Hitting the capital markets for the fourth time in a year, Adelphia Communications last week raised about $1.5 billion from offerings of common stock and convertible securities.
The offering, the proceeds of which will go toward paying down debt, comes as speculation that the company is preparing for a sale is mounting. On the heels of Comcast's acquisition of AT&T Broadband, Adelphia has become more vocal in suggesting that it is willing to sell out to form a larger MSO.
Earlier this month, at the Salomon Smith Barney Global Media and Entertainment Conference in Scottsdale, Ariz., Tim Rigas, Adelphia's CFO, indicated to investors that Adelphia was positioning itself for sale, according to the accounts of several people familiar with his presentation. Rigas discussed the strategic options available to Adelphia in the Comcast-AT&T Broadband deal, including remaining independent or swapping assets with Comcast/AT&T Broadband. He also mapped out potential combinations of Adelphia's assets with other major MSOs.
Interest in Adelphia's stock peaked on Jan. 7, the day Rigas presented, when shares closed at $32.66, a four-month high. Rigas said he did not rule out the possibility of an equity offering while answering investors' questions, which may help account for the subsequent drop in the stock price. Shares closed Friday at $26.02.
Adelphia, the sixth-largest MSO, sold 40 million common shares at $25.50 each, for a total of about $1.02 billion, and a total of $500 million in convertible securities.
Adelphia has been ?really looking to decrease leverage? over the past year, Rigas says, noting that the company has about $500 million of high-yield debt coming due in February and September. ?We felt that rather than replacing [that debt], the company was better off strategically to reduce the leverage and therefore issue equity.?
Adelphia's leverage will be at about six times its cash flow ?post this deal,? says Jeff Wlodarczak, an analyst at CIBC World Markets. That's about the industry average.
The timing of the offering surprised some analysts, who did not expect Adelphia to raise equity until later this year. It also comes just weeks before Adelphia announces fourth-quarter earnings. Last year Adelphia commenced a similar offering and weeks later disappointed investors with its earnings results.
In January 2001, Adelphia raised more than $2 billion by selling equity and debt. Several weeks later the company posted fourth-quarter results below Wall Street's expectations. Increased marketing expenses for Adelphia's digital rollout ? the company was adding 40,000 digital customers a week at the time ? depressed operating cash flow, which came in at 4% growth, not the 11% Wall Street expected. Adelphia's stock plunged 13% over the next three days. Rigas says Adelphia's marketing expenses last quarter did not see a similar spike.
Wlodarczak points out that he would be surprised if the company missed its numbers this time around. But ?I would have been more comfortable if the company raised capital after they reported? earnings, he says.
To keep investors' confidence, Adelphia has to hit its fourth-quarter and first-quarter numbers, Wlodarczak says. In addition, the Rigas family has to keep a commitment that it made in November to buy a total of $400 million in Adelphia shares. Of that total, the family still needs to purchase about $150 million, according to Rigas. He expects those purchases to be completed by August.
Until recently, Adelphia had been planning to raise funds by shedding systems serving about 770,000 subscribers. Those sales are still a possibility, Rigas says, although he says there have been no specific negotiations.
If Adelphia is seriously considering offers to merge with another company, then it may be in the company's best interest to keep all its systems.
?You don't get much benefit by getting smaller,? says John Martin, a cable and media analyst at ABN Amro. If the endgame is to sell the entire company, then ?it doesn't do you much good to go in the other direction,? he adds.
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