Three years ago — at the height of the cable industry's consolidation boom — Adelphia was at the top of many lists of potential takeover targets. But even with cable valuations in the historically high range of 20 to 22 times annual cash flow, Adelphia held on.
In a 1999 interview with Multichannel News, Adelphia chairman and co-founder John Rigas said, "The one thing that I tell people is that if it wasn't for the children — they've had a lot of experience, they do the job exceptionally well, they know the business and they're committed — then I would probably have been a candidate [to sell] and do what others did."
Now John Rigas is gone. He was pushed out as chairman and CEO of the company he co-founded 50 years ago by members of his own board of directors, amid a financial scandal that has grown to near-epic proportions in the past two months.
On Friday, Adelphia acknowledged that federal prosecutors were investigating the company, whose two top officers — John Rigas and son Timothy Rigas, the company's chief financial officer, have resigned.
Adelphia also suspended an independent audit of its finances and hired a famed Washington litigator, David Boies, to look into "issues" regarding that internal audit.
The Securities and Exchange Commission had already been investigating Adelphia's accounting practices.
Adelphia said federal grand juries from the Southern District of New York and the Middle District of Pennsylvania were investigating certain matters related to the company. Adelphia said it would cooperate with the probes.
Last Wednesday, John Rigas resigned, saying Adelphia needed new management. Although Rigas will retain his seat on the board of directors and become chairman emeritus of Adelphia, he will be replaced as chairman by Erland Kailbourne, a board member and former chairman of the New York Region of Fleet National Bank.
Executive vice president and chief financial officer Tim Rigas resigned on Thursday. Tim Rigas also will remain on the company's board of directors, although sources speculate that he and John Rigas will shortly resign those posts as well.
Some observers wondered how long John Rigas's other sons — executive vice president of operations Mike Rigas and executive vice president of strategic operations James Rigas — would remain with the company. At press time, both Mike and James Rigas still held their positions with the company, as well as their board seats.
As CFO, Tim was known as an aggressive acquirer of systems, unafraid to use sometimes risky debt deals to finance growth. But as he piled on the debt to boost Adelphia's subscriber base, he was taking on loans — backed by the MSO — to help finance family stock purchases.
The flurry of bad news emanating from tiny Coudersport, Pa., Adelphia's home base, forced many analysts to assume the worst.
REPORTS: SUBS MOVED
While the company itself has remained mum, save for several terse press releases issued last week, published reports of possible malfeasance regarding the movement of subscribers from one part of the company to another to juggle cash flow — and obtain loans — could be the last straw for Adelphia, some observers said.
"If that's true, that's really, really bad," said one industry executive who asked not to be named.
Many observers who said bankruptcy for Adelphia was a long shot two weeks ago aren't saying that anymore. And if Adelphia is delisted from the NASDAQ exchange — a possibility, since it missed a May 16 deadline to file its already delayed 10-K annual report — that could allow convertible bond holders to force Adelphia to pay them $1.4 billion, making a bankruptcy more likely.
Adelphia acknowledged its officials met with NASDAQ officials on May 16 and said the exchange issued no decision. The MSO said it expects to hear a decision from the exchange in the near future.
In the same prepared statement on Friday, Adelphia confirmed it missed a $23.4 million interest payment on its 9.38 percent senior notes due 2009, and a $6.5 million dividend payment on its 7.5 percent convertible preferred stock.
In addition, Adelphia subsidiaries Olympus Communications L.P., Olympus Capital Corp. and Arahova Communications Inc. failed to make combined interest payments of $14.8 million.
The company said it did make certain interest payments on its bank credit facilities, totaling $4.8 million.
"The company decided not to make these payments on outstanding bonds and preferred shares, because we are now pursuing a thorough evaluation of Adelphia's business objectives and financial requirements," Adelphia said in a statement.
Merrill Lynch & Co. high-yield cable analyst Oren Cohen said that while a bankruptcy seems more likely for Adelphia than ever before, he still believes there is a way out for the MSO.
"It looks like it [bankruptcy] will happen, but I don't think it's obvious either way," Cohen said. "People are getting confused with the convertible note holders. This is all up to the banks."
The convertible bondholders have the right to put their shares back to Adelphia for cash, in the event of a delisting. But Cohen thinks it is unlikely that they would do that.
"It would be stupid for them [convertible bondholders] to force Adelphia into bankruptcy," Cohen said. "They don't get anything, They have the power to do it, but they are too junior. In a bankruptcy, they're at the bottom of the food chain."
Instead, Cohen said Adelphia's future hinges on its lenders, who he said still want to find a way to keep the operator out of bankruptcy.
"If they see a path outside of bankruptcy, they'll take it," Cohen said.
BANKERS ARE MAD
But banks would be high on the list of creditors to be paid back first. And actions taken by Adelphia executives have helped deteriorate the company's standing with the banks, according to several sources.
Sources said Tim Rigas met with Adelphia's lenders last Monday, informing them that all was well and that the company intended to file its 10-K annual report by the May 16 deadline.
Two days after that meeting, John Rigas resigned; the company suspended its audit; and it announced that it had hired Boies to look into certain issues regarding that audit.
Whether Tim Rigas believed what he told those bankers May 13 or not, sources said the banks felt deceived.
"When the banks have had it with you, you're done for," said one industry observer who asked not to be named.
Adelphia's problems stem from $2.3 billion in off-balance sheet debt for which the MSO could be liable. What upset most investors about the loans is that the Rigas family used some of the money to buy Adelphia stock.
While Adelphia failed to explain which assets in the Highland Holdings Inc. partnership would support the debt, Adelphia's share price began to plummet.
The stock — in which trading was halted May 15, after John Rigas announced his resignation — has dropped more than 70 percent since March 27, the day Adelphia revealed the off-balance sheet partnerships.
Most observers saw John Rigas's resignation as a largely symbolic gesture. It does nothing to shed any light on the murky off-balance sheet partnerships that started Adelphia's rapid decline just two months ago.
In a prepared statement, Rigas said his decision was made because of his belief that Adelphia needed "fresh, independent leadership."
But most observers said that isn't Adelphia's biggest problem. Providing detail concerning its off-balance sheet partnerships is.
"No disrespect to John, but his resignation is pretty much a status-quo situation," said one analyst who asked not to be named. "There is still a fair amount of information lacking. All other things are peripheral."
What at first appeared to be a simple case of detailing the assets contained in a family partnership has turned into a quagmire of questionable accounting practices.
GOLF COURSE CITED
In addition to loans made to the Rigases to buy stock, a report in The Wall Street Journal
last week said company auditors are examining whether Adelphia issued loans of more than $1 million to senior executives, and whether it had funded a family-built golf course — The Golf Club at Wending Creek Farms, in Coudersport.
Adelphia's auditors, Deloitte & Touche, are also looking into an agreement through which Adelphia may have paid millions of dollars for timber rights to land owned by the Rigases, the Journal
Some industry executives wondered if these other revelations were the main reason Adelphia hired Boies — a top Washington lawyer known for heading the federal government's attempt to break up Microsoft Corp., and for representing former Vice President Al Gore in litigation related to the disputed 2000 presidential election.
"Boies is a litigator," said one industry executive who asked not to be named. "What else would you hire him for?"
Some sources familiar with the situation speculated that Deloitte & Touche, worried about retaining other cable clients — it's the auditor for both Comcast Corp. and Cox Communications Inc. — was reluctant to sign off on the 10-K without more information, whereas Adelphia is insisting it has provided all that is needed.
"Deloitte is trying to save its own skin," said one MSO executive who asked not to be named.
All in all, it looks to be a sad ending for Adelphia and for John Rigas, who built a cable company from scratch a half-century ago.
Adelphia has fostered the homespun, rags-to-riches story of its co-founder for years, spreading the tale of how John Rigas started his first cable system with $300 from an overdrawn bank account in tiny Coudersport. Along with his sons, he built his firm into the sixth-largest MSO in the country, with 5.8 million subscribers.
Adelphia was late to the cable consolidation game in the late 1990s, but began aggressively buying systems in 1999, eventually more than doubling in size.
Despite that rapid growth, most industry observers had expected Adelphia to sell out during the consolidation wave, something the Rigas family has vehemently resisted.
Cable operators, while not wanting to comment directly about Adelphia's woes, expressed sympathy for John Rigas, one of the last remaining pioneers in the industry.
"The industry has in John a great pioneer and an active participant," said Insight Communications Co. president Michael Willner. "To the extent that he is not going to be involved in industry affairs, he will be sorely missed."
Mediacom Communications Corp. chairman and CEO Rocco Commisso remarked that Rigas's resignation was a sad milestone.
"It's painful," Commisso said. "The man devoted his entire life to an industry. He's been a hero figure for many of us. It's just sad."
Former Charter Communications Inc. CEO Jerry Kent — now a partner in Cequel III, a St. Louis investment firm — echoed Commisso's comments.
"I'm in a state of shock," Kent said. "It's a sad way to end John Rigas's run in the cable industry. I'm just devastated."
Cox Communications Inc. president Jim Robbins, through a spokesperson, said, "I'm deeply saddened. John Rigas is a true industry pioneer. He will remain a great friend."
TOW TAKES ACTION
At least one former cable executive — who is also a large Adelphia shareholder — has taken a harder stance. Citizens Communications Co. chairman Leonard Tow, who launched an effort to unseat the Rigas clan from Adelphia's board of directors, is continuing those efforts.
Last Monday, Tow said he was exercising a contractual right to name three members to Adelphia's board — himself, Citizens vice chairman Scott Schneider and Citizens president and COO Rudy Graf.
On Wednesday, after John Rigas resigned, Tow sent a letter to Kailbourne expressing disappointment with the new chairman's indication that Tow's proposal would not be a top priority.
Tow, his wife Claire and various family trusts own about 12 percent of Adelphia's outstanding shares. Since the end of March, Tow's holdings in Adelphia have lost 70 percent of their value. He received those shares after selling Century Communications Corp. to Adelphia in 1999, for $5.2 billion in Adelphia stock and assumed debt.
While Tow acknowledged in his May 15 letter that Adelphia has more pressing issues at this time, he stressed that his proposal is a key component of restoring credibility in the Coudersport, Pa.-based MSO.
"Again, I must say that I was extremely disappointed by our conversation, and ask that you contact me immediately to work out the details of seating Scott Schneider, Rudy Graf and myself on the board," Tow wrote. "If we do not hear from you by 5 p.m. (Eastern time) on Friday, May 17, 2002, we will assume that Adelphia and the Rigas family will not comply with their contractual obligations and we will pursue all appropriate remedies."
Just what those remedies are remain to be seen. Tow and Adelphia officials could not be reached for comment.
SCHNEIDER SPEAKS OUT
Earlier on Wednesday, Schneider — Century's former chief financial officer — downplayed the significance of Rigas' resignation on a conference call with analysts discussing Citizens' first quarter results.
"Mr. Rigas's resignation does nothing to resolve the conflicts of interest between Adelphia's board and the company's shareholders," Schneider said on the call. "Mr. Rigas is retaining his seat on the company's board, and the board is still controlled by the Rigas family.
"In our view, the conflicts still exist, which are a clear obstruction to the company moving forward."
Schneider also expressed concern with the lack of information Adelphia has provided shareholders.
"Our goal remains to restore Adelphia's credibility, to participate in the stabilization of the company financially, and to maximize the value of our investment," Schneider said.