Adelphia Communications: A Case Study

Jim Mahar Carol Fischer St. Bonaventure University

The Rise of Adelphia

1952: John Rigas borrowed money to open a movie theatre in Coudersport, PA Film salesperson urged him to get into the ground floor of the cable industry Rigas purchased his first cable franchise for $300 1972: Adelphia (from the Greek word for Brothers) was incorporated

The Rise of Adelphia

Key Growth Strategies Geographically dense operations Emphasis on customer service Focus on suburbs (as opposed to metropolitan areas) Aggressive acquistions 1986: IPO shares widely held & traded on NASDAQ 1999: stock traded as high as $87 per share

Expansion into New Markets

By 1999, Adelphia was 6th largest cable company in US & had expanded into
Telephony business (Adelphia Business Solutions) Sports radio station Sports cable television channel Many other smaller subsidiaries

A Family-Run Firm
John Rigas, CEO & Chairman of the Board Son Tim Rigas, CFO Son Michael Rigas, VP of Operations Son James Rigas, VP of Strategic Planning Son-in-law Peter Venetis, Board of Directors Family owned 77% of voting rights

A Family with strong ties to the Community

Company headquartered in Coudersport, PA
1990 Population: 2,854

Donated cable & internet connections to local schools Sponsored youth sports, cultural events Family purchased Buffalo Sabres Hockey Team Personal donations to needy neighbors

Adelphias Financial Structure

High fixed costs Highly leveraged
Public financing at corporate level Private debt placements at subsidiary level Some public debt at subsidiary level, related to acquisitions

Parent company held control, while subsidiaries were responsible for about 2/3 of the firms debt Parent company largely protected in event of bankruptcy of individual subsidiary

Hard Times for the Cable Industry

In late 1990s, cable industry began to falter, as it was hard hit by: Technology slowdown Slowing economy Increased competition Over-capacity problems

100

10 Adelphia Stock Price (data from http://finance/yahoo.com )

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4/8/99 6/8/99 8/8/99 10/8/99 12/8/99 2/8/00 4/8/00 6/8/00 8/8/00 10/8/00 12/8/00 2/8/01 4/8/01 6/8/01 8/8/01 10/8/01 12/8/01 2/8/02 4/8/02

Hard Times for Adelphia

The 3/27/02 Analysts Meeting: A Critical Event

Oren Cohen, Merrill Lynch, questioned how the Rigases could afford to buy stock worth over $1 billion since they were collectively making less than $2.5 million at Adelphia
They must be borrowing, but from whom? Now that stock prices had fallen so much, how could they repay the loans?

Stock price fell from $22 to $16.70

The Fall of Adelphia

Within days, Adelphia announced it had an additional $2 billion of debt (later amended to over $3 billion owed by Rigases & their companies) SEC announced it was investigating Investigators uncovered shoddy accounting practices, numerous instances of self-dealing, & fraud, including comingling of corporate & family funds

Chronology of Events
4/1/02: Adelphia delays filing annual report 4/2/02: Shareholder lawsuits filed 5/8/02: Adelphia solicits bids for cable systems in LA and the Southeast US 5/15/02: John Rigas resigns as Pres & CEO; NASDAQ stops trading in Adelphia stock 5/16/02: Tim Rigas resigns from CFO 5/23/02: John, Tim, Michael & James Rigas resign from Board of Directors

Chronology of Events
5/24/02: Adelphia discloses details of Rigas familys use of company assets for personal use 6/3/02: Adelphias stock is delisted 6/9/02: Adelphia dismisses Deloitte & Touche 6/11/02: Peter Venetis (Rigass son-in-law) resigns from Board 6/14/02: Adelphia hires PriceWaterhouseCoopers & terminates employees whose primary function was to provide service to members of the Rigas family

Chronology of Events
6/17/02: Adelphia misses $96 million in interest & dividend payments 6/21/02: Adelphia arranges financing for reorganization 6/25/02: Adelphia files for bankruptcy 7/24/02: The Arrests

Postscript
11/6/02: Adelphia sues Deloitte & Touche for professional negligence, breach of contract, fraud & other wrongful conduct. 11/14/02: James Brown, former VP of Finance, pleads guilty to fraud