Under Pressure

Under PressureByline: Jim Barthold

Scandal-ridden Adelphia Communications, teetering on the brink of financial ruin, is blemishing cable's newfound economic luster and devastating shareholders. And one of them, Leonard Tow, chairman and CEO of Citizens Communications, wants more say in how the company runs its business.

Tow last week demanded that he, along with fellow Citizens executives Scott Schneider and Rudy Graf, be placed on the Adelphia board, using his family's 12% ownership stake as justification. As of press time, the move had thus far been ignored, resulting in a threat to take further - probably legal - action if a Friday deadline was not met.

The battle couldn't have come at a worse time. While Adelphia's woes are smudging the cable industry, they're further dampening the prospects of telecom competition, said John Culver, senior director of Fitch Ratings. The telecom sector is in "a general state of malaise" from which recovery won't begin until next year, he said at a conference last week.

For the cable sector, Adelphia is a minor long-term inconvenience, but one that is punishing their stocks in the short term.

"The Tier 1 [multiple systems operators] have improved their credit rating in recent years, which has enabled them to enjoy strong access in capital markets," said Brendan Buckley, Fitch Ratings' senior director of corporate finance. "I don't think what's happening with Adelphia translates into a large problem for the overall cable sector."

But other operators, which were basking in the glow of generally positive first-quarter earnings, are taking a number of short-term hits. Both AT&T and AOL Time Warner, the two largest MSOs, have seen their shares decline more than 10% since $2.4 billion in loans to the Rigas family were first revealed. Cablevision shares have lost almost 50% of their value.

"[Cable operators] are very ticked off at Adelphia," said Cynthia Brumfield, president of Broadband Intelligence. "They've all been dragged down by the bad news at Adelphia."

Tow claims his Adelphia stake has lost 70% of its value since March. His demand to appoint three board members led indirectly to the resignation of Adelphia Chairman and CEO John Rigas, who founded the company in 1952, and his son Timothy, the company's chief financial officer. Both remain on the board of directors along with John's sons Michael and James and his son-in-law, Peter Venetis (see figure).

Adelphia also hired David Boies, who has been working with former Enron CFO Andrew Fastow, to advise it in connection with its investigation. Erland Kailbourne was named chairman and interim CEO, though John Rigas will remain president.

Neither management group acceded to Tow's demands, though Tow wrote in a letter to the company's board that Kailbourne had at least called him. "It is precisely because Adelphia's continued existence is currently being threatened that my family has exercised its right to appoint representatives to the board... who will work to preserve value for all of Adelphia's stockholders," Tow wrote.

The company's slide began March 27 when it casually disclosed $2.3 billion in off-balance sheet debt during a generally upbeat quarterly earnings announcement. Further aggravating the situation, the debt was accrued via a co-borrower relationship with cable entities - owned by the Rigas family but separate from Adelphia - which used some of the money to purchase Adelphia shares.

Company officials didn't have any idea of the turmoil they were starting with the disclosures, said Brumfield. "Adelphia has always... had a lot of debt, and they've always bought up their stock with debt," she said.

The company's stock fell 27% in just two days, and most other cable stocks slid along with them.

Saying it needed to further review the accounting for the off-balance sheet borrowings, on April 1 Adelphia asked the Securities and Exchange Commission for a 15-day extension to file its final, audited results for the year. On April 16, the company said it needed still more time. The next day, Adelphia received notice from NASDAQ that it was subject to delisting for failure to report earnings. A delisting hearing was held late last week, the results of which were not available at press time.

Adelphia's failure to file its 10-K resulted in a default on various credit facilities. Though Adelphia received waivers on the reporting requirements of these facilities, it was unable to draw them down any further, putting the company in a cash crunch. Adelphia late last week also failed to make $44.7 million in interest payments on four separate bond issues and is now being investigated by grand juries in the Southern District of New York and the Middle District of Pennsylvania. Adelphia said it is cooperating with the probes.

The cable industry is now being tainted by Adelphia in no small part because the largest MSOs traditionally have been family-run operations. Ralph Roberts and his son, Brian, rule Comcast, which is in the process of acquiring AT&T Broadband and becoming the largest MSO. Cablevision Systems is under the control of Charles Dolan and his son, James.

Still, neither company should be lumped in the same class as the notoriously secretive Adelphia, said Michael Goodman, a Yankee Group analyst. "It's like pulling teeth getting information from [Adelphia]," he said.

Adelphia's secrecy exacerbated its problems in times of crisis, he added. "When something like this happens, the natural question is, 'Is this business as usual?' I can't answer that because they're so private I don't know."

While the company issued several press releases last week, executives did not return phone calls as employees hunkered down in its Coudersport, Pa., headquarters.

"We're all just trying to stand by and take the shocks," said one employee. "Employee morale is still pretty good, overall."

Tow, who also refused comment except through a spokesperson, ironically helped boost Adelphia into the big leagues as former chairman and CEO of Century Communications. To fight its current financial problems, Adelphia plans to divest the showcase Southern California operations that Century previously owned. That may personally rankle Tow, but it's not his primary complaint, said his spokesman.

"He's been concerned by the potential sales," said the spokesman, "but more so by the lack of disclosure, the lack of information to the shareholders, the announcements of co-borrowing arrangements, and the resulting SEC investigation."

With additional reporting by Toby Weber in Chicago.


The major players

Erland Kailbourne, retired chairman and CEO of Fleet Bank's New York region, now heads up a nine-person board, which includes John Rigas, three of his sons and a son-in-law (Peter Venetis).

Leonard Tow, the company's largest outside shareholder, is pushing for a 12-person board that would include two Citizens Communications executives and himself.

Though both John and Tim Rigas resigned their positions last week, they remain on the board.

Purse strings

Timothy Rigas' CFO duties are now being handled by Kailbourne, FPL Group General Counsel and Secretary Dennis Coyle, and Caithness President Leslie Gelber.