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Cable Operators

Climbing Out of The Abyss

11/21/2004 7:00 PM Eastern

To say it’s been a tough couple of years for Adelphia Communications Corp. is definitely an understatement. Its founders were found guilty of securities fraud. The company is currently operating under Chapter 11 bankruptcy protection. Adelphia’s creditors, unhappy with the proposed reorganization plan, forced a potential sale that could liquidate part or all of the MSO’s cable properties. And if that’s not enough, natural disasters — fires on the West Coast last year and hurricanes on the East Coast this year — have pummeled Adelphia’s operations, costing millions of dollars.

Despite all that, employee morale remains high. The company’s value has almost doubled in the last 18 months, and operations continue to improve. In fact, when asked, just about everybody says they are doing “just fine, thank you.” Most employees appear to be maintaining a good sense of humor and showing a strong sense of determination since the Securities & Exchange Commission determined the Rigas family, who founded Adelphia about 50 years ago, bilked the company out of $3 billion, forcing it into bankruptcy.

Adelphia Communications Corp.
(all numbers in millions)
Date Monthly Revenues Monthly EBITDA Basic Subs Digital Subs Data Subs
Jan. 2004 $313.4 $69.6 5.440 1.947 1.051
March 2004 $322.8 $72.3 5.415 1.955 1.143
June 2004 $326.8 $92.7 5.381 2.051 1.241
Sept. 2004 $327.2 $83.6 5.313 2.035 1.331
Source: Adelphia Communications

Without question, Adelphia is a completely different entity than it was 18 months ago. A whole new management team has been installed. The MSO had rebuilt about 75% of its plant by 2003, and has upgraded 96% of its plant to date. The company is paying its bills — on time. It has renegotiated most of its programming contracts, and is launching new products as fast as it can. It’s also rebuilding broken relationships with local franchise authorities after years of neglect.

“When we got here, Adelphia was a very centralized company run by a very small number of people, most of which shared the same last name and who were quite isolated,” says president and chief operating officer Ron Cooper. “The company was very dysfunctional. It lacked depth of management, focus or strategy. I am delighted with the team we have organized at both the national and regional level.”

When Cooper and CEO Bill Schleyer were hired in March 2003, they immediately set out to craft a new, decentralized organization. That meant hiring an entirely new management team. Only two regional executives, Lee Perron in Los Angeles and Bob Wahl in the Northeast, were retained as regional senior vice presidents. Jack Olson, senior vice president of media services, was the only holdover at corporate. Cooper and Schleyer hired the rest of the current management team.

“After coming on board last year,” Cooper says, “we moved the company to Denver to tap into the leadership talent we needed to make the company effective, and we decentralized operations. We reduced the number of regions, and we replaced a number of leaders in the field. We also built up the depth of talent in the field in areas of marketing, human resources, engineering and law and public policy. Working with this team has been one of the greatest pleasures about working here.”

That sentiment is echoed throughout the company. Schleyer says that the only complaint about his job is that he doesn’t get a chance to work with the team he and Cooper put together as much as he’d like. “We all show respect for one another both personally and professionally,” he says. “It’s not just a process. It’s the way we all are.

“Everyone here pulls like a team,” Schleyer adds. “Our goal was to bring in people who’d hold up their end of the bargain, and they’ve all done that despite the situation here. The people are the best part of my job.”

Cooper and Schleyer have divided the company’s tasks into two areas: the bankruptcy/sales process and operations. Cooper handles day-to-day operations, while Schleyer tackles the financial morass, including overseeing one of the largest corporate bankruptcies in the nation’s history, as well as a complex sales process that could result in part or all of the company being sold. Operations have improved, but Cooper and his top management team are quick to point out that the job is far from complete. It’s too soon to say how the sale will turn out.

“We were two years behind our peers in terms of upgrades when I came on board in March 2003,” says Marwan Fawaz, Adelphia’s chief technology officer. “We were also not technologically competitive in terms of product offerings. But once we got our debt financing in place we set out to change all that. We went from having about 75% of our plant upgraded in March 2003 to having it almost all upgraded today. We started launching new products, including video on demand, high-definition and digital video recorders, to customers in the summer of 2003.”

But before all that could happen, Fawaz had to beef up the company’s engineering team at both the field level and corporate level. Adelphia also had to prepare its local operations for the onslaught of construction and new-product launches that would ensue over the next year. It may not be ideal trailing your peers in technology — especially in the extremely competitive multichannel industry. However, because most of the other MSOs had completed their upgrades, there was a surplus of talent available to Adelphia.

“Engineers often live for challenges, and clearly Adelphia offered plenty of those,” Fawaz says. “Today, the majority of our network plant is 750 Megahertz or better, and much of it is 860 MHz.” Fawaz declined to say how much Adelphia has spent over the last 18 months to upgrade its network but he says it was typical of what other MSOs have spent to upgrade their plant.

Adelphia has also taken steps to improve sales and marketing efforts. The company reorganized its customer-care division to better handle call volume, which came in handy while Adelphia was upgrading its plant.

In areas where call volumes were high during construction, the company was able to shift overflow calls to other call centers. That process was crucial during a series of hurricanes that ripped Florida earlier this year, as Adelphia concentrated its efforts on the state, says Ellen Filipiak, senior vice president of customer care.

The MSO also created two specialized customer service centers that focus strictly on sales, allowing the other call-center reps to concentrate on troubleshooting, scheduling and billing questions. One sales facility, in Orlando, Fla., opened in March. It concentrates strictly on product sales. The other, in Coudersport, Pa., focuses on retaining customers who are considering defecting to the competition, downgrading or disconnecting.

“They are trained to probe customers and come up with the right package for them,” Filipiak says, in speaking of customer service reps in the sales centers. “Their ultimate goal is to retain customers.”

And to improve profitability. One of the first things the new management did was reconfigure the company’s digital packages and pricing. That meant price hikes in some markets. And Adelphia lost some customers as a result, Cooper admits.

Over time, the changes have become “established facts,” and the additional program services have helped improve customer satisfaction, subscriber retention and profitability. Cash-flow margins have improved to the mid to high 20s, over the low 20s when the new management came on board. But the company continues to lag the performance of its peers in those categories. Cooper hopes to improve the numbers further in 2005.

Adelphia is required to release some financial data to the bankruptcy court every month, but it hasn’t offered up quarterly reports since filing for Chapter 11 two years ago. As a result, the financial information available to the public is limited.

Still, it would appear Adelphia’s numbers are improving. The MSO reported a net loss of $35 million, or 14 cents a share, for the period ended Sept. 30. That’s down from a loss of $36.4 million, or 14 cents a share, for the month of August. Adelphia continues to lose basic customers, but the drops get smaller every month. In January, the company lost 29,636 customers. By March, the losses were down to 10,708 basic customers for the month. Losses dropped to 8,307 in September, bringing the total to slightly more than 5.3 million customers.

As it cuts losses, Adelphia is adding digital and high-speed data customers. In September, the MSO added 7,114 digital customers, giving it more than 2 million. And it added 42,302 new high-speed customers, to bring its total to more than 1.3 million. Total revenue generating units also rose between August and September by 41,109 to a total of about 8.7 million.

While Cooper concentrates on improving those numbers, Schleyer and chief financial officer Vanessa Wittman have been crafting a plan to emerge from bankruptcy. That involves satisfying testy creditors. The unsecured creditors committee balked last spring when Adelphia’s current board placed a value of $17 billion on the company’s assets post bankruptcy. They felt the company was worth more and demanded the company be put up for sale. That meant Adelphia has had to pursue a “dual path” plan — continue to emerge from bankruptcy as a standalone company, while placing a “for sale” sign out front at the same time.

The credit committee backed down earlier this month, agreeing to a bankruptcy emergence plan that would value the company at $17 billion after deducting payments to bank lenders and other senior creditors. But the sales process remains in mid-swing. Interested bidders are in the process of closely examining the company’s properties, and Schleyer says final bids are expected in January. It will likely take most of the first quarter to determine whether any of the offers are worth serious consideration.

Wittman, a bankruptcy expert who led broadband provider 360Networks Corp. out of bankruptcy a few years ago, has actually been spending most of her time lately on the proposed sale.

“This bidding process is much more complicated than normal partly because of the way the process was created and partly because of how many ways the company can be broken up,” Wittman says. “In an ideal world, if you’re selling a cable company, you’re not breaking it into pieces. It’s also not an ideal sales market right now. But we’re feeling good about the process and interest so far.”

More than 50 prospective bidders have signed confidentiality agreements to examine Adelphia’s operations, including Time Warner Inc. and Comcast Corp., which are expected to make a joint bid for all or part of Adelphia.

Earlier this month, a report in The New York Times claimed that three private equity firms — Thomas H. Lee Partners, Providence Equity Group and Kohlberg Kravis Roberts — were also mulling whether to team up on an Adelphia bid. While the Times said those discussions were in early stages and could break down, the article suggested that the group planned to keep Adelphia’s current management team on board. Adelphia has declined comment on the Times article.

But Adelphia’s board expects some slicing and dicing. The board is offering the company in seven clusters: Northern New England/Eastern New York; Cleveland/Greater Ohio Valley; Florida/Southeast; California; Virginia/Maryland/Colorado Springs/Kentucky; Pennsylvania; Western New York and Connecticut. Each cluster has about 750,000 customers, according to a company spokesman.

“There is no way we can make everyone happy no matter what happens in the end,” Wittman says. “A lot of people lost a lot of money. But things are much better today than they were two years ago. When [Schleyer and Cooper] took over, the company was trading at a value of around $10 billion. We’ve managed to double that value in 18 months. That hasn’t satisfied everyone, but we’ve come a long way.”

September