Deals Help Shore Up Adelphia's CLEC


Adelphia Business Solutions Inc. — the competitive local-exchange carrier subsidiary of Adelphia Communications Corp. — has reached an agreement to sell certain CLEC markets to its parent company for $125 million, a cash infusion some analysts believe comes none to soon.

The deal calls for Adelphia Business, also known as ABIZ, to slash its capital spending by $25 million this year and $185 million next year, mainly by halting further investment in 10 selected markets.

ABIZ also said its 2002 capital budget will fall from $420 million to $235 million. During 2003 and thereafter, capital expenditures would be reduced from $320 million per year to $200 million per year.

ABIZ did not disclose which markets it would sell to its parent. The deal is expected to close by the end of the month.

The CLEC unit has been strapped for cash for months, and its stock was hammered after Moody's Investors Service assigned a negative outlook to its debt on Aug. 20. ABIZ stock fell by $1.30, to $2.30, on the day of that announcement, when Moody's said the company was quickly running out of cash.

While ABIZ stock continued to slide — it hit $1.50 on Sept. 4 — investors appeared pleased with the most recent deal, driving the stock up 34 cents each, to $1.84 per share.

Investors who worried about Adelphia Communications Corp.'s continued funding of the CLEC also appeared pleased: The stock rose more than $1 on Wednesday before closing at $32.96, up 62 cents.

While the asset sale appears to solve ABIZ's near-term funding problems, the company is still in need of cash.

ABIZ said it expected to close on a bank facility of between $300 million and $500 million by the end of the month. Some analysts speculated that the company engineered its latest deal to appease the banks.

"We assume that the dramatic retrenchment in capital expenditures at ABIZ is at least partially related to its current bank negotiations," wrote Merrill Lynch & Co. Inc. high-yield media analyst Oren Cohen in a research report. "If so, the press release announcing the new capital expenditure plans probably brings ABIZ one step closer to finalizing its long-awaited standalone bank facility."

ABIZ has been burning cash at a rate of about $48 million per month, according to UBS Warburg high-yield cable analyst Aryeh Bourkoff. After it made a $15.3-million interest payment on its debt on Sept. 1, ABIZ — which had about $85 million of liquidity as of June 30 — was essentially out of cash, Bourkoff added.

"I don't know if this [deal] was a requirement [of the bank facility]," Bourkoff said. "This should help in getting that facility done, given the banks are now not the only source of financing for the company."

ABIZ said the combination of capex reductions, asset sales and the new bank facility should reduce its funding gap from $1.1 billion to between $80 million and $280 million, depending on the size of the bank facility.

"If they get the bank deal done, they still have a funding gap, but they've bought themselves a lot of time," Bourkoff said.

He added that with the present deals and the bank facility, ABIZ should be funded to late 2002. The deal also takes some pressure off of parent Adelphia.

"This is all good news for Adelphia," Cohen said in an interview. "By dramatically cutting back capex, they're saying they're definitely not going to be spending $300 million on capex that we thought they were going to spend."

Adelphia has been trying to shore up its own balance sheet for years, mainly by paring its substantial debt. Currently Adelphia has about $14.4 billion in debt, or about 9 times cash flow. Bourkoff said that a more manageable debt load would be about 7 times cash flow, or some $11.2 billion.

Earlier in the year Adelphia announced it was trying to sell non-strategic systems with about 800,000 subscribers to help pare down its debt. Given that the systems are in non-strategic areas, most observers believe they would attract about $3,000 per subscribers, bringing Adelphia about $2.4 billion.

But Adelphia apparently has been unable to find a buyer for the systems, and — except for properties with about 150,000 customers in Puerto Rico — has not identified which systems it has put up for sale.

"Adelphia would obviously like to find the right buyer," Bourkoff said. "It has not historically been a seller of assets. But cable valuations on a private net basis are all good."