More Cracks In Ice

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Pieces of the Rigas family's crumbling sports and cable empire began to fall last week, with the final slice — Adelphia Communications Corp.'s cable operations — expected to head into bankruptcy court as soon as today (June 24).

Late last Thursday, the National Hockey League wrested control of the Buffalo Sabres franchise from the Rigas family, the first step in a possible sale of the team.

Also, Adelphia revealed that it had sent letters to its 3,500 franchise authorities across the country, responding to a threat by Los Angeles officials to revoke Adelphia's franchise licenses in the city because it had halted work on upgrades.

In the letter, Adelphia general counsel Randall Fisher assured them of the MSO's commitment to service and cooperation with its franchise authorities.

"Adelphia is committed to reversing its admittedly difficult present financial situation," Fisher wrote. "We ask for your patience and understanding as we work to restore the confidence of our lenders, shareholders, customers and the 3,500 franchise authorities we serve across the nation."

The letter was dated June 11, three days before an Adelphia securities filing revealed more self-dealing transactions by its founding Rigas family, including a $700,000 expenditure for a country-club membership at the exclusive Briar Creek Golf Club in South Carolina.

In the filing, Adelphia said it was "investigating this transaction and whether the membership interest was purchase primarily for purposes relating to the business of the company, or was purchased primarily for the personal use by members of the Rigas family." The filing stated that the membership was neither presented to the board of director nor approved by it.

EMPLOYEE LOANS

Also, Adelphia said it identified a total of $1.9 million in loans made to current and former employees, in addition to a possible $700,000 loan made to former vice president of finance Jim Brown. Adelphia has taken a reserve of approximately $500,000 against non-payment of these loans, the filing said.

Loans were also made to eight current and former employees of Adelphia's competitive local-exchange carrier subsidiary, Adelphia Business Solutions, for a total of $278,000.

Adelphia said it has taken action with respect to five employees who had worked for Brown, transferring them to other duties inside the company. Those workers are cooperating with an investigation by the counsel to Adelphia's special committee of independent directors.

The company identified seven employees on the payroll whose primary function was to provide services to members of the Rigas family. All seven were terminated or transferred to the Rigas family's payroll.

As the company continues to investigate these and other transactions, the NHL wrested control of the Rigas family's pride and joy, the Buffalo Sabres.

NHL commissioner Gary Bettman said the league assumed operation of the Sabres on June 20, at press conference following the league's Board of Governors meeting in Toronto.

"Based on discussions that we've had and agreements that we've made with the Rigases, the operational control of the franchise resides in the league office and through me," Bettman said, according to a transcript of the press conference.

Still in question was the status of other Rigas family holdings: the HSBC Arena, where the Sabres play, and Empire Sports Network, the cable channel that carries Sabres games.

ESN vice president and general manager Bob Koshinski was not available for comment.

According to published reports, at least two individuals have expressed interest in buying the Sabres, as well as the network and the arena. They are Robert E. Rich Jr., owner of the Buffalo Bisons triple-A minor league baseball club, and Mark E. Hamister, owner of the Arena Football League's Buffalo Destroyers.

While the Sabres were owned by the Rigas family — through a partnership called Niagara Frontier Hockey LP — and not by Adelphia, the franchise did owe the MSO as much as $150 million.

As Adelphia edged closer to bankruptcy, the league determined that a takeover was necessary in order to ensure an orderly transition to new ownership.

According to reports, Bettman said the league would not be liable for that debt.

The Sabres could be worth between $85 million and $95 million. The Rigases paid $15 million for a 34 percent interest in the team 1994 and bought the rest of the team in 2000 for an undisclosed sum.

Sale proceeds would go to Adelphia and not to the Rigases, according to reports.

ASSETS ON MOVE?

The loss of the Sabres could be the first in a series of asset sales as Adelphia inches closer to bankruptcy.

According to sources, Adelphia was in meetings late last week with about six different banks — including JP Morgan Chase & Co., Salomon Smith Barney Inc., Bank of America and General Electric Capital Corp. — to line up a $1.5 billion debtor-in-possession financing as part of a pre-packaged Chapter 11 bankruptcy filing.

Bankruptcy would be a sad end to what had been a 50-year ride for former Adelphia chairman John Rigas, who bought his first system in 1952 with $300 from an overdrawn bank account. Rigas built Adelphia into the No. 6 MSO in the country, with 5.7 million subscribers, by making aggressive acquisitions over the last few years.

As Adelphia released some of the more lurid details of those transactions in SEC filings — the most serious of which were charges that the company inflated cash-flow numbers — the Rigases were forced to step down as officers and directors of the company.

The family essentially lost control of the MSO after the board required that its Adelphia stock, which gives the family majority voting control, be placed in trust. The board also has the power to vote on behalf of the Rigas family shares.

FUZZY OUTLOOK

Most sources believe a bankruptcy is imminent, but what could ultimately happen to the company is less clear.

Last week, industry sources said several scenarios were being floated to Adelphia management, including a liquidation of cable assets; a restructuring of debt and reorganization of management without selling assets; and even a bondholder proposal that would swap debt for systems.

Also unclear is who would actually get paid were the company to file for bankruptcy.

While it is likely that the banks will be made whole in a Chapter 11, bondholders — owed about $7 billion — are likely to be left out in the cold.

Last week, Adelphia said it had already missed $55 million in interest payments on its bonds, and failed to pay the interest on another $45 million in debt securities.

According to Los Angeles bankruptcy lawyer Ivan Kallick of Manatt, Phelps & Phillips, in most Chapter 11 bankruptcies, the first in line to get paid are the lawyers and accountants that handle the bankruptcy. Next up are any taxing authorities, secured lenders, employees with claims against the company or any city or local authorities that are owed franchise fees.

Next in line are the bondholders, followed by shareholders.

While bondholders would have some say in how the bankruptcy is run, Kallick said, they're unlikely to see any money after the other creditors are paid.

"The reality of payment is very low [for bondholders]," Kallick said.

The same could hold true for vendors. While the bankruptcy court would set aside certain funds to make sure that essential vendors are paid, others may be left holding the bag, he said.

"Vendors can get a little screwed," Kallick said.

AT&T: STUCK WITH FEES?

Several sources in the financial community said last week that AT&T Broadband — a minority partner in two joint ventures with Adelphia in the Buffalo, N.Y., region and Los Angeles — was stuck with as much as $20 million in programming licensing fees that Adelphia had failed to pay.

AT&T Broadband declined to comment.

Also up in the air is the future status of Adelphia's systems. While the company had hired four investment bankers to investigate asset sales, those sales are currently on hold.

Charter Communications Inc. chairman Paul Allen had also been in earlier negotiations to purchase Adelphia's Los Angeles systems. But those talks broke down when the parties could not agree on price and, one informed source said, could not determine whether Adelphia or its competitive local-exchange carrier unit owned key local fiber assets.

Former Los Angeles Mayor Richard Riordan was reportedly trying to put together a group to purchase Adelphia's systems in that city, but he also backed out. Riordan told Dow Jones Newswires last Thursday that because he recently became a board member of a potential Adelphia competitor in that city — Altrio Communications Inc. — involvement in an Adelphia purchase would constitute a conflict of interest.

Adelphia systems would attract potential buyers, especially after a bankruptcy, sources said.

The list of interested MSOs would include the top cable companies, including AOL Time Warner Inc., AT&T Broadband, Cox Communications Inc., Charter, Insight Communications Co. and Mediacom Communications Corp.

Several private-equity firms and even former cable executives — such as former Continental Cablevision Inc. chairman Amos Hostetter — also have let it be known that they would be interested.

Sources close to Hostetter said he would be interested in examining the books on some of Adelphia's systems, but only after it files for bankruptcy.

Several sources said AT&T Broadband would be interested in buying out Adelphia's interests in the joint ventures — Adelphia owns 67 percent of the Buffalo partnership and 75 percent of the Los Angeles venture — but only if the parties could reach a deal before a full-scale auction for the Adelphia properties begins.

"If this thing doesn't get to an auction phase before [the] AT&T-Comcast [merger] closes in November or December, then I think they will be players in this," one former industry executive said. But if it goes down before that, I don't think they [AT&T] will have any role. They're too close to the line already."

If Adelphia systems are put on the block again, the former executive added, smaller operators and private-equity firms are more likely to bid on the systems than some of the bigger MSOs.

"The major players would have trouble because their stocks are so beat up," the former executive said. "Comcast and AT&T have their own deal to close, and Charter stock has dropped from $25 [per share] to $4 [per share]. The normal bidders won't be there, or at least won't be there aggressively."

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