Stocks Hit New Lows

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Investor concerns surrounding the off-balance sheet debt debacle at Adelphia Communications Corp. finally bled through to the rest of the cable sector last week, as stocks in five of the nine publicly traded MSOs hit new 52-week lows.

Adelphia led the pack with a decline of nearly 20 percent ($1.89), to close at $8.01 on April 11. Earlier in the day, the Coudersport, Pa.-based MSO hit a new 52-week low of $7.83.

Adelphia shares had dropped a total of 59.7 percent since March 27, when the company revealed that it could be responsible for $2.3 billion in off-balance-sheet debt.

Other cable stocks that hit low points included Comcast Corp., Cablevision Systems Corp., AOL Time Warner Inc. and AT&T Corp.

Comcast fell to $27.17 before rallying to close at $27.47, down 6.8 percent, or $2. Cablevision fell to $26 and closed at $26.35 (down $2.60); AOL dropped to $19 before winding up at $19.60 (down $1.10) and AT&T went as low as $13.19 and ended at $13.27 (down $1.15).

The rest of the sector was down as well, with Charter Communications Inc. down $1.05 per share to $9.41; Insight Communications Co. finishing down 73 cents apiece to $18.22; Mediacom Communications Corp. down 79 cents each to $11.96; and Cox Communications Inc. off 92 cents per share to $34.10.

"You've got three issues," SunTrust Robertson Humphrey cable analyst Gary Farber said. "You've got a situation with some soft video trends; you have a leverage issue, which has been heightened by the Adelphia situation; you've got some telecom sector related issues.

"The combination of those three things and an already-weak stock market is pretty much it."

Some investors apparently saw the falloff as a buying opportunity, and most of the stocks rose a bit early Friday.

Comcast and Cablevision each ticked up more than $1 in early trading Friday — to $28.57 and $27.40, respectively — while Adelphia slipped another 58 cents, to $7.43.

Cable stocks have been hit hard in 2002. Even before April 11, the MSO sector was down about 36 percent for the year, according to a report by Banc of America Securities LLC analyst Doug Shapiro.

In his report, Shapiro said there was room for further decline. But cable multiples were expected to level off, he added, dismissing fears that they could approach their all-time lows of six times cash flow — where they stood in the mid-1990s.

Farber pegged the sector at about 11.7 times 2002 estimated cash flow, which is about where the stocks traded in 1998. He also didn't foresee a return to six-times multiples.

'WSJ' PIECE WEIGHED IN

"The volume in the stocks isn't that heavy. There is just a lack of buyers," Farber said. "The supply is decent, but the demand is limited."

Leading to the sell-off was uncertainty surrounding off-balance sheet holdings by other cable MSOs, as highlighted in The Wall Street Journal's influential "Heard on the Street" column on April 11.

The article made specific note of off-balance sheet obligations by Cablevision Systems Corp. — including about $939 million in contractual commitments to purchase digital set-top boxes from Sony Corp. — and AOL Time Warner Inc., which has about $2 billion in off-balance sheet debt tied to a special-purpose entity.

Although investors have known about the Cablevision and AOL off-balance sheet commitments for months, the Journal
article seemed to validate their fears.

Analysts, though, downplayed concerns about those AOL and Cablevision situations.

Cablevision, for example, had committed in 1999 to buy nearly $1 billion worth of set-tops from Sony Corp. over several years — at a time when the MSO had planned to switch-out its entire installed base of analog set-tops.

Since then, Cablevision has scaled back those plans, and most observers believe the MSO will be able to renegotiate that contract.

Adding to the pressure is the continued uncertainty surrounding Adelphia, which was scheduled to release its 10-K annual report on April 15, after receiving a 15-day extension from the Securities and Exchange Commission.

According to sources, Adelphia has privately said it has every intention of filing the 10-K by the end of the day on April 15, but could not guarantee it would meet that timetable.

If Adelphia misses the April 15 deadline, it could lose its S-3 corporation status, which could make it more difficult to raise money in the public markets.

Generally, SEC spokesman John Heine said, companies that miss the deadline lose their S-3 status, although there is the opportunity for a waiver.

Adelphia is looking at other means of raising money. On April 4, it hired three investment bankers to look into possible systems sales to help pay down its debt. So far, though, no deals appear imminent.

Adelphia also faces opposition from irate shareholders, led by Gordon Crawford, who heads up the major Adelphia investor Capital Research & Management.

According to sources, Crawford has assembled shareholders with more than 50 percent of Adelphia stock — including Leonard Tow — to try to force Adelphia's ruling Rigas family out of the top management slots.

The plan, those sources said, is to oust the Rigas family and replace them with Tow, who sold his Century Communications Inc. to Adelphia in 1999 for $5.2 billion in cash, stock and assumed debt.

After the sale, Tow became the largest individual shareholder of Adelphia common stock, with 19 million shares, or 10.8 percent of all outstanding class-A common stock.

Tow had his own problems with Century: the company was criticized for poor customer service and antiquated systems. But he had planned an aggressive upgrade prior to selling out to Adelphia. And sources said Tow is the one available cable executive with intimate knowledge of many of Adelphia's cable properties.

"He [Tow] is the guy that is easiest to parachute in," said one source familiar with the situation. "He knows those systems."

PITCHING DIRECTORS

Last week, sources said that Crawford has made his pitch to at least three of Adelphia's four outside directors. The influential investment manager also has spoken to about 30 institutional investors about his plan.

Adelphia's outside directors are Dennis Coyle, general counsel and secretary of FPL Group Inc. and Florida Power & Light Co.; Pete Metros, managing director of Mannesman Dematic Systems; Erland Kailbourne, retired chairman and CEO of Fleet Bank's New York region; and Leslie Gelber, president and COO of Caithness Corp.

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