Adelphia's Fall Will Bruise a Crowd

The bankruptcy is hurting rivals as well as suppliers

Two years ago, Scientific-Atlanta Inc. (SFA ) was so eager to sell set-top boxes to Adelphia Communications Corp. (ADLAC ) that it offered to advance the cable-TV operator $26 a box to help market a new digital service. These days, the deal doesn't look quite so enticing. On June 10, scandal-ridden Adelphia acknowledged that it never spent the marketing money--using it instead to reduce reported expenses. And today, with Adelphia in Chapter 11 reorganization, Scientific-Atlanta will have a tough time collecting the $83.8 million Adelphia owes it.

Scientific-Atlanta may want to take a number. For weeks, as the nation's sixth-largest cable company has careened from one accounting revelation to another, suppliers of programming and technology have been bracing for likely losses from Adelphia contracts. Indeed, they're gearing up to ask the courts to put them at the front of the line by declaring them "critical vendors," meaning Adelphia couldn't stay in business without them.

Walt Disney Co. (DIS ), which sells Adelphia its ESPN sports programming, will see its cash flow cut by $50 million as a result of the bankruptcy, figures Merrill Lynch & Co. News Corp. (NWS ) officials acknowledge they are owed as much as $20 million for Fox News, FX, and other channels. And pay-per-view vendor In Demand thought it had figured out a way to not get burned: It required Adelphia to put up $1.2 million for the Mike Tyson-Lennox Lewis fight on June 8. But In Demand is still owed money for Major League Baseball games.

It's not just suppliers that will feel the ripples of Adelphia's bankruptcy. Rival cable operators have been under pressure since Adelphia said it hadn't disclosed some $3 billion in off-balance-sheet loans to the company's founders, members of the Rigas family. Although no other cable companies have been accused of similar shenanigans, Adelphia's meltdown--and now WorldCom's problems--has left investors wary of debt. On June 26, shares of heavily indebted cable operators Charter Communications Inc. (CHTR ) and Cablevision Systems Corp. (CVC ) fell by 14% and 26%, respectively. Since Adelphia's woes were revealed in March, both are off by some 70%.

Moreover, Comcast Corp.'s (CMCSA ) stock fell by 9% in mid-June in the wake of Wall Street rumors that rating agencies would downgrade the cable operator's debt after it completes its $35 billion merger with AT&T's (T ) cable unit. Neil P. Begley, a senior vice-president at rating agency Moody's Investors Service, discounts the rumors but says he understands the hair-trigger nerves of cable investors. "The concern is that there are a lot of founding families still running cable companies," he says.

Still, with Adelphia's problems savaging their shares, cable companies may have trouble completing deals. Charter, which is looking to expand through acquisitions, will likely need more cash from majority owner Paul Allen to do so. Cox Communications Inc. (COX ), considered one of the industry's best operators, has seen its stock fall by 28% since March even though it expects to reduce capital expenditures and increase cash flow later this year. "We're not sure what we can try next," laments Cox CEO James O. Robbins.

Despite the troubles, media and technology companies still covet Adelphia's 5.7 million subscribers in Los Angeles, southern Florida, and elsewhere. Anticipating that Adelphia will sell some of its choice systems or get money from the courts to keep operating, Disney and others have signed deals to secure space on digital systems Adelphia is planning. Why cut a deal with a sinking company? "If they're long-term contracts with time to run on them, the bankruptcy court could keep them in effect when those systems are sold off or restructured," says Richard B. Levin, a partner at Skadden, Arps, Slate, Meagher & Flom LLP.

That could be wishful thinking. And there could be more surprises as independent board members investigate the Rigas family deals. Even now, however, the line at the bankruptcy court looks plenty long.

By Ronald Grover in Los Angeles

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