Rigases Lose Grip On Adelphia

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Adelphia Communications Corp.'s founding Rigas family relinquished control of the company last week, while agreeing to transfer $1.2 billion in privately controlled cable assets, or cash generated by systems, over to the MSO.

Effective control of the sixth-biggest U.S. cable operator now rests in the hands of Adelphia's independent directors: chairman and acting CEO Erland Kailbourne, Caithness Corp. president Leslie Gelber, Mannesmann Dematic Systems managing director Pete Metros and FPL Group Inc. general counsel Dennis P. Coyle.

Kailbourne, Gelber and Coyle are also members of Adelphia's special committee of independent directors, which was formed May 16 and has broad powers to conduct a full investigation into transactions between the company and certain entities controlled by the Rigas family.

Chasing the Rigases out the door are a string of published reports that detail the dealings between those family partnerships and Adelphia. The Wall Street Journal
reported last Friday that federal investigators have uncovered a vast network of business dealings between Rigas family holdings and the MSO that the paper called "one of the largest cases of inside dealings ever seen at a public company."

Without a bank financing deal in place, Adelphia still faces a major cash crunch. With the company burning through about $1 billion a year just to operate the business, more capital is sorely needed to stave off a bankruptcy filing.

Last Thursday, recently resigned chairman and CEO John Rigas left Adelphia's nine-member board of directors, along with his three sons: former chief financial officer Timothy Rigas, executive vice president of operations Michael Rigas and executive vice president of strategic planning James Rigas. Michael and James Rigas also resigned as company officers.

John and Timothy Rigas had earlier stepped down as executives, but retained their seats on the board.

Peter Venetis, a son-in-law of John Rigas, also is expected to step down from the board, although reports last Friday said he was resisting the demand that he resign.

If Venetis leaves, that opens five seats on Adelphia's nine-member board of directors. The Rigases can name two non-family members, leaving the rest to Adelphia's largest individual shareholder, Citizens Communications Co. chairman Leonard Tow.

MORE DEBT SEEN

Tow has pressed Adelphia to give him three board seats — for himself, Citizens vice chairman Scott Schneider and the telco's president, Rudy Graf.

Tow, who owns about 12 percent of Adelphia stock, had threatened legal action unless Adelphia gave him the seats. He claims he's entitled to them after selling his MSO, Century Communications Corp., to the company in 1999.

Adelphia also revealed that it's on the hook for about $3.1 billion in debt from Rigas holdings — about $600 million more than had originally been thought.

Adelphia did not provide any details as to where that additional debt came from, but stated in a press release Thursday that it would file an "8-K" report with the Securities and Exchange Commission on Friday, "disclosing certain related-party transactions."

In a research report, UBS Warburg LLC high-yield cable analyst Aryeh Bourkoff said the additional debt might stem from a $500 million bank facility from Adelphia Business Solutions (ABIZ) — Adelphia Communications's competitive local-exchange carrier subsidiary — as well as $100 million of credit support pledged to the CLEC.

As part of the agreement, the Rigases will forgive $567 million in convertible Adelphia bonds it owns in return for being relieved of obligations to purchase $202 million in Adelphia stock. In addition, Adelphia will assume primary liability for $365 million of co-borrowings by the Rigas family entities.

The Rigases also will either transfer $1.2 billion worth of cable systems, or the cash flows associated with those properties — depending on the tax liability to the family — to help cover the debt from the Rigas co-borrowing debt.

Cable properties held in Rigas family entities will be transferred to Adelphia at appraised values.

"I am very pleased that the Rigas family has agreed to transfer important assets to the company," Kailbourne said in a statement. "This is an appropriate step on the part of the Rigas family toward restoring the company's credibility with shareholders, lenders and the marketplace as a whole."

STOCK RESUMES, DOWN

Trading in Adelphia stock was resumed at 12:30 p.m. last Thursday. The NASDAQ had halted trading on May 14, as the exchange sought more information from the company.

Although the press release appeared to meet NASDAQ's requirements, many investors bailed out. Adelphia's stock, which had traded at $5.70 per share before trading was halted, sank as low as $1.55 on Thursday, before closing at $2.62, down $3.08 (54 percent).

The Rigases, who own about 20 percent of Adelphia's outstanding stock and have 60 percent of its voting control, won't be able to block future moves by the special committee of Adelphia's independent shareholders. They agreed to place all of their Adelphia shares into a voting trust until all obligations are met.

The special committee will vote on behalf of the family's shares, Adelphia said.

The resignations — which came at the behest of the special committee — were the latest in what has been a flurry of bad news for the Rigas family since March 27, when the company first announced that it had $2.3 billion in off-balance sheet debt.

When Tim Rigas and vice president of finance Jim Brown, who resigned on May 19, could not answer an analyst's question regarding just what backed up that debt, it set off a chain of events that include Securities and Exchange Commission and federal grand-jury investigations of Adelphia's relationship with various Rigas family partnerships.

Speculation is that the family had used Adelphia to back up other loans for its interest in the Buffalo Sabres National Hockey League franchise, forced the MSO to pay it millions for timber rights on various Rigas lands and secured loans to Adelphia executives.

Plenty of questions remain about what the company has disclosed so far.

In the press release announcing the Rigas family's secession from the board, board member and special committee chairman Leslie Gelber said, "the special committee has a number of issues with the Rigas family" but "we appreciate the family's willingness to take this important step at this time toward the company's recovery."

INFORMATION WANTED

"Everybody wants an answer, but the story here is that they [the Rigases] haven't given us any information," said Merrill Lynch & Co. high-yield analyst Oren Cohen, the analyst whose conference-call question stumped Adelphia. "Rather than speculation, we need a full accounting on all the bank facilities."

Adelphia currently has about six bank facilities for between $8.2 billion and $8.3 billion. "We need to know what is the breakdown [of the bank facilities], and how much is it related to [Rigas] family stock purchases," Cohen said.

"When this broke six weeks ago, I suspected that information was going to trickle out," he added. "That's exactly what happened."

Adelphia's existing line of credit raises even more questions. According to a report issued last week by Morgan Stanley Dean Witter & Co. fixed income analyst David Allen, Adelphia has drawn about $7 billion from the $8.3 billion credit facility. That's about $1 billion more than previously estimated.

That extra $1 billion would significantly increase Adelphia's leverage, which could affect the MSO's ability to avoid a bankruptcy filing. With $7 billion in bank debt, Adelphia's leverage grows to about $16 billion, or more than 10 times 2002 estimated cash flow.

"One billion dollars makes a big difference in how you value the bonds, and it makes a big difference as to whether this company is going to go bankrupt or not," Cohen said. "You're getting to the point where leverage is so high, every $500 million [of debt] is going to make a big difference."

Cohen also questioned the lack of a bank financing deal — which was the main catalyst for the Rigas' departure, according to speculation by some industry sources.

In the press release, Adelphia said only that it has "initiated discussions with the agent banks under the existing credit facilities of its subsidiaries."

FINANCING NEEDED

The company added that it also is in early discussions toward obtaining additional near-term financing, and it's continuing its efforts to sell assets. Earlier this month, Adelphia said it had put systems with 2.75 million subscribers in Los Angeles, Florida, Virginia and the Southeast on the block.

Cohen put Adelphia's chances of filing for bankruptcy at "50-50," because the MSO's bank debt is held at the operating level, while the bond debt is held above that, at the holding company level.

The banks could opt to fund Adelphia at only the operating level and not provide money to pay interest on the bond debt, Cohen said. He estimated interest on Adelphia's $7.5 billion in bond debt at $600 million to $700 million.

"Given their liquidity situation, why should the banks continue to send out $600 [million] or $700 million of cash out to the holding companies to pay interest?" Cohen said.

If the banks decide not to pay the interest on the bonds, they would essentially force the bondholders to file for bankruptcy at the holding-company level.

Under that scenario, the bonds would continue to accrue interest as Adelphia sells off assets to pay debt, which could take as long as nine months.

If Adelphia sells between $6 billion and $7 billion in assets, it could pay off its bank debt and then — as a new company — begin to pay interest on the bonds again.

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