Buying Adelphia Was the Easy Part

Apr 11, 2005  •  Post A Comment

For Time Warner Inc., the easy part may have been its win in the closely watched race for Adelphia Communications.

With the bankrupt cable operator last week having accepted in principle Time Warner and Comcast Corp.’s joint $17.6 billion cash and stock bid, attention now shifts to the challenge Time Warner’s cable unit faces in integrating the Adelphia cable assets.

The first order of business will likely be Time Warner and Comcast settling on which cable systems in the newly combined entity will be handed to Comcast in exchange for Comcast’s 21 percent stake in Time Warner Cable. That remains an open question, though most analysts believe they will include 2 million to 2.5 million subscribers in areas where Comcast already has a presence, including Southern Florida and Colorado Springs, Colo.

A considerably more complicated issue could be sorting out the fate of cable systems owned by Adelphia’s founding Rigas family. Those systems have around 225,000 subscribers and are located near Los Angeles, near Atlanta and in Coudersport, Pa. Adelphia has managed the Rigas-owned systems for years and had hopes of including them in any deal struck to sell the entire company. However, the Department of Justice has moved to seize the systems to pay fines associated with the company’s role in an accounting scandal that pushed Adelphia into bankruptcy in 2002. Further, it’s unclear whether members of the Rigas family will willingly relinquish control of those systems.

Another nagging issue could be the payment of creditors. Already tussles have begun among Adelphia’s credit holders over who among them should be paid first. Because of the complexities involved in Adelphia’s finances, who gets paid, when they get paid and how much they are paid could be significant sticking points.

Aside from those potential land mines, the completion of the deal is far from certain. Sources familiar with the matter said Friday that the companies were still perhaps a week to 10 days away from being able to officially announce that an agreement had been reached.

That leaves the possibility of sweetened offers from either Cablevision Systems or the investment team of Kohlberg Kravis Roberts & Co. and Providence Equity Partners, which presently have on the table bids worth $16.5 billion and $15 billion, respectively. However, sources familiar with the matter said Cablevision’s offer amounted to a one-page letter that mapped out in broad strokes its offer but was short on specifics.

That said, most analysts are still betting that the Time Warner-Comcast bid will emerge the winner. Although final terms and a full agreement have yet to be reached, the two cable giants tweaked their original offer to placate Adelphia credit holders worried that the stock portion of the deal might fall below a certain price.

While the Time Warner-Comcast bid did not provide a price guarantee, the offer was adjusted to provide creditors with more shares in the new company. As things stood last week, Time Warner and Comcast together will put up a total of $12 billion in cash and more than $5.6 billion in stock that would be issued by a new company created by the combination of Time Warner Cable and Adelphia.

According to estimates from Credit Suisse First Boston, the new cable company would be 81 percent controlled by Time Warner, while Adelphia’s creditors would own the remaining 19 percent. What is unclear, however, is whether the new company would be publicly traded.

Spokespeople for Adelphia, Cablevision, Comcast and Time Warner declined to comment.

Though the Time Warner-Comcast bid had been seen as the likely winner in the race for Adelphia, things took a strange twist early last week when Cablevision submitted a $16.5 billion all-cash bid. Though Cablevision had been rumored to be preparing to throw in with KKR’s offer, the company surprised Wall Street by supplying its own offer.

Most analysts largely dismissed the bid, noting that Cablevision lacks the synergy opportunities that the Time Warner-Comcast bid provides. Cablevision’s systems are located mostly in the New York area, while Comcast and Time Warner each own systems near markets where Adelphia does business. Many analysts think it’s unlikely Cablevision will try to increase its bid.

Meanwhile, Time Warner, which was lead player in the Time Warner-Comcast offer, has made it clear that it wants to increase its subscriber base from the present level of 10.9 million customers in an attempt to squeeze out more of the types of savings that come with size, particularly in terms of paying lower fees for programming. In addition, a desire by both Time Warner Cable and Comcast to unwind Comcast’s stake in Time Warner Cable is seen as a major driver in getting the deal with Adelphia completed. n