A Cable Clan on Thin Ice

The Rigas family's debts have Adelphia in peril

Almost from the moment he heard about cable television back in 1952, John J. Rigas has melded family and debt to build his empire. His first cable system, in the north-central Pennsylvania town of Coudersport, was built with $40,000 lent to him by friends. Borrowing heavily, he bought cable systems throughout the country with his younger brother Gus, even naming the company Adelphia, from the Greek word adelphos, for "brother." Gus left the company in 1983, but Adelphia, the nation's sixth-largest cable provider, is still a family affair. John controls the nine-person board, along with his three sons and a son-in-law. Until a few years back, Adelphia even rented its trucks, equipment, and the converted church that serves as its headquarters from the Rigas clan.

Now, debt and Adelphia's family connections are the focus of a broadening investigation that may separate Rigas from the company he founded. Adelphia's stock has fallen 47% since it disclosed on Mar. 29 that the company had co-signed for more than $2.3 billion in off-balance sheet loans to help Rigas family-controlled partnerships buy cable systems. Adelphia has promised fuller disclosure, and the Securities & Exchange Commission is investigating. And BusinessWeek has learned that nearly half the Rigases' $650 million Adelphia stake, part of which was bought with off-balance-sheet loans, has been pledged against margin. The margin pledges have forced the family to scramble to get the stock up and reduce debt. Investment bankers say they are trying to sell systems with as many as 1 million of Adelphia's 5.8 million subscribers.

Could increasing fear of margin calls ultimately force the clan to sell the company? "They won't sell easily," says New York money manager Salvatore Muoio, a onetime shareholder. "It is in their blood." Included in their 30% stake are all the voting B shares, which give the Rigases control of 74% of voting rights. But some of the B shares may also be pledged against margin calls, say insiders. Adelphia isn't commenting.

Still, the pressure on the Rigas family is building. Two shareholder suits have been filed, and at least one large investor is contemplating filing his own. And there are other claims on the Rigases' money. The family has pledged $67.5 million to Adelphia Business Solutions, the cable company's onetime phone unit, which filed for Chapter 11 on Mar. 27. The family also owns the money-losing Buffalo Sabres hockey team, a purchase Adelphia helped by lending the team $76.5 million.

Investors also want to hear more about bank loans in excess of $3 billion Adelphia co-signed in 1999 and 2000 to help Rigas-owned cable partnerships. At least $2.3 billion of that went to Rigas-controlled Highland Holdings, more than analysts say they had been led to believe. Insiders say the partnerships used some of the money to buy cable systems in Carlsbad, Calif., but investors believe that at least $1 billion went to buy Adelphia stock--just as the cable company was promising Wall Street that it was reducing debt. The number could go even higher because the Rigases bought $400 million in added Adelphia stock in January and pledged to buy $200 million more. "I calculate that there is $500 million that is still not accounted for," says Ajay Mehra, a portfolio manager for Columbia Management Group, which owns 1.4 million shares. "I want to know if they're misrepresenting the number, or if they're just outright liars."

Adelphia has delayed its annual report to let auditors at DeLoitte & Touche LLP review the off-balance-sheet financing. It also has hired Salomon Smith Barney to sell its cable systems to pare debt, say insiders. If shares continue to fall, Adelphia itself could be vulnerable. "It is attractive because it has lots of well-clustered systems" in Southern California, Pennsylvania, and upstate New York, says Stephen J. Ketchum, an investment banker at UBS Warburg. But it also has the Rigas family, which isn't likely to give up without a fight.

By Ronald Grover in Los Angeles and Tom Lowry in New York

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