Rigases Give Up Control of Adelphia
Improving the chances--at least slightly--of averting a bankruptcy of Adelphia Communications Corp., the Rigas family buckled to mounting pressure from bankers, investors and outside directors Thursday and agreed to relinquish control of the cable company and contribute $1 billion worth of assets to cover mounting liabilities.
Founder John Rigas, who resigned as chairman, chief executive and president last week, stepped down from the nine-member Adelphia board. His three sons, Michael, James and Timothy, also resigned as directors. Michael and James Rigas gave up top management roles, after the resignation last week of Timothy Rigas as chief financial officer.
The assets the family agreed to contribute to Adelphia will only partially offset the additional liabilities the company faces as a result of co-borrowing arrangements with private Rigas family partnerships. These off-balance-sheet loans disclosed in March have prompted an investigation of Adelphia, the largest cable provider in Southern California, by the Securities and Exchange Commission and by two states, New York and Pennsylvania.
Adelphia disclosed Thursday that as of April 30, the family partnerships had borrowed about $3.1 billion using the public cable company as a guarantor, up from the $2.3 billion the Rigases said they had borrowed as of December.
Adelphia already has agreed to restate its financial results for the last three years to reflect this off-balance-sheet debt. On Thursday, Adelphia, which already is carrying a debt of about $15 billion, said it would add $2.5 billion to account for the off-balance-sheet loans. Just weeks ago, the firm said it would be increasing its debt by only $1.6 billion.
“They’ve taken positive steps but are not out of the woods yet,” said Oren Cohen, a bond analyst at Merrill Lynch. “The numbers don’t add up. We need more clarity. What’s included in that $3.1 billion? How much cash do they have on the balance sheet? How much bank debt do they have?”
Adelphia shares resumed trading Thursday after being halted May 14, dropping $3.08 to $2.62 on Nasdaq. Since disclosures of the extent of the Rigases’ co-borrowing in March, Adelphia shares have plunged 90%.
Some investors were encouraged by the resignations, which came after weeks of silence and stonewalling by the company. Analysts warned, however, that Adelphia still faces a severe cash crunch and potential bankruptcy.
“This is positive news, but there’s still a 50-50 chance of bankruptcy,” said Ajay Mehra, a portfolio manager at Columbia Management Co., which recently sold its holdings in Adelphia. “They need an injection of capital because they still have a liquidity issue.”
In a private meeting with the family Tuesday, bankers, which have loaned the company at least $5.5 billion, agreed to provide Adelphia additional credit if the Rigas family stepped down from the board. The Rigases refused to relinquish control Wednesday, but sources said the family finally surrendered when banks threatened to push the company into bankruptcy, risking a new round of shareholder lawsuits. The Rigases and Adelphia face more than 18 class-action shareholder lawsuits accusing them of securities fraud.
One source familiar with the meeting said John Rigas wept at the Wednesday session with creditors after agreeing to give up control. A cable pioneer who was revered in the small town of Coudersport, Pa., Rigas founded Adelphia there in 1952 with $300. He survived a consolidation in the 1990s by tripling the company’s size through acquisitions, including Century Communications Corp., the largest provider in Los Angeles.
Today, however, Adelphia, the nation’s sixth-largest cable operator, has a far higher debt ratio than any other cable company.
Analysts said that even after the Rigases contribute $1 billion in assets to the company, Adelphia still will be about $700 million in the hole as a result of the family’s borrowing. The assets include Adelphia securities and cash flow from certain cable systems owned by the family. Under the agreement, the Rigases will place their voting stock--60% of the company’s total--in a trust, preventing them from exercising control.
Adelphia said it plans to release other details about transactions with the family in a filing with the SEC late Thursday or today.
Some analysts said they were surprised by certain concessions made by the company to force the family’s ouster. Among the most controversial is a severance package that would pay John Rigas $1.4million a year for three years.
The family also has the right to appoint two non-family board members of their choice.
A special committee of outside directors running the company also is seeking the board resignation of a fifth Rigas.
Sources said Rigas’ successor, Erland E. Kailbourne, one of the outside directors, is in discussions with cable pioneer Leonard Tow about joining the board. Tow, who became the largest shareholder after he sold Century to Adelphia in 1999, claims he is entitled to three board seats as part of the sales agreement.
One large Adelphia shareholder, Capital Research & Management, has been pressuring outside directors to make Tow chief executive, hoping to restore credibility so the firm can avoid bankruptcy.
