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Lucky 7?

9/26/2004 8:00 PM Eastern

Adelphia Communications Corp. unveiled its plan to sell off the company in pieces last week, identifying seven clusters ranging from 500,000 to 1.3 million subscribers that could be the cable industry’s last shot at acquiring quality systems.

The clusters are as follows: Northern New England/Eastern New York; Cleveland/Greater Ohio Valley; Florida/Southeast; California/Western; Virginia/Maryland/Colorado Springs/Kentucky; Pennsylvania; and Western New York and Connecticut.

The average size of the systems is about 650,000 subscribers, with California/Western being the largest, with 1.3 million customers.

While there are several small properties within the seven clusters, each has its fair share of affluent markets. For example, the Northern New England cluster includes Cape Cod and Martha’s Vineyard, Mass.; the Pennsylvania cluster includes the Pittsburgh suburbs; Western New York/Connecticut includes Buffalo and Waterbury, Conn.; and Virginia includes Charlottesville, home of the University of Virginia.

“Clearly, it’s a beachfront property,” Adelphia chairman and CEO Bill Schleyer said in an interview at the Manhattan offices of Adelphia’s bankruptcy attorneys Willkie, Farr & Gallagher, last Thursday afternoon. “It may be the only beachfront property left. I would expect the financial players and the people in this industry that want to participate — I would expect they would understand that. There is an awful lot of interest, but this is a lot of assets. I would expect to have a large number of people looking at this thing and try to figure out how they can participate.”

ALL SCENARIOS OPEN

Schleyer said there are several scenarios that could play out: selling the entire company; selling each individual cluster to different parties; scuttling the sale and emerging as a whole entity; or selling part of the company and emerging as a smaller company.

But Schleyer said it’s his duty to extract the maximum value for Adelphia’s constituents.

“Our fiduciary responsibility is to maximize the value of the estate,” Schleyer said. “I’m hoping to arrive at an answer to what is the value of this company, so when we file our plan, whether it’s a standalone plan or whether it’s a plan that includes a set of securities or cash from a buyer, that we know we have solved the valuation issue in the marketplace. That’s what I would like to do.

“Whether that means selling the company or not, that’s another issue. I really don’t have an opinion.”

Asked if he would be interested in running a downsized Adelphia if the latter scenario came to be, Schleyer declined to comment.

“That’s a question for another day,” Schleyer said. “That has nothing to do with my fiduciary responsibility.” The most hotly contested areas are expected to be California (including Los Angeles) and Florida (including Miami).

At least three major MSOs are expected to vie for the L.A. territory: Time Warner Cable, Comcast Corp. and Charter Communications Inc.

So far, more than 20 interested parties have signed confidentiality agreements to participate in the auction. While Adelphia would not reveal those parties, sources familiar with the bidding process said that smaller operators such as Bresnan Communications Inc. and Patriot Media & Communications have signed confidentiality agreements.

Missing from that list is Comcast — at least for the time being.

According to sources familiar with the matter, Comcast is weighing whether to make a bid to buy Adelphia entirely, or to form some kind of alliance with Time Warner Cable to buy the Denver-based MSO outright.

Once Comcast or anyone else signs the confidentiality agreement, they are not allowed to talk to other potential bidders.

EYE ON TIME WARNER

Time Warner has long been thought to be the most logical buyer for Adelphia. It could launch a bid by merging its cable assets into Adelphia, which is already publicly traded.

Time Warner Inc. had proposed an initial public offering of its cable assets last year, but scrapped that plan after announcing a Securities and Exchange Commission investigation into accounting practices at Internet-service provider unit America Online.

By merging its cable unit into an existing public company, Time Warner would take those assets public with no need for SEC approval.

A Time Warner Cable reverse merger would also solve several other problems for the nation’s No. 2 MSO. Comcast, which received a 21% interest in Time Warner Cable as part of the unwinding of the Time Warner Entertainment L.P. partnership, could receive Adelphia cable systems as payment for that interest.

Comcast also has a bargaining chip in that it already owns a 25% interest in Adelphia’s Los Angeles cable operation — through the Century TCI California partnership — and has matching rights to any offer to purchase that market.

Sources familiar with the situation said Comcast could surrender its Adelphia Los Angeles interest — and possibly its wholly owned 500,000 subscribers in the market — to Time Warner, in exchange for properties of equal value.

Sanford Bernstein & Co. cable analyst Craig Moffett believes most of the clusters were created with only one buyer in mind.

THREE FOR COMCAST?

Moffett said he expects that the Ohio cluster, Western New York and Connecticut and California will likely end up with Time Warner Cable.

Florida, Pennsylvania and New England will most likely be won by Comcast, although Charter may also express interest in the New England cluster.

The rest — Virginia/Maryland/Colorado Springs/Kentucky — could be split between smaller players, Moffett said.

$2B TO $5.2B BLOCKS

Just how much each of these clusters will attract still remains to be seen. But at the $4,000 per subscriber valuation that Adelphia placed on itself, systems could attract between $2 billion and $5.2 billion each.

Most analysts don’t expect the prices to be that high for all of the systems. In a research report, Oppenheimer & Co. cable analyst Tom Eagan estimated that the Los Angeles cluster would attract the most interest at $5.8 billion (about $4,300 per subscriber), while the rest of the properties would sell for between $3,200 and $3,850 per customer.

While Schleyer said that the idea of selling the company in several different pieces was made to attract the highest number of potential bidders and the highest prices, he added that $17 billion was not a minimum price. Although Adelphia did value itself at $17 billion in a reorganization plan field with the U.S. Bankruptcy Court in February, Schleyer said the ultimate price could be higher or lower.

Asked if the final selling price could be as low as $13 billion, Schleyer said it depends on the market.

“If the market for cable stocks recedes to a level of unimaginable proportions over the next six months, that $13 billion could look like a great bid,” Schleyer said. “Since we put the plan of reorganization out there, cable stocks have slid about 7%. If they were to slide another 20% or 30%, $13 billion might look good, particularly if it was cash.”

CRITICAL MASSES

Adelphia president and chief operating officer Ron Cooper said that the clusters were selected with the optimal return in mind.

“They were obviously established principally by geography, but they’re really designed to appeal to the broadest range of potential buyers, while trying to ensure that each cluster has the critical mass to operate on its own.” Cooper said. “We don’t want to be in a situation where there is a cluster that is left behind that doesn’t have sufficient scale to operate independently.

“Beyond that, the goal of the entire clustering strategy is to try to get the most competitive auction going and to get the best possible response from likely buyers.”

Heading up the Adelphia auction is media investment banker Allen & Co. and UBS Investment Bank. Allen managing director Nancy Peretsman and UBS media chief Jeff Sine, two longtime media executives, will be the point people for the sale.

Nondisclosure agreements were set to go out to prospective bidders on Sept. 22, said Cooper. Once those NDAs are returned and signed, bidders will receive a 230-page confidential information memorandum, which includes an overview on each cluster, historical and projected financial information and operational overviews.

To get to the next round — including access to an electronic data room with more detailed information — participants will have to submit a preliminary bid. From there, site visits and possibly interviews with management will be set up for each potential bidder.

Cooper said he expected preliminary bids to come in during October, with final bids due by the end of the year.

RIGAS SYSTEMS, TOO

Among the 5.3 million subscribers up for sale are several properties, with about 230,000 subscribers, that are currently owned by the Rigas family but are managed by Adelphia, said Cooper.

Adelphia’s Clusters
What the MSO will offer to bidders
Cluster Larger Markets Subscribers
Northern New England/Eastern New York Cape Cod, Martha’s Vineyard, Mass.; Bennington, Vt.; Bangor, Me. 600,000
Cleveland/Greater Ohio Valley Cleveland, Cincinnati suburbs 600,000
Florida/Southeast Miami, West Palm Beach 600,000
California/Western Los Angeles 1,300,000
Virginia/Maryland/Colorado Springs/Kentucky Charlottesville, Va; communities near Baltimore/Washington, D.C. 1,000,000
Pennsylvania Pittsburgh suburbs, Erie 500,000
Western New York & Connecticut Buffalo; Waterbury, Conn. 650,000
Sources: SEC documents, industry sources

September