Revolting Mess

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Could this be the end of Adelphia as we know it? A week after revealing that it could be responsible for $2.3 billion in debt amassed by its largest shareholders to buy company stock, Adelphia Communications Corp. last week took what is often the first step to selling out.

The Coudersport, Pa.-based MSO said it hired investment advisers to explore its options, including asset sales.

Merely selling some cable systems might not keep the wolves who've set their sights on toppling the company's founding Rigas family at bay, though.

Wall Street analysts who cover the company last week openly urged John Rigas and his family members, who own controlling stakes in the cable operator he co-founded 50 years ago, to sell out altogether — or to at least yield control.

The firestorm that began with fumbled answers on a March 27 conference call — and continued with deafening silence from management — now includes an inquiry by securities regulators and several shareholder lawsuits, as well as an incipient revolt led by key outside shareholder Leonard Tow. Tow sold MSO Century Communications to Adelphia in 1999.

The latest move came late last Thursday, when Adelphia said it hired Salomon Smith Barney Inc., Bank of America Securities and Credit Suisse First Boston Inc. to help find ways to shed company debt, including the sale of assets.

Adelphia also took on Denver cable investment bank Daniels & Associates as a special adviser and hired the law firm of Fried, Frank, Harris, Shriver & Jacobson to "advise on various matters."

LATEST STATEMENT

"We want our shareholders to know that both Adelphia and the Rigas family are committed to building the value of the company for all Adelphia shareholders," John Rigas said in a statement.

"We recognize that this is a challenging time for all of our shareholders, as well as our employees," the company chairman and CEO said. "But Adelphia has many valuable assets that generate strong and predictable revenue and cash flow, and nearly 6 million loyal customers.

"We believe that the steps we are taking to reduce debt and deleverage our balance sheet through potential cable asset sales will result in a stronger company, better positioned to build shareholder value."

Adelphia's "challenging" events last week included acknowledgement of an informal inquiry by the Securities and Exchange Commission, and the receipt of at least 10 shareholder lawsuits.

Sources also confirmed reports that former Century chairman Tow — who sold his systems to Adelphia in 1999 for $5.2 billion in cash, debt and Adelphia stock — is assembling a group of shareholders who aim to purge Adelphia's management, headed by Rigas and sons Timothy, Michael and James.

SEC IS INQUIRING

Last Wednesday, Adelphia acknowledged the SEC was "conducting an informal inquiry into its previously disclosed co-borrowing agreements and has asked the company to provide clarification and related documentation."

Adelphia said it was "cooperating fully with this inquiry and is providing the requested information as expeditiously as possible."

The SEC probe was expected — it's one of many such inquiries initiated after the collapse of Enron Corp. — and prompted the NASDAQ to temporarily halt pre-market trading on Adelphia stock early Wednesday.

Adelphia stock had fallen as low as $9.57 Wednesday, before closing at $11.04. On Thursday, the stock dropped $1.04, to close at $10. It ticked up 80 cents, to $10.80, early last Friday.

Since the cable company disclosed about $2.3 billion in debt in off-balance sheet partnerships for which it could be liable, Adelphia's share price has been more than cut in half.

On March 26 — the day before it disclosed the off-balance-sheet debt — Adelphia closed at $20.39.

Although the $2.3 billion figure was surprisingly high, it could end up being higher. Some analysts believe Adelphia could be on the hook for $2.7 billion to $2.9 billion in debt, including money the Rigas family has borrowed since December.

In order to keep their equity positions at a stable level, the Rigas family borrowed billions to buy Adelphia stock in several convertible equity offerings over the past 18 months.

Investors knew the Rigases were buying the stock, mainly through their Highlands Holdings Inc. private partnership. But it was generally assumed those purchase were made with the family's personal funds.

When it turned out the stock purchases were backed by the cable company — which could be liable in the event of a default — investors became spooked.

Adelphia has lost nearly $2 billion in market capitalization since March 27. And through it all, the Rigases have been largely silent about the partnerships, saying more information would come with its annual report.

Adding to the problems, Adelphia said last Monday it sought SEC permission to delay filing that Form 10-K annual report beyond the April 1 deadline. The 15-day extension would expire on April 15, an analyst said last week.

TOW-HEADED REVOLT

According to sources, one important and irate shareholder, Tow, has gathered others — including influential media investor Gordon Crawford, whose Capital Research & Management owns 10.6 million Adelphia shares — to force the Rigases to yield control.

Crawford confirmed last Friday he was backing Tow.

"I think it is untenable for the Rigas family to continue to manage the public company given their obvious conflicts of interest," Crawford said. "It's in the stockholders' best interest, the bondholders' best interest and it's in the Rigas family's best interest to bring in an outside manager, like a Len Tow, to stabilize the company and to restore the confidence of the bond and stock market, given the company's obvious needs for capital over the next couple of years."

The Rigases control more than 74 percent of Adelphia's voting rights through their class-B super-voting shares, and therefore cannot be voted out by shareholders.

But some observers said Tow — who owns 10 percent of Adelphia stock, or about 19 million class-A shares — could have other options.

"Leonard wants to get control of this company," said one former MSO executive who asked not to be named.

One way that Tow could do that is to curry favor with Adelphia's lenders. In the event of a default on Highland's loans, the creditors could force a change in management.

Tow and Crawford did not return phone calls.

Adelphia appears to be leaning toward selling its systems to raise cash and pay down debt. But that might not be enough, sources said.

Including the off-balance sheet obligation, Adelphia's debt currently stands at about $16.6 billion, or $2,800 per subscriber.

To get its debt down to a more manageable level — about $1,000 per subscriber, one analyst figures — Adelphia would have to raise about $10 billion.

At current prices of roughly $3,500 to $4,000 per customer, that would mean selling off 2.5 million to 3 million subscribers, around half the MSO's total.

According to sources, Adelphia won't be able to get away with selling just any systems, like the 700,000 subscribers in nonstrategic markets it put on the block more than a year ago. The company will likely have to part with substantial properties in large markets, such as Los Angeles, Cleveland and central Florida.

Adelphia has other large clusters in the Pennsylvania-Ohio-New York region, and in New England, Kentucky and Virginia.

AOL Time Warner Inc. has hinted at interest in the Florida systems, located near its large clusters in Tampa and Orlando.

Other interested parties could be Cox Communications Inc. and Charter Communications Inc. chairman co-founder Paul Allen, who might have his eye on the Los Angeles properties.

Sources said Allen, who's personally worth about $25 billion, would be more likely to buy Adelphia systems apart from Charter, which already is relatively highly leveraged.

"Even [paying down debt] is probably going to involve some understanding with the lenders," the former executive pointed out. "And the lenders are very, very angry."

That could leave an outright sale of the company — either as a whole or in parts.

Most observers believe Adelphia's huge debt and the uncertainty surrounding additional obligations to Rigas family partnerships would make it hard for a single entity to buy Adelphia.

"Who's going to buy it now, with four or five class-action suits against it and who knows how many contingent liabilities?" one investment manager asked. "This is a huge can of worms."

'CRISIS OF CONFIDENCE'

It's getting harder to believe the Rigases can ride out the storm, a view many industry executives held when news of the off-balance sheet partnerships first broke.

"The substance of this is awful," a former MSO executive said. "I think the lawsuits are going to go on for years. It's going to be very hard for them to generate further credibility."

At a conference last week, CIBC World Markets cable and satellite analyst Jeff Wlodarczak said: "There is a crisis of confidence in management. I think this is going to get uglier. At this point, the investment community wants them to sell."

Goldman Sachs & Co. declared a "no rating" on Adelphia last week. In a note, cable and media analyst Richard Greenfield wrote that the Rigas family's continued silence on the debt issue makes it "impossible to support any rating on Adelphia shares."

Uncertainty over Adelphia's future and possible implications for other highly leveraged MSOs — notably Cablevision Systems Corp. — have begun to affect other stocks.

Between April 1 and April 4, shares in other MSOs declined by 9 percent.

'NOT ISOLATED'

"I wouldn't underestimate the effect Adelphia will have on the rest of the industry," GE Capital Commercial Finance managing director Michael Cummings said at the same industry conference, sponsored by Kagan World Media, last week.

"I don't think the Adelphia thing will be so isolated. I'm sure the next time I pick a cable deal up, I'm going to [have to] explain the Adelphia situation in detail."

If the Rigases are forced to sell out, many would call it a sad end for an industry pioneer — chairman, president and CEO John Rigas — who founded Adelphia in 1952 and built it from a few hundred subscribers into the No. 6 MSO, with 5.8 million customers.

Rigas built the company as a family asset. Son Michael is executive vice president of operations and secretary; Timothy is executive vice president, chief financial officer, chief accounting officer and treasurer, and James is executive vice president of strategic planning.

Rigas family members occupy five of the nine seats on Adelphia's board of directors.

Tim Rigas's reluctance to answer an analyst's question regarding off-balance sheet debt on Adelphia's fourth-quarter conference call on March 27 touched off the debacle.

"I don't think John has kept as close an eye on things lately," said the former MSO executive. "This is Tim's train wreck."

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