After watching Adelphia Communications Corp. double in sizein about 10 days, Wall Streeters were scratching their heads over the company'ssudden boldness and wondering where it's headed.
Adelphia emerged last Friday as the surprise winner atauction of Century Communications Corp., agreeing to pay about $5.2 billion in stock, cashand assumed debt for Century and its 1.6 million subscribers.
Analysts considered the price high -- about $3,600 persubscriber, or around 15 times cable cash flow -- and Adelphia's share price fellearly Friday while other MSO shares rose.
Coudersport, Pa.-based Adelphia presumably outbid the likesof MediaOne Group Inc. and Charter Communications -- a pair of suitors that alreadyoperate in Los Angeles, home of Century's 772,000-subscriber joint venture withTele-Communications Inc.
Century CEO Bernard Gallagher told analysts that chairmanLeonard Tow, who controls Century, saw "significant upside possibilities" inAdelphia.
For that reason, Tow chose to take about $1.6 billion, or75 percent of his consideration, in Adelphia stock, which "he has no intention ofselling," Gallagher said. Tow will join Adelphia's board of directors.
Tow put Charter up for sale in December, hiring Donaldson,Lufkin & Jenrette Inc. to "explore strategic alternatives." That came afterTow and Microsoft Corp. cofounder Paul Allen, principal owner of Charter, were unable tocome to terms on a sale price, according to sources.
Adelphia has no Los Angeles operations, prompting analyststo speculate that the controlling Rigas family will try to swap or sell that cornerstoneasset, or that chairman John Rigas will attempt to sell the company outright.
Possible buyers would include Charter -- especially afterAllen takes it public -- and AT&T Corp., which is buying TCI and its 25 percent stakein Century's operation there.
Adelphia executive vice president Timothy Rigaswouldn't rule out anything that might enhance shareholder value. Selling or swappingare always possibilities, he said in an interview after the deal was announced.
But Rigas said his end game right now is to assimilateCentury and the 702,000-subscriber FrontierVision Partners L.P. systems into Adelphia andto "make sure that the full story is out there."
Adelphia's investment story is "a pure cable play-- as pure as they get at this size, at 4.7 million subscribers," Rigas said."Rebuilding and continuing to work on the cash flow" are the rest of theimmediate plan, he added.
The Century deal came hard on the heels of Adelphia'sagreement to buy FrontierVision for about $2.1 billion -- again in stock, assumed debt andsome cash.
Those acquisitions roughly doubled Adelphia'ssubscriber base to a pro forma 4.7 million from 2.3 million, making it the No. 5 MSO. Itsannual revenue base will rise to $2 billion from $528 million in the fiscal year endedMarch 31, 1998.
While FrontierVision's systems in the Northeast were agood strategic fit with Adelphia's, the Century clusters in Los Angeles, Puerto Ricoand Colorado Springs, Colo., are not.
But the combined Adelphia, FrontierVision and Centuryoperations would have more than 90 percent of subscribers in 11 regional clusters thatrange in size from the Los Angeles block to ones in Colorado and New Jersey with about100,000 subscribers apiece.
Other big clusters include southeast Florida, with 701,000subscribers; New England, with 608,000 subscribers; and Ohio/Kentucky/West Virginia andwestern New York, with about 500,000 subscribers each.
Adelphia and Century both have significant joint ventureswith TCI, containing a total of some 1.3 million subscribers. That gives Adelphia a goodbase from which to negotiate a telephony deal with AT&T, Rigas added.
The deal for Century came together after DLJ gathered thebids last Tuesday, Rigas said. So Adelphia is still working out many details of how thecompanies will be consolidated, and the company plans to make another presentation toanalysts this week. Daniels & Associates Inc. advised Adelphia.
Adelphia will issue 48.7 million new Class A shares toCentury shareholders. Century Class A shareholders will get 0.6122 shares, plus $9.16 incash, for each Century share.
Based on Adelphia's close last Wednesday, the totalconsideration was about $44.14 per share. Analysts said they had expected Century tocommand about $39 or $40 per share.
Owners of supervoting Class B shares -- Leonard Tow and hiswife, Claire -- will get a 29 percent cash premium, or $11.81 per share, and a 4 percentstock premium, or 0.636 Adelphia shares for each Class B share. The Century Class Bshareholders' total consideration is $48.14 per share, or a total premium of about 9percent.
Including new equity to be issued as part of theFrontierVision deal, Adelphia estimated that the "float" of shares available tothe public would double from its current size. That extra liquidity could help its shareprice.
Moving up in subscriber size could also help Adelphia tonarrow the gap between its and Century's stocks and the better-performing stocks ofComcast Corp. and Cox Communications Inc., analysts said.
But analysts, including Richard Read of Credit LyonnaisSecurities USA, said the deal was certainly dilutive to Adelphia shareholders, as was theFrontierVision deal.
"It's good for Century shareholders, whetherthere's a discrepancy between A and B holders or not," he added.
Looking ahead, Read said, he thinks that Adelphia will sellout, or that it will at least sell or swap the Los Angeles operations. But, he added, hecan't predict when that might happen.
"It seems to me that the consolidation of Los Angelesis a big issue," he said.
And even at the price that Adelphia is paying for Century,other operators' stocks are trading at bigger cash-flow multiples thanAdelphia's, so it could afford to pay more.
Salomon Smith Barney analyst Spencer Grimes predicted thatAdelphia would swap Los Angeles and possibly other Century assets to add systems in theFlorida and Virginia area.
Adelphia might manage to swap Colorado Springs to TCI forPittsburgh, which is near Adelphia's hometown, he added.