's fate is in the hands of the courts, which will have final say in virtually every move the company makes.

The bankruptcy filing will take some of the heat off Adelphia in that it keeps its creditors at bay while it tries to formulate out a restructuring plan.

In the filing, Adelphia listed assets of $24.6 billion and liabilities of $18.4 billion. However, about $3.1 billion in off-balance sheet debt was not included in the liability figure.

According to the filing, Adelphia owes its top 50 unsecured creditors a total of $9.8 billion, although the bulk of that — $9.4 billion — is for unsecured notes and other bond debt.

Programmers took about 20 spots on the list of Adelphia's top 50 unsecured creditors. They're owed a collective $169.8 million (see page 3).

Other major unsecured creditors include Scientific-Atlanta Inc. ($83.4 million) and Motorola Inc. ($49 million). Other equipment and telecommunications products vendors — including CommScope, C-COR.net and Arris Group Inc. — are owed a collective $124.3 million.

Unsecured creditors are usually near the end of the line when it comes to being paid in a bankruptcy and could receive just pennies on the dollar for their debt.

Just how Adelphia intends to restructure remains to be seen. In a press release announcing the bankruptcy filing, Kailbourne said the bankruptcy "will enable us to fully evaluate our enterprise without the immediate pressure to sell valuable assets that may well benefit the company in the future."

ON THE BLOCK?

In an interview last week, Kailbourne continued to support the notion that Adelphia wouldn't be splintered into several parts.

"It's fair to say that we would be divesting, but in reality I see an entity that will remain a single cable entity," Kailbourne said. "That is one of the goals coming out of Chapter 11."

The company has already been contacted by several parties interested in purchasing systems, he added.

"We've had eight to 10 inquiries," Kailbourne said. "At this point in time, we're just stepping back. We're talking to a variety of people at this point."

However, most industry observers believe that selling off assets is inevitable.

Adelphia had tried to sell about 2.7 million subscribers in April, hiring four investment bankers led by Salomon Smith Barney Inc. to advise it on asset sales. The systems on the block were Adelphia's largest systems, including Los Angeles, Northern Virginia, and central Florida.

But those sales were put on hold as more sordid details about questionable accounting and self-dealing partnerships involving Adelphia's founders and largest shareholders — the Rigas family — were revealed.

At one point Charter Communications Inc. negotiated with Adelphia to buy its Los Angeles property, but backed out after the parties could not agree on price and questions regarding ownership of the systems' fiber optic network.

But with the bankruptcy underway, it is expected that potential suitors for the systems will emerge. Last week, Kailbourne said that he had already received at least 10 inquiries from interested parties.

SECTOR STOCK WOES

While there is little doubt that the Adelphia systems will attract interest, less clear is what prices they will invite. While system valuations had hovered in the $4,000 to $5,000 per subscriber range in the past, this year they have dropped to as low as $3,000 per subscriber.

Also, cable stocks have experienced a serious case of Adelphia flu. The sector is down by about 62 percent this year, most of over the past three months. As a result, publicly traded MSOs have seen their deal currency — shares of stock — greatly diminish in value.

Still, the usual suspects are expected to be sniffing around for deals, including AOL Time Warner, Cox Communications Inc. and Charter Communications Inc.

Also entering the picture could be former cable executives, like ex-Continental Cablevision Inc. chairman Amos Hostetter. Sources close to Hostetter said he would be interested in looking at Adelphia properties after a bankruptcy filing.

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