Founders May Be Ousted at Adelphia
With Adelphia Communications Corp. facing a potential cash crunch and an inquiry by the Securities and Exchange Commission, a group of major shareholders was preparing Wednesday to demand that the family that runs the nation’s sixth-largest cable TV company step down.
Sources close to the situation said the shareholder group is expected to approach the Rigas family by the end of the week with a proposal to remove them from day-to-day management. The outside investment group represents more than 50% of Adelphia’s equity shareholders, according to one member of the group.
The investors are worried that Adelphia will not have enough cash to pay debts that are due soon and will not be able to find banks willing to lend it more money.
It is unclear whether a shareholder group could unseat the Rigases, given the family’s control of Adelphia’s voting stock. Adelphia, which is based in Coudersport, Pa., is the largest cable operator in Southern California, with 1.3 million subscribers.
Adelphia’s stock has plunged 43% in the last week since investors learned the company had guaranteed $2.3 billion in loans, as of Dec. 31, to off-balance-sheet partnerships owned by the Rigas family. Adelphia already was one of the most leveraged cable companies, with $14.7 billion in consolidated debt.
The Rigases maintain that the partnerships were previously and properly disclosed and are backed by sufficient assets.
Yet investors are concerned that the Rigas family partnerships are not backed by enough collateral and that Adelphia’s public shareholders will be liable if the partnerships default. Investors believe the partnerships bought $1.8billion of Adelphia stock since 1998 at an average price of $41 a share. The stock now is worth about a fourth of that.
Adelphia closed at $11.04 on Wednesday, down 79 cents on Nasdaq, near its five-year low.
Concern about off-balance-sheet accounting practices has intensified since the Dec. 2 Chapter 11 bankruptcy filing of Enron Corp., which used private partnerships to shift debt off its books.
Adelphia confirmed Wednesday that the SEC was conducting an “informal inquiry” into the company’s accounting practices and had asked for clarification and documents related to these “co-borrowing arrangements” with the Rigas partnerships.
At the same time, analysts, investors and bond rating companies have calculated that Adelphia’s total off-balance-sheet debt could be as much as $3 billion because of stock purchases by the family since December.
Investors have grown frustrated by the company’s refusal to disclose what the Rigas partnerships bought with the money and what assets serve as collateral for the debt.
“The SEC inquiry ... is a red flag,” said Richard Siderman, analyst at Standard & Poor’s, which has put Adelphia’s debt rating under review.
On Monday, the company requested an extension from the SEC for filing its 2001 annual report so it could review its accounting practices.
Some analysts predict that in light of the Enron scandal, Adelphia’s auditor, Deloitte & Touche, will force the company to add at least some of the partnership debt to the public company’s balance sheet. In the worst-case scenario, analysts said, this could violate Adelphia’s bank agreements and put it into default.
Investment bankers were busy combing Adelphia’s financial statements for clients who might want to buy additional cable properties.
Adelphia could be forced to sell some or all of its assets to pay the debts. Some analysts estimate that Adelphia needs an additional $3billion over the next two years to continue operating and to cover various debts that are due.
However, this is not the best time to sell cable assets. Two of the biggest cable operators, Comcast Corp. and AT&T; Broadband, are in the midst of their own merger and are unlikely to take on another deal. And the second-biggest cable operator, AOL Time Warner Inc., is in the midst of restructuring with its cable partner.
Wall Street sources say Charter Communications Corp., the fourth-largest cable operator, controlled by computer billionaire Paul Allen, is eager to buy Adelphia’s Los Angeles system, which serves 500,000 customers.
Yet the Los Angeles operation is the pride of Adelphia founder John Rigas, who operated mostly in small and medium-sized communities before his $3.4-billion acquisition two years ago of Century Communications Corp. As part of that deal, Century founder Leonard Tow became Adelphia’s largest shareholder outside the Rigas family.
