Adelphia Communications Corp.'s talks with potential CEO William Schleyer snagged last week, after details of a hefty compensation proposal for him and his prospective No. 2 appeared in print.
Schleyer, most recently CEO of AT&T Broadband, has been talking with Adelphia's board of directors since November about becoming the new chief of the troubled Coudersport, Pa.-based MSO. Longtime Schleyer lieutenant Ron Cooper is also in talks to join Adelphia.
Adelphia planned to announce the hirings last week, but things changed after details of a two-year, potential $64 million compensation package for the two men appeared in The New York Times
"The much-publicized draft agreement is not going to happen," said a source close to the negotiations. "Changes are being made. It's a little fluid right now, but I don't expect this to be a several-hours process. This is more like a several-days process."
According to the Times, Schleyer was to receive a $3.6 million signing bonus, $900,000 in annual salary and a non-guaranteed annual performance bonus of up to another $900,000.
Above that, the proposal provided potentially huge "success-based" compensation to Schleyer: 0.9 percent of any valuation of Adelphia above $10.3 billion, limited to $33 million.
Cooper stood to receive a $2.4 million signing bonus, $600,000 in annual salary and another $600,000 annual performance bonus, plus success-based compensation of 0.6 percent of any Adelphia valuation above $10.3 billion, capped out at $22 million.
Adelphia currently values itself at about $8.7 billion — including assets, debt and other securities — so Schleyer would have to increase the company's value by about 20 percent before the success bonuses kicked in.
Some industry observers found the $10.3 billion valuation a low hurdle, equaling about $1,800 for each of Adelphia's 5.7 million subscribers.
UBS Warburg cable debt and equity analyst Aryeh Bourkoff estimated Adelphia could be worth more than $2,000 per subscriber after its bankruptcy, or about $11.4 billion. At that level, Schleyer would reap a $8.1 million bonus.
For Schleyer to get the full value of the contract, Adelphia's value would have to rise to about $2,400 per subscriber, or about $13.9 billion.
The success-based compensation likely would be in the form of stock or options for Adelphia shares.
Still, several industry executives were troubled by the contract's size and relatively short duration.
"It's disgusting," said one MSO executive who asked not to be named.
At least one source attempted to justify the size of the deal. "Some people are overlooking the fact that the risk is being placed on these two executives and it's contingent on their ability to meet performance targets," said the source familiar with the matter, who also asked not to be named. "The bar has been set appropriately and it totally aligns their interests with those of Adelphia's shareholders."
Tow group sues
That line of reasoning did not appeal to Adelphia's official committee of equity security holders, which sued last Thursday to oust the MSO's board of directors.
The committee includes the five largest holders of Adelphia stock. Leading it is Citizens Communications Corp. chairman Leonard Tow — himself Adelphia's largest individual shareholder — and Blue River Capital LLC managing member Van Greenfield.
Tow has been a vocal opponent of Adelphia's board of directors. He even managed to win a seat on the board in May, but resigned after two weeks.
Tow amassed about 12 percent of Adelphia's outstanding stock after selling his Century Communications Corp. cable holdings to Adelphia in 1999, for about $5.2 billion in stock and assumed debt.
Tow's 27 million Adelphia shares — worth as much as $838 million on Jan. 9, 2002, when the stock was at $31.05 per share — are now worth about $3.2 million, based on Adelphia's share price of about 12 cents each.
"Shareholders are entitled to exercise their corporate-governance rights and elect a board of directors of their choice. This suit is solely to allow the proper exercising of these rights," Tow and Greenfield said in a joint statement.
Tow has been quiet for months. But sources say he became incensed when Adelphia's board began negotiations to hire Schleyer and Cooper.
Pay plans irked Tow
Those sources said Tow was especially angry when he learned of the lucrative compensation package Adelphia's board was planning to give the two executives, who became available when Comcast Corp. completed its merger with AT&T Broadband last month.
In its lawsuit, the shareholders' committee called the Schleyer package "unconscionable and severely prejudicial to the interest of [Adelphia] and its shareholders."
The committee also chastised the board for limiting its CEO search to Schleyer, claiming Adelphia "blithely conducted the search process in a way that excluded from practical consideration a large swath of highly qualified potential candidates."
Adelphia officials declined comment.
Norman Kinel, a partner in Sidley Austin Brown & Wood LLP, attorneys for the equity committee, said the compensation packages influenced the timing of the lawsuit.
"One of our concerns is that the compensation proposal we saw did not properly incent the CEO and COO to maximize the value [of the company]," Kinel said. "They were being rewarded handsomely for merely bringing the company out of bankruptcy."
Prepping for sale?
Several industry sources felt the compensation package's design and relatively short duration signal the company is leaning more toward an outright sale than a restructuring.
"This has got such a short fuse on it that they can come in and be caretakers for two years, and walk away with kind of a guaranteed return without being put to the test of making sure they've got viable, ongoing performance criteria that have to be met," one MSO executive said. "They're almost saying to the M&A market: 'Here's the price, $2,400 a sub.' It looked as though they were being paid for a turnaround, but the criteria really just required that they be caretakers."
Along with chairman Erland Kailbourne, Adelphia's directors are managing director of Mannesmann Dematic Systems Peter Metros, Caithness Corp. president Leslie Gelber, FPL Group general counsel Dennis Coyle, former Renaissance Cable vice chairman Rod Cornelius and Yale Law School Dean Anthony Kronman.
The shareholders' committee also wants the court to prevent a special committee of the company's current board from influencing the outcome of the election by voting Rigas family shares.
The Rigases, who had controlled about 20 percent of outstanding shares and held 60 percent of Adelphia's voting power, agreed to put those shares in a trust after they resigned in May.
Adelphia created a special committee of directors that would vote the Rigas shares, consisting of Kailbourne, Coyle and Gelber.
The lawsuit claims the three directors have been serving at the pleasure of the Rigases.