Sell Adelphia? Maybe Not

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Handicapping who might buy Adelphia Communications Corp.’s cable assets got trickier at last week’s National Show, with executives at top MSOs downplaying their interest and analysts discouraging them altogether.

Adelphia said on April 22 it would explore a sale of the company in conjunction with its plan to emerge from Chapter 11 bankruptcy intact.

Adelphia would be expected to fetch a price of $17 billion to $20 billion.

Possible suitors for the assets — which have about 5.4 million subscribers in 31 states and Puerto Rico — include Time Warner Cable, Comcast Corp., Cox Communications Inc., and Liberty Media Corp.

SEEKING ADVISERS

A spokesman said last week that Adelphia was interviewing investment bankers to oversee the sale, a move that would essentially start the auction process for the company.

“We’re interviewing banks right now,” said corporate communications vice president Paul Jacobson. “We have not made a decision. It’s probably a matter of not days or months, but weeks [before Adelphia makes a decision].”

Jacobson would not identify the banks Adelphia is talking to, but said they include Lazard Frères & Co. LLC, the investment bank that helped create Adelphia’s reorganization plan.

“We’re not ruling out Lazard,” Jacobson said. “They are obviously familiar with us.”

Hiring an investment banker is important because whoever is chosen would run the sale process for Adelphia, serving as a focal point for bids.

Jacobson said the hiring — which would have to be approved by the bankruptcy court — is not a signal that Adelphia is leaning more toward a sale than an emergence from bankruptcy.

“It’s purely mechanical,” he said. “It’s no different than hiring a real estate agent when you’re trying to sell your house.”

PUBLIC DISINTEREST

But while the National Show was abuzz with who would ultimately bid for Adelphia, executives at the top MSOs were still downplaying their interest —at least in public.

Time Warner Inc. chairman Dick Parsons restated a desire for more cable assets, but at a low price.

Comcast Corp. CEO Brian Roberts skirted the Adelphia question, focusing more on the promise of new services.

Other MSO executives, like Parsons, downplayed the need for increased scale.

At a press conference, Roberts said it was still too early to tell what will happen with Adelphia.

“What we’ve said is we like the core cable business,” Roberts said. “We don’t need to get bigger, we can afford to be disciplined in any acquisition. Certainly that is the case in cable.

“There are a number of [Adelphia] properties that do fit us, I think that’s probably true for a number of cable companies. This is the beginning of the process.” (See related stories from the show, page 12.)

Speculation was running high last week that Time Warner could launch a bid by merging its Time Warner Cable assets into Adelphia, which is already publicly traded.

Time Warner had proposed an initial public offering of its cable assets last year, but scrapped that plan after announcing a Securities and Exchange Commission investigation into accounting practices at its America Online Internet-service provider unit.

By merging its cable unit into an existing public company, Time Warner takes those assets public without needing SEC approval.

An Adelphia purchase could also solve another problem for Time Warner: unwinding Comcast’s 21% interest in the cable assets.

Time Warner could swap some Adelphia systems for the interest, which would serve another purpose in that an exchange of assets of equal value minimizes the tax hit for both parties.

ROBERTS: 'THRILLED’

In a press conference last week after the opening general session of the National Show, Roberts said Comcast was “thrilled” with the Time Warner Cable investment and was in no rush to do a deal. Comcast has until November 2007 to dispose of the interest.

He appeared to be open to other ways to unwind Comcast’s interest other than an IPO of Time Warner Cable.

“There are more creative solutions to resolve the partnership than selling shares to the public,” Roberts said.

Parsons said the two companies continue to discuss their options, and he also didn’t feel pressed for time.

“Three years gives us the flexibility to be as creative and thoughtful to create value on both sides,” Parsons said.

Another possibility is a three-way deal between Cox, Liberty Media Corp. and Advance/Newhouse, in which Liberty would finance an Adelphia deal in return for Cox’s and Advance/Newhouse’s 25% stake in cable channel Discovery Communications Inc.

By giving up that stake — valued at between $3 billion and $4 billion — Cox would get the systems it wants, Advance/Newhouse — which owns about 2 million Bright House Networks subscribers, mostly in Florida — would get Adelphia systems in that state, and Liberty would own 100% of Discovery.

Cox has said in the past that it would swap its interest in Discovery for cash-flowing assets, a stance CEO Jim Robbins restated in a brief interview on the show floor last week.

Advance/Newhouse chairman Bob Miron declined to comment.

NO STREET LOVE

Wall Street wasn’t showing much love for a potential sale of Adelphia to another MSO last week.

At a panel last Tuesday at the National Show, one top analyst said the major MSOs should forget about an Adelphia bid all together.

“Nobody needs Adelphia,” said Bear Stearns & Co. media analyst Ray Katz. “Don’t pay up.”

Later, Katz said that paying a high price for Adelphia would virtually assure that the buyer’s stock would plummet.

“Adelphia could be dangerous,” Katz said. “It’s a complicated transaction. The Street is not going to like it.”

Katz said a big payout for Adelphia could result in the few institutional investors showing interest in cable losing that interest quickly.

“Portfolio managers are simple creatures — they have thousands of stocks to choose from and they are very sensitive to news flow,” Katz said. “If they [Adelphia] come out at a high price in a complicated transaction, your stock is going to go down.”

Charter Communications Inc. emerged as a possible bidder, after chairman Paul Allen said at the National Show’s opening general session last Monday that he would look to expand Charter’s cable footprint.

“There are obviously opportunities, whether it’s partnering or whatever options are out there,” Allen said. “I think that scale is something that all operators look at very seriously.”

CHECK FROM ALLEN?

Most analysts don’t believe Charter, which is saddled with $19 billion in debt, has the financial wherewithal for an Adelphia bid.

But Allen, with a personal net worth estimated at about $21 billion, could write a check himself.

At the closing session panel last Wednesday, Charter CEO Carl Vogel said Charter would evaluate all opportunities.

“We, like anybody else, will look at ways to improve our company,” Vogel said. “We’re focused on the assets we have today and if something presents itself, we would take a hard look at it. In terms of his [Allen’s] capacity to write a check, I learned a long time ago, don’t spend other people’s money. We will look at what opportunities present themselves.”

Allen has long expressed a desire to consolidate Los Angeles, where Charter has about 500,000 subscribers. Adding Adelphia’s estimated 850,000 customers in the Los Angeles area would go a long way toward doing that.

“We like our assets in L.A.,” Vogel said. “Paul has often said we would look to be a consolidator in L.A. But, I’m not so sure Adelphia doesn’t stay the way it is.”

Some have speculated Adelphia’s decision to put itself on the block is merely a ploy to get creditors off its back.

SIGNS SAY NO SALE

Several creditor groups have pressed for a sale for months, and by agreeing to investigate that route — albeit only as a whole company — Adelphia appeases those creditors while working toward emerging intact from bankruptcy.

According to one cable executive who asked not to be named, the simple fact that Adelphia won’t be broken up signals it won’t be sold at all.

According to the monthly financial reports Adelphia files with the bankruptcy court, the Denver-based MSO has generated about $259 million in cash flow in the first three months of the year, which works out to around $1 billion in cash flow on an annualized basis.

A rock-bottom valuation of the company puts it at $17 billion, or 17 times cash flow, multiples that the industry hasn’t seen in years.

The rest of the publicly traded MSOs are trading at between 8 times and 10 times annual cash flow.

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