Will Adelphia Find Many Bidders?


By Steve Rosenbush Last winter, the debt holders of scandal-scarred cable TV operator Adelphia Communications (ADELQ.PK) blocked the company's plan to emerge from bankruptcy and resume life as an independent entity. Convinced that the outfit's pieces were worth more than the $17 billion whole the bankruptcy plan had envisioned, Blackstone Group and other investors forced an auction of Adelphia's far-flung systems.

After months of delay, the auction is moving ahead. It took the company's chief executive, former MediaOne President William Schleyer, until July to find suitable investment advisers that weren't already tied to the sprawling, complex case. He selected UBS and Allen & Co. Assuming that the bankruptcy court approves the choice of advisors, the company said Aug. 6 that it will "commence the process of the sale of the company shortly after Labor Day, with the objective of finalizing the auction by yearend."

GEOGRAPHIC SPREAD. However, it's now uncertain whether the company will be able to realize the $17 billion envisioned in the original restructuring plan, let alone the $20 billion to $21 billion that some investors at one time believed the company was worth. If the auction bids aren't sufficiently exciting for investors, management may ultimately win the battle and restructure Adelphia as an independent concern.

"Our goal is to maximize the value of the company. We're looking at doing that two ways: Either through the sale of the company or as an independent company as proposed in the original restructuring plan," Adelphia spokesman Paul Jacobson says.

It's one more sign of the damage wrought by founder John Rigas. He and his son Timothy were convicted in a fraud and conspiracy case, triggered by the discovery in 2002 that Adelphia had $2.3 billion in debt that Wall Street didn't know about. A case against son Michael has ended in mistrial. The company's shares, which peaked at $32 in 2002, are now trading for around 35 cents. The company's market cap has plummeted from $8 billion to about $75 million.

Adelphia does have some attractive cable assets. The nation's fifth-largest cable operator, Adelphia's key property is in Los Angeles, where it covers about one third of the market. Adelphia also has systems in Florida, Ohio, and its native Pennsylvania.

BAD TIMING. The Los Angeles property is likely to draw the most interest. Possible buyers include Time Warner (TWX) and Comcast (CMCSA), both of which have a presence in the market. By acquiring more systems in Los Angles, either company would get more bang for its advertising dollars.

The rest of the auction might not be that competitive, which means it will be difficult to obtain a strong price. Comcast is regarded as a likely acquirer of the Florida systems, and Time Warner is considered the most likely acquirer of systems in Buffalo, Western Pennsylvania, and Ohio. Those properties could be used to expand Time Warner's existing presence in the Northeast and Midwest.

The timing of the auction could depress prices, too. When the restructuring plan was announced early in 2004, the stock market was still performing strongly. But share prices have fallen, and cable has been particularly hard hit.

UNDERVALUED SECTOR? Overall weakness in the stock market has been compounded by rising pressure from satellite TV operators that are stealing cable customers. With marketing support from local phone companies, satellite is gaining market share. And the telecom companies are talking seriously about upgrading their networks so they can offer video directly to consumers, making the pay TV market even more competitive. One media executive says Adelphia is likely to be valued at about $3,200 to $3,300 per subscriber, which is substantially less than the peak set in the late '90s, when some cable companies were valued at more than $5,000 per subscriber.

However, some analysts still believe the sector is undervalued. The bulls think the loss of TV subscribers will be made up in the broadband and phone markets, where cable has an edge over satellite. They note that privately held Cox Enterprises voiced confidence in the sector Aug. 2, when it offered to take its publicly owned cable TV unit, Cox Communications (COX), private (see BW Online, 8/03/04, "Cox's Big Bet on Itself").

But the turnaround in cable prices is still probably a good way off, if it comes at all. That means the tone of the market isn't going to be too rah-rah as the auction gets under way in September. Rosenbush is a writer for BusinessWeek Online in New York


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