For Sale: 2.75M Subs

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Adelphia Communications Corp. has publicly identified the properties it will offer for sale to help pare down its debt, and they include systems in some of the operator's largest markets.

In a press release issued late on May 8, Adelphia said its board of directors has authorized the company's financial advisers to shop its systems in Los Angeles (1.2 million subscribers); Florida (750,000 subscribers); Virginia (575,000 subscribers); and in the Carolinas and Georgia (225,000 subscribers).

In total, Adelphia will offer up systems with 2.75 million customers, or nearly half of its base of 5.8 million subscribers. That would bring the company back almost to where it was in 1999 — just prior to an $8 billion, 2.7 million-customer acquisition binge during which it acquired the likes of Century Communications Inc., FrontierVision Partners L.P. and Harron Communications Corp.

According to sources familiar with the matter, Adelphia only wants to sell about 2 million subscribers. By selling those subs, though, the Coudersport, Pa.-based MSO would shed 35 percent of its customer base and leave itself largely in midsized and rural markets.

Once its prized Los Angeles operation — which it acquired mostly from Century in 2000 — and the rest are gone, Adelphia's largest systems would be in Cleveland (336,000 customers) and Buffalo (177,000 customers).

Adelphia would remain the No. 6 MSO after the sales, but it would be a lot closer to No. 7, Cablevision Systems Corp., which has 3 million subscribers in a single market, the New York City metropolitan area.

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Adelphia's financial advisers — Salomon Smith Barney Inc., Credit Suisse First Boston, Banc of America Securities LLC and Daniels & Associates — are expected to release more detailed financial information on the systems this week (May 13).

Given their size and locations, the properties are expected to attract a large amount of interest. The Los Angeles systems are likely to draw the most attention.

Among those most likely to bid on the Los Angeles properties include AOL Time Warner Inc., Charter Communications Inc. and Cox Communications Inc.

Cox could also be a bidder in Virginia, where it has large clusters in Fairfax and Hampton Roads.

AOL Time Warner, which has large properties in Tampa and St. Petersburg, Fla., is also expected to be a bidder for Adelphia's Florida systems.

Cox also has properties near Los Angeles, in San Diego and Orange County, Calif. AOL Time Warner also has about 150,000 subscribers in the Los Angeles suburbs.

AT&T Broadband — which also has a large cluster in the Los Angeles area — is not expected to bid, mainly because it's busy with its own merger with Comcast Corp.

None of the MSOs in question would comment on Adelphia, but each said that they are always open to strategic acquisitions located near their existing clusters.

Charter was expected to be the early front-runner for the Los Angeles systems, but may have to work out a deal in which its chairman, Microsoft Corp. co-founder Paul Allen, buys the systems personally, and has Charter manage them.

Already one of the most-leveraged MSOs in the industry, Charter is reluctant to increase its debt.

At a CEO tour of the National Show exhibit floor in New Orleans last week, CEO Carl Vogel said Charter has many options to finance a deal — if it believes the transaction is a strategic move that makes sense. He would not comment specifically on Adelphia.

RANGE: $7B TO $13.2B

While it came as no surprise which systems Adelphia would sell — in April, it had announced that it had hired four financial advisers to look into its alternatives, including asset sales — just what Adelphia can get for those systems is another question.

The systems on the block are in major markets and could attract top prices. But the fact that Adelphia is most likely looking for a cash deal to pay down debt — and that it's under pressure to do a deal soon — could drive down the price.

According to sources, valuations for the properties run the gamut. Some observers place a $4,800 per subscriber price tag on the systems, while others value them as low as $2,600 per customer.

At those prices, Adelphia could raise between $7 billion and $13.2 billion for the assets.

In a research report, UBS Warburg LLC high-yield cable analyst Aryeh Bourkoff estimated that the systems would attract a price of about $2,560 per subscriber, or about 10 times the fourth quarter run-rate cash flow of $256 per subscriber. At that price, the systems could fetch a total of about $7 billion.

That would reduce Adelphia's overall debt to about 9.7 times 2002 estimated cash flow, he estimated.

At 11 times to 13 times run-rate cash flow, the price rises to between $2,800 and $3,300 per subscriber, thus raising between $9 billion and $11 billion in cash. That would reduce Adelphia's debt-to-cash flow ratio to between 8.8 times and 7.1 times cash flow.

Whatever the final valuation, there is expected to be competition for the systems, as evidenced by Adelphia's press release disclosing the properties to be sold.

"Based on the many informal expressions of interest we have received in recent weeks, as well as the high quality of our cable operations, I am confident that the steps we are taking will enable us to achieve our objectives of reducing debt, deleveraging our balance sheet and creating a stronger Adelphia," chairman John Rigas said in a prepared statement.

But paring down the debt may not be enough to get Adelphia out of Wall Street's doghouse.

Since the company revealed that it had $2.3 billion in off-balance sheet debt — a ledger item that could be as high as $2.7 billion, according to some analyst estimates — Adelphia management has lost much of its credibility with investors.

Even if the Rigas family believes it can ride out the storm once the debt is repaid, several observers said it would be nearly impossible for the company to raise capital in the public or private markets. An inability to raise capital can be a critical blow for a cable company.

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