Is Adelphia Communications Chairman John Rigas enforcing a contract or gripped by a bad case of buyer's remorse? That's the question in his company's fight over its deal to buy GS Communications cable systems for the highest per-subscriber price on record.
Adelphia has gone to court in Pennsylvania, arguing that Maryland newspaper publisher GS has failed to live up to the terms of the agreement by not upgrading plant to the extent promised. One thing Adelphia is asking in the lawsuit is a declaration that it is living up to its side of the deal but GS isn't, so that Adelphia doesn't have to set a closing date. However, the suit also asks to force GS to comply.
The fight has Wall Street executives wondering about Rigas' real goal. Some accept Adelphia's contention that GS simply isn't delivering as many subscribers and as much upgraded plant as promised. Others suspect that the Rigas family, which is under pressure from investors to curtail spending, may be looking for an excuse to walk away from a high price that doesn't make quite as much sense as it did when the deal market was hot.
At $740 million for 126,000 subscribers in Maryland, Virginia, West Virginia and Pennsylvania, GS is not a dramatic takeover except that Adelphia executives have tried to cloud the precise price, which turned out to be the highest-price per subscriber on record.
A copy of the purchase agreement shows that Adelphia agreed to pay $5,873 per subscriber. That's well above the previous record, the $5,400 per subscriber that Cox Communications paid in its $1.4 billion takeover of Media General Cable.
When Adelphia and GS signed the deal in May, the deal market and Adelphia's stock had tanked, rival bidders were scarce, and Rigas had agreed to pay in cash rather than stock. Along with other acquisitions and support of its ailing telephone subsidiary, stock and bond investors were hammering the company's securities because of all the demands on its cash. After the stock price fell from $60 to $20, Adelphia executives managed to double it by agreeing to curtail expansion.
Some Wall Street analysts see the GS suit as part of that trend. "I think they're trying to bust the deal," said one cable analyst.
One investment banker familiar with the dispute disagrees. "If you're going to deliver a house with three bedrooms," the executive said, "you better deliver a house with three bedrooms."
Three Adelphia executives did not return calls seeking comment. A GS lawyer would not discuss the case.
The deal was supposed to close Jan. 5. But in a complaint filed in state court in York County, Pa., Adelphia contends that executives of GS, a unit of Frederic, Md.-based Great Southern Printing, had assured it that they would continue improving the systems.
For example, 37% of the systems were supposed to be upgraded to 750 MHz, two-way capacity. But as of November, GS had reached only 27%. Further, the company was supposed to have extended the plant into new housing areas, adding about 100 miles of plant. But Adelphia contends that hasn't happened.
"They're short on anything you can think of," said one Wall Street analyst. "They're 5% to 10% short on subscribers, 5% to 10% short on revenues."
The case was moved last week to federal court in Harrisburg, Pa.