In what could be its first outright system sale in 36 years, Adelphia Communications Corp. is looking to shed about 935,000 subscribers in nonstrategic markets, company chief financial officer Timothy Rigas said.
Rigas told analysts at a UBS Warburg bond conference last Monday that Adelphia is already shopping its 135,000-subscriber Puerto Rico system and could put an additional 800,000 subscribers in play after that operation is sold.
UBS Warburg analyst Aryeh Bourkoff said Rigas valued the nonstrategic assets at between $3,000 and $4,000 per subscriber, or between $2.8 billion and $3.7 billion. But with other systems on the market- including 1.2 million AT&T Broadband subscribers-a more realistic value is between $2,000 and $3,000 per customer, Bourkoff said.
Adelphia could still turn a profit on a sale of that size, Bourkoff said, given that the systems were purchased when cable valuations were low.
The Coudersport, Pa.-based MSO has tried to raise cash through the bond market to help finance recent acquisitions-including its $846 million purchase of GS Communications Inc.-and to fund its competitive local-exchange carrier, Adelphia Business Solutions. But the company has had little luck because of a sluggish debt market.
Earlier this month, Adelphia vice president of finance Jim Brown hinted that capital expenditures for the CLEC unit would be reduced and the carrier would concentrate on offering service in existing Adelphia cable markets.
Although the bond market has begun to turn around, Bourkoff said the decision to sell non-strategic assets is a sound one for Adelphia.
"The public equity and debt markets, up until the last week or so, have not been that favorable," Bourkoff said. "Adelphia needs to fund its CLEC and some of its acquisitions. This is the best and most prudent way to do that."
Adelphia went on an acquisition tear last year, spending more than $8 billion for systems for an additional 2.7 million subscribers from Century Communications Corp., Frontier-Vision Partners L.P. and Harron Communications Corp. This year, the company spent another $2.4 billion for Cablevision Systems Corp.'s Cleveland system and GS Communications systems in Virginia with a combined 461,000 customers.
Bourkoff added that Adelphia's decision to sell of some non-strategic assets, coupled with AT&T's plan to sell 1.2 million subscribers in mainly rural markets in Montana, Iowa, Nevada and Wyoming, point to a new round of consolidation in the industry.
"In a difficult financing environment, this highlights that cable companies have built a relatively stable value over the past five years. There should be a resurgence of consolidation come next year."
Although Adelphia, which has 5.5 million subscribers, did not identify the location of the non-strategic assets currently on the block, Bourkoff said it is likely that they would be on the East Coast, including Florida, and in Ohio.
One area in which Adelphia would not likely want to sell systems is Los Angeles, a still-fragmented market that has resisted consolidation efforts. "L.A. will be too strategic for them," Bourkoff said.
Adelphia has historically been a buyer of systems, not a seller. Bourkoff estimated the sale would be Adelphia's first outright system sale since 1964.
The transaction would also alleviate investor concerns about Adelphia's high leverage, currently about 8 times cash flow on the cable side. Selling off those systems would reduce Adelphia's leverage to about 7 times cash flow, Bourkoff said.
Including Adelphia Business Solutions, the competitive local-exchange carrier, Adelphia's leverage is about 10 times cash flow. The sale would reduce that overall ratio to about 9 times, Bourkoff said.