Adelphia: A Lead Role in Cable's Consolidation?

Its solid operations, improving balance sheet, and attractive valuation make it a natural for a bigger system to acquire

By Gene Marcial

In the wake of Comcast's (CMCSK ) December deal to purchase AT&T Broadband, the cable unit of AT&T (T ), cable assets are suddenly turning heads. That has renewed investor interest in Adelphia Communications (ADLAC ). It's the country's No. 6 cable-TV provider, operating in 32 states -- with its primary markets in Los Angeles, Pennsylvania, Ohio, New York, Florida, Virginia, Colorado, and New England.

The Comcast-AT&T deal, plus the recent bid by EchoStar (DISH ) to merge with DirecTV, a unit of General Motors' Hughes Electronics (GMH ), should spur more merger-and-acquisition activity, according to some analysts.

"Adelphia owns and operates clustered cable systems that we believe would be very attractive to potential acquirers in a consolidating environment," says John Martin, analyst at ABN AMRO, who has upgraded his rating on Adelphia stock from an add to a buy. The cable industry, he says, is about to enter a "new wave of consolidation -- perhaps beginning as early as 2002."


  Adelphia is "clearly a candidate for acquisition or merger with one of the larger cable systems," says Mark Minichiello, a partner at Spin-Off Advisors in Chicago. The stock already reflects some takeover premium, he notes. It had gone from 20 a share on Sept. 21, 2001, to 30 at about the time that the Comcast-AT&T deal was announced. Nonetheless, Minichiello argues that the stock is still attractive, based on its "private transaction value," which he puts somewhere between the low side of its current market value and the high side of the Comcast-AT&T Broadband deal's valuation.

Valuing Adelphia's system at $4,000 per subscriber, the company's equity value would be $9.5 billion, or $45 a share, estimates Minichiello. Similarly, based on its peer group's valuation of 16 times earnings before interest, taxes, depreciation, and amortization (EBITDA), Adelphia's equity worth would be $11.8 billion, or 55 a share, he says. These valuations, he adds, are somewhat below Comcast-AT&T Broadband's valuations of $4,400 per subscriber and 20 times EBITDA.

Adelphia is currently trading at 32, down from 50 in January, 2001, and its high of 75 in January, 2000. So Adelphia, says Minichiello, is an interesting asset play for investors with a 12- to 24-month horizon -- although the terms and timing of any deal cannot be predicted, or whether any deal at all happens. A spokesperson for the company could not be reached for comment.


  Another factor: Adelphia has been working to spruce up its balance sheet. It's spinning off to shareholders its 79% stake in Adelphia Business Solutions (ABIZ) on Jan. 11, 2002. Now trading at 39 cents a share, the unit provides telecom services to businesses, including voice, data, and Internet access. The spin-off is clearly a positive for Adelphia, says Minichiello, as it would remove $1.45 billion in debt from Adelphia's balance sheet, although the parent is the guarantor of $500 million of that debt.

Minichiello figures the spin-off reduces Adelphia's debt leverage from an industry high of 13 times EBITDA to 8.5 times, which is close to its peer group's mean of 7.7 times. In the spin-off, a holder of 100 Adelphia shares will receive 50 shares of ABIZ. Pressure on shares of ABIZ is expected to increase as Adelphia shareholders are likely to sell their newly received ABIZ shares, which they would consider "found money."

ABN AMRO's Martin expects Adelphia's revenues to jump 10%, to $3.1 billion, in 2001 and to climb to $3.5 billion in 2002. And he forecasts a rise in EBITDA of 12%, to $1.4 billion, in 2001, and to $1.6 billion in 2002. The analyst recently upped his 12-month stock-price target (on fundamentals alone) to 40 a share from 37, adjusted for the ABIZ spin-off and a dilution associated with the company's $1.1 billion combined equity and convertible offering in November.

In all, Martin argues that Adelphia's continuing solid operating momentum, decreasing balance-sheet risk, and its enticing valuation in a consolidating industry, makes its stock "very attractive" at current levels. And that's saying a lot, considering the runup it has already experienced.

Marcial is BusinessWeek's Inside Wall Street columnist

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