News Gets Worse

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Adelphia Communications Corp. stock took another nosedive last Friday, after the company revealed that it could possibly be delisted from the NASDAQ stock exchange — leading some analysts to believe an outright sale could be in the cards.

In a press release late last Thursday night, Adelphia said it had received a letter from the NASDAQ staff on April 17 which said the company's failure to file its 10-K annual report with the Securities & Exchange Commission in a timely manner could cause it to be delisted.

Adelphia said it has requested a hearing before a NASDAQ Listing Qualification Panel to review the staff determination. The delisting has thus been postponed, pending the panel's ruling.

As a result, Adelphia stock was hammered. It dropped as low as $5.85 per share — down $1.21 each, or 17.1 percent — in early trading last Friday. The stock had gained back some of that ground later in the day, trading at $6.32, down 74 cents, at 10:38 a.m. on April 19.

Adelphia has lost about $2.6 billion in market capitalization since March 27.

"I thought it was a bad thing when they missed the filing deadline," said one MSO executive who asked not to be named. "Now this looks more like a really
bad thing."

The delisting warning is more bad news in what has been a horrible month for Adelphia.

SEC PROBE WIDENS

Also last week, Adelphia announced that the SEC has upgraded its probe of the company to a formal investigation, giving the commission subpoena power to request documents and testimony from company executives.

News of the formal SEC query came on April 17, one day after Adelphia said it would be unable to file its 10-K. Adelphia had received a 15-day extension from the SEC for filing the report, which was originally due on April 1.

Adelphia — the No. 6 U.S. cable operator, with 5.7 million subscribers — ran into trouble March 27. During its fourth-quarter conference call, chief financial officer Tim Rigas and vice president of finance Jim Brown could not explain which assets backed up a Rigas family partnership that held $2.3 billion in debt.

What sent investors into a tizzy — and Adelphia's stock into a tailspin — was the fact that a portion of those loans were used by the Rigas family to purchase Adelphia stock — and that the MSO could be liable for the debt.

Since then, sources estimated the amount of debt in the partnership, called Highland Holdings Inc., could actually be closer to $3 billion.

According to a report by Janco Partners analyst Matt Harrigan, the delisting and the subsequent decline of Adelphia stock could mean that the MSO's prior plan to sell off systems to pay off the debt is no longer feasible.

"We continue to think that Adelphia's free-falling stock price may dictate a sale of the company rather than limited system sales, given pressure from the banks in the Highlands partnership," Harrigan wrote. "We suspect that system sales may not be adequate to reinvigorate [Adelphia's] stock price to a point where there is equity value in the Highlands partnership — which we think is now at least $500 million underwater, even if cash flow does cover immediate interest."

PRICETAG: $22 PER

Harrigan estimated Adelphia could be had for about $22 per share, or about 13 times 2002 estimated cash flow — still well below the $35-to-$40-per-share estimated sale value of the cable assets.

Possible suitors include Cox Communications Inc., AOL Time Warner Inc., and Charter Communications Inc.

Adelphia stock is currently trading at about 10.3 times 2002 estimated cash flow.

Earlier this month, Adelphia announced it had hired four investment bankers — Salomon Smith Barney Inc., Bank of America Securities LLC and Credit Suisse First Boston Inc. — to help it find ways to lower its debt, including asset sales.

Denver-based investment bank Daniels & Associates was retained as a special adviser.

So far, Adelphia has not identified any assets for sale, although observers believe those would likely be some of its largest systems, including Los Angeles, Northern Virginia and Central Florida.

The Los Angeles cluster, with about 1.1 million subscribers, would attract the most bidders, industry observers said, including Charter, Comcast Corp., AT&T Broadband, AOL Time Warner and Cox.

According to sources, Comcast would likely be interested in the Northern Virginia systems — located near its Washington, D.C., cluster — while AOL's Time Warner Cable would be the likely candidate for central Florida.

ADELPHIA: 10-K IS JOB 1

Adelphia director of investor relations Karen Chrosniak would not comment on which systems the Coudersport, Pa.-based MSO would or would not put up for sale.

"Our highest priority is filing our 10-K," Chrosniak said. "Our next-highest priority would be providing investors with more clarification on these co-borrowing agreements and bringing some resolution to this item that has taken up a lot of people's time for the last four weeks.

"Beyond that, there will be another set of priorities, and I'm sure some of those will be strategic alternatives and releasing our first-quarter results. Right now, we are focused on getting our 10-K filed. Our plans are to get the 10-K filed as soon as possible."

Although Chrosniak could offer little information beyond what the company has already released, her comments point to a new openness at Adelphia after several days of total silence.

Many in the investment community complained shortly after the March 27 conference call that Adelphia executives were avoiding their questions by not returning phone calls and generally keeping mum about the whole situation. But in the past few days, Adelphia has begun to talk to analysts, although it hasn't been able to answer all questions.

"We have been returning calls to investors and we have been speaking with analysts," Chrosniak said. "But the amount of information is limited at this point."

Chrosniak couldn't speak as to what information Adelphia will ultimately provide, but added that it would at least be more than has been available in the past.

"We haven't really talked to the type of items that people can expect to see in the 10-K. I can tell you there will be more disclosure on these items than what we disclosed in the press release and what we have disclosed in prior years."

CHAPTER 11 OPTION?

Another MSO executive, who also requested anonymity, said that although the Rigases — who own about 60 million shares of Adelphia stock — have weathered other storms, the most recent turn of events could force them to seek Chapter 11 bankruptcy-law protection from creditors.

"If they [the Rigases] have nothing to lose, they could go into bankruptcy," the executive said. "If they've got 60 million shares that are now, at $6 each, worth $360 million, and it's tied to $2.3 billion in debt, they're worthless. If they're worthless, it's like a wounded bull. They're going to do anything they can to stay alive."

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