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Breaking Up Is Hard To Do

Adelphia aims to avoid auction leftovers 9/26/2004 08:00:00 PM Eastern

Any bidder trying to cherry-pick the best cable systems from Adelphia Communications Corp.'s auction may get stuck with the pits. That's what potential buyers are facing as they prepare for the sale of the nation's fifth-largest cable system in what is shaping up to be the biggest, most complicated auction of the year.

Adelphia executives revealed to buyers how they're chopping up their systems for the auction block, liquidating in order to finalize the company's long trip through Chapter 11. The properties serving 5 million subscribers are being divided into seven packages ranging from 500,000 to 1.3 million subscribers each.

One goal is to make the packages relatively bite-size to attract a flurry of financial buyers. With system assets worth $15 billion to $18 billion, Adelphia is considered too big for all but a few cable companies. Still, there are many buyout firms capable of handling one or more $1.5 billion to $4 billion chunks.

"The key factor in a successful sales process is having as many bidders as possible," says Adelphia Chairman Bill Schleyer. "That is what will drive price."

But another goal is to prevent buyers from merely cherry-picking the best markets, such as South Florida and Los Angeles, leaving Adelphia with low bids for its many small-town and rural properties. Otherwise, Adelphia might be stuck with the least attractive systems in an industry where scale is needed to generate efficiencies. So an Adelphia bidder interested in a sizeable market like Pittsburgh will now have to buy smaller systems scattered across the Western Pennsylvania mountain, too.

"If you want West Palm Beach, you get stuck with little systems in Alabama," complains an investment banker.

Buyers are chuckling about one purported "cluster" that stretches from Virginia and Maryland, out to Kentucky, and finally to Colorado Springs, Colo.. "Who would want that?" asks an executive with one private-equity firm interested in bidding.

One answer is Comcast, which has systems in all those areas. Adelphia's investment bankers—UBS and Allen & Co.—have clearly tailored the packages to fit the existing portfolios of big operators. Cox Communications, for example, has a big presence in Southern California and Tulsa, Okla.; Adelphia's lucrative 1.2 million Los Angeles operation is paired with much smaller Oklahoma systems. Time Warner is the bidder to beat, as it openly covets several properties on the block

Unfortunately, Adelphia has more than $20 billion debt. In a weak market for cable systems, any sale is unlikely to repay all creditors.

At least 20 companies have signed a confidentiality agreement that lets them receive data on Adelphia's operations, although not all will actually bid.

Adelphia executives initially wanted a simpler auction, offering the company in one piece, which would limit tax issues, among other things. Some creditors claimed that Schleyer and COO Ron Cooper were motivated to make such an auction fail and escort the company out of Chapter 11. The executives would get bigger payouts than if the company were liquidated. The executives have denied that's a motive.

Cox forced everyone's hand. First, the cable operator declared it had no interest in buying all of Adelphia. Then, in August, its largest shareholder, the Cox family, announced it wanted to spend $7 billion buying out public shareholders and take the company private. That guaranteed that Cox wouldn't be a bidder.

"Cox going private changes everything," says one financial executive involved in the sale. "You needed Cox, Comcast and Time Warner going at each other to get a big price."

If the bidding is completed in October as expected, Adelphia could spend weeks evaluating the offers. After the bids are submitted, different groups of lenders and bondholders—which have varying agendas—will have to agree on a final sale plan.

Schleyer is prepared for the headache. "The message we want to get out is that it's a very complicated process but it's a very orderly process," he says. "Right now, we want to maximize the number of bidders."

Adelphia Breaks It Down
Here's how the operator plans to carve up its systems for auction
Cluster Subs Characteristics
Source: Legg Mason; Broadcasting & Cable estimates
California/Western 1.3M Most of Los Angeles; systems in Oklahoma and Washington
Va./Md./Ky./Colorado Springs, Colo. 1M Toughest sell, all over the place
Florida/Southeast 600K West Palm Beach comprises half the subs
Cleveland/Greater Ohio Valley 600K Parts of Cleveland, Columbus plus smaller towns
Pennsylvania 500K Pittsburgh is 35%-40% of subs; lots of smaller rural Western Pa. systems
Western New York/Connecticut 600K Primarily Buffalo, N.Y.
Northern New England/Eastern New York 600K Includes all of Vermont