A CASE REPORT ON

ADELPHIA COMMUNICATIONS CORP.’S BANKRUPTCY

 A Case Report on
Adelphia Communications Corp.’s Bankruptcy

Submitted To:

Dr. M. Sadiqul Islam

Professor
Department Of Finance
University Of Dhaka

Submitted by:

Group No: 56
MBA 20th Batch, Section: - B
Department of Finance
University of Dhaka

SL NO NAME ID

1 Israt Jahan Ananna 20-306

2 Mohammad Hossain 20-373

3 Nayeem Ul Islam Chowdhury 20-539

Submission Date:

07 April, 2019

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Letter of Transmittal
April 07, 2019

Dr. M. Sadiqul Islam

Professor
Department of Finance
University of Dhaka

Subject: Letter regarding the submission of the case report for the course F- 506

Dear Sir,

It is an immense pleasure for us to submit the group case report on “Adelphia Communications
Corp.’s Bankruptcy” which is prepared as a fulfillment of the requirement of course named
“Cases in Financial Decision Making” of MBA program under Department of Finance of the
Faculty of Business Studies, University of Dhaka.

The study has given us scope to learn theoretical and practical knowledge about different distress
method and liquidation and analysis associated in corporate finance and their applications
through various real life examples of business cases. We have tried our best to cover all the
relevant fields. As we have encountered several assumptions, errors may exist there and we are
requesting your kind consideration in this regard.

Sincerely yours,

-----------------------------

On behalf of the members

MBA 20th Batch, Sec: B

Department of Finance

University of Dhaka

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Acknowledgement
This report entitled “Adelphia Communications Corp.’s Bankruptcy” is prepared as a part of the
MBA program requirement for “Cases in Financial Decision Making (F-506)” course in the
MBA program conducted by Department of Finance, University of Dhaka.

Firstly, we are expressing our gratitude to Almighty for enabling us in successful completion of
this report. Secondly, we are very thankful to our course teacher Dr. M. Sadiqul Islam, Professor,
Department of Finance, University of Dhaka for his persuasive motivation, helpful suggestion,
guidance, supervision, and support in the preparation of this report without which the completion
of this task might not have been possible.

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Executive Summary
This case is about the bankruptcy of one of the USA’s major cable company Adelphia
Communications Corporation that was happened in June, 2002. During that year, a massive
accounting fraud and corporate looting scandal involving the founding Rigas family caused the
file of Chapter 11 bankruptcy of Adelphia Communications Corp. in June 2002. For this reason,
Adelphia was trying to sell off most of its operating assets, possibly through a “Section 363”
transaction. The CEOs of Adelphia chose it, as many creditors believed that it would produce
higher recoveries on their claims. But in the meantime, Cablevision Company offered $16.5
billion to buy the assets later it was increased to $17.1 billion. The request to the judge for the
approval of a $440 million breakup fee that Adelphia would commit to pay Time Warner and
Comcast in the event, it agreed to accept their bid but later walked away from it. Now Adelphia
had to decide whether option it would choose. It had to consider the Cablevision’s offer
comparing to other two. If it withdrawn the offer of TWC, what associated risks would be faced
by Adelphia. Considering these situation, now Adelphia had to decide the best option that would
produce maximum value to the creditors of it. Regarding this issue, an efficient restructuring
plan also is to be managed.

Alternative courses of action that are followed to solve the case are either go for liquidation or
stay as a going concern. If the company chooses the option going concern, then it has three
options: Private placement of equity, Optimum debt and equity structure and debt equity swap.

By analyzing all the options, we found that alternative of Debt-Equity Swap gives the highest
value per share for Adelphia which is $15.33 value per share. Though a largest bondholder
mentioned that if the company were combined with another company it’s assets would be worth
even more. But when we have done the valuation, combined with TWC, it gives lowest value to
the firm. On the other hand for restructuring DIP financing is easily available to the bankrupt
company, so we have chosen this financing method.

So, Adelphia will have to pay $8800 million to its debt-holders by DIP financing and remaining
will be paid through debt-equity swap. The payment through swap will be $7387. As Adelphia’s
value as an independent going-concern was $17 billion. The remaining value will be $9613
according to our calculation.

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Table of Contents

Section Topics Page number

Acknowledgement 4

Executive Summery 5

1 Introduction to the Case 7

2 Analysis of the Economy 8

3 Analysis of the Industry 9-12

4 Analysis of the Company 13-29

5 Problem Statement of the Case 30-31

6 Alternative Courses of Actions 32

7 Analysis of Each Alternatives 33-47

8 Recommendations, Conclusion, Appendix 48-53

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Chapter 1: Introduction to the Case

A group of executives and lawyers representing four of the largest U.S. cable television
companies assembled in the U.S. bankruptcy court in the Southern District of New York for a
closed hearing in front of Judge Robert Gerber on April 2005. The four cable companies
represented at the meeting—Adelphia, Time Warner, Comcast, and Cablevision—collectively
served over 50 percent of all 73 million U.S. cable television subscribers and At the time,
Adelphia’s filing represented the eleventh-largest Chapter 11 bankruptcy in history. The January
31, 2005 deadline for receiving final bids, the field had narrowed to the two highest offers: a
$17.5 billion cash–and-stock offer from Time Warner, Inc. and Comcast Corp.; and a $15 billion
cash-only offer from Kohlberg, Kravis, Roberts, & Co. (KKR) and Providence Equity Partners.
Over the next few months Adelphia management had decided to accept the offer from Time
Warner and Comcast. Although competition among the bidders had significantly raised the value
placed on Adelphia’s assets, potentially benefitting all claimholders, Schleyer and Wittman still
had a number of important questions to consider. To further complicate matters, two hedge funds
that had accumulated large stakes in Adelphia’s debt were engaged in litigation with one another
over a number of issues, including the treatment of inter-company claims and the relative priority
of different subsidiary debts. Until these disputes were resolved, creditor support for Adelphia’s
sale—to any acquirer—was far from assured.

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Chapter 2: Analysis of the Economy

In USA Cable television started in the late 1940s, soon after television (TV) broadcasting itself
began growing into a mass market. In the mid-1960s, regulatory hurdles imposed by the Federal
Communications Commission (FCC) in response to pressures from movie theater owners and
TV broadcasters, the cable industry’s growth accelerated. In 1975, over three thousand cable TV
franchises had been awarded across the country. In the 1990s, further deregulation permitted
cable operators and telephone companies to enter each other’s businesses and offer bundled
services to their customers. The economy of US growing at 3% which play role in cable cand
television industry. Deregulations increased competition from direct broadcast satellites (DBS)
and other technological innovations such as the internet, fiber optics, and wireless
communications, drove further consolidation in the cable industry.

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Chapter 3: Analysis of The Industry
3.1 Porter’s 5 Forces Model
Porter's Five Forces Framework is a very popular way which helps to analyze competition of a
business organization. This model makes a great impact in an industry. The factors of porter’s
model are described below:

Bargaining power of Buyer:

Bargaining power of buyers indicates the pressure that customers exert on the business
organisations to get high quality products at affordable prices with excellent customer service.
This force directly influences the Adelphia Communications Corp s ability to accomplish the
business objectives. Strong bargaining power lowers profitability and makes the industry more
competitive. Whereas, when buyer power is weak, it makes the industry less competitive and
increase the profitability and growth opportunities for Adelphia Communications Corp s.

Bargaining power of suppliers:

Bargaining power of suppliers in the Porter 5 force model reflects the pressure exerted by
suppliers on business organisations by adopting different tactics like reducing the product
availability, reducing the quality or increasing the prices. When suppliers have strong bargaining

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power, it costs the buyers. Moreover, high supplier bargaining power can increase the
competition in the industry and lower the profit and growth potential for Adelphia
Communications Corp s Similarly, weak supplier power can make the industry more attractive
due to high profitability and growth potential

Threat of new entrants:

Threat of new entrants reflects how new market players impose threats to the existing market
players. If the industry will be profitable and barriers to enter the industry will be low, it will
attract more players and hence, the threat of new entrants. Adelphia Communications Corp s will
face the low threat of new entrants if existing regulatory framework imposes certain challenges
to the new firms interested to enter in the market. In this case, new players will be required to
fulfil strict, time consuming regulatory requirements, which may discourage some players from
entering the market.

Threat of substitute product:

The availability of substitute products or services makes the competitive environment

challenging for Adelphia Communications Corp s and other existing players. High substitute
threat shows that customers can use alternative products/services from other industries to meet
their needs.

Rivalry among existing firms:

The Rivalry among existing firms shows the number of competitors that give tough competition
to the Adelphia Communications Corp s High rivalry shows Adelphia Communications Corp s
Bankruptcy Spanish Version can face strong pressure from the rival firms, which can limit each
other’s growth potential. Profitability in such industries is low as firms adopt aggressive
targeting and pricing strategies against each other.

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3.2 PESTEL Analysis:

PEST Analysis is known as a macro environmental framework used to understand the impact of
the external factors on the industry. PESTEL stands for Political, Economic, Social,
Technological, Environmental and Legal. PESTEL analysis for Good Year is given as follows:

Political factors:

Political factors play a significant role in determining the factors that can impact Adelphia
Communications Corp.’s long term profitability in a certain country or market. Adelphia
Communications Corp.’s is operating in cable communication in more than a countries and
expose itself to different types of political environment and political system risks. The achieve
success in such a dynamic cable communication and Television industry across various countries
is to diversify the systematic risks of political environment. Adelphia Communications Corp.’s
can closely analyze the before entering or investing in a certain market.

Economic Factors:

The Macro environment factors such as – inflation rate, savings rate, interest rate, foreign
exchange rate and economic cycle determine the aggregate demand and aggregate investment in
an economy. While micro environment factors such as competition norms impact the competitive
advantage of the firm. Adelphia Communications can use country’s economic factor such as
growth rate, inflation & industry’s economic indicators such as cable and television industry

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growth rate, consumer spending etc to forecast the growth trajectory of not only –sector name--
sector but also that of the organization.

Social Factors:

Society’s culture and way of doing things impact the culture of an organization in an
environment. Shared beliefs and attitudes of the population play a great role in how marketers at
Adelphia Communications will understand the customers of a given market and how they design
the marketing message for cable communication and television industry consumers.

Technological Factors:

Technology is fast disrupting various industries across the board. Cable communication and
television broadband industry is a good case to illustrate this point. Over the last 5 years the
industry has been transforming really fast, not even giving chance to the established players to
cope with the changes. Adelphia Communications must has to cop up with this and keep fast in
technological changes and increase social media involvement.

Environmental Factors

Different markets have different norms or environmental standards which can impact the
profitability of an organization in those markets. Even within a country often states can have
different environmental laws and liability laws. Before entering new markets or starting a new
business in existing market the firm should carefully evaluate the environmental standards that
are required to operate in those markets. Some of the environmental factors at a firm should
considers.

Legal Factors:

In number of countries, the legal framework and institutions are not robust enough to protect the
intellectual property rights of an organization. A firm should carefully evaluate before entering
such markets as it can lead to theft of organization’s secret sauce thus the overall competitive
edge. Some of the legal factors that Adelphia Communications leadership should consider while
entering a new market .

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Chapter 4: Analysis of The Company

4.1 Ratio Analysis

A ratio analysis is a quantitative analysis of information contained in a company’s financial
statements. Ratio analysis is used to evaluate various aspects of a company’s operating and
financial performance such as its efficiency, liquidity, profitability and solvency. Here we have
examined some ratios of Adelphia Communications Corp. based on the consolidated historical
data which is presented below:

Liquidity Ratios:

Liquidity ratios measure a company's capability to pay debt obligations and its margin of safety
through the calculation of current ratio, cash ratio. From the following table we can see that
Adelphia Communications Corporation liquidity ratios are moderate good and they are capable
of paying of their debt somehow.

Liquidity Ratios Formulas 2001 2002 2003 2004

Current ratio Current Asset/Current 0.02 0.66 0.52 0.29

Liabilities

Cash ratio Cash& Equivalent/CL 0.01 0.30 0.25 0.18

Here is the graph for liquidity ratio.

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Profitability Ratios:

Profitability ratios compare income statement accounts and categories to show a company’s
ability to generate profits from its operations. Usually Profitability ratios focus on a company’s
return on investment in inventory and other assets. Adelphia Communications Corporation
profitability ratios are given in the following table and it can be said that they have decent
profitability ratios.

Profitability Ratios Formulas 2001 2002 2003 2004

Gross
Gross Profit Margin Profit/Revenue 96.96% 103.09%
Operating Profit Margin EBIT/ Revenue -159.63% -145.28% -4.16% -3.98%

Here is the graph for profitability ratio.

Leverage Ratios:

Financial leverage ratios or Solvency ratio measure the value of equity in a company by
analyzing its overall debt position. These ratios either compare debt or equity to assets to
measure the true value of the equity in a business. Leverage ratios are given the following table
where we can see that Adelphia Communications Corp. has debt ratio of 1.085, 0.054, 0.077

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and 0.145 in year 2001, 2002, 2003 & 2004 respectively which indicates Adelphia
Communications Corp. has almost one times as many assets as it has liabilities. Adelphia
Communications Corp. has interest coverage ratio of 4.14 and 6.26 in the year of 2001 and
2002 which means that profit is more than 4times or 6 times from interest.

Leverage Ratios Formulas 2001 2002 2003 2004

Long term debt ratio Long term debt/TA 1.085 0.054 0.077 0.145
Interest Coverage Ratio EBIT/Int. exp 4.14 6.26

Here is the graph for leverage ratio.

Efficiency Ratio:

Efficiency ratio measure how the company used its assets to generate revenue or profit. From the
table we see that Adelphia Communications Corp. generate .19, .24,.27,and .32 times revenue
from its total assets in the year of 2001,2002,2003 and 2004. And from fixed asset Adelphia
Communications Corp. generate 10.34, 8.85, 8.79 and 8.97 times revenue in the year of 2001,
20023, 2003 and 2004.

Efficiency Ratios Formulas 2001 2002 2003 2004

Total Asset Revenue/TA 0.19 0.24 0.27 0.32
Turnover
Fixed asset Revenue/Fixed 10.34 8.85 8.79 8.97
turnover Asset

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Here is the graph for leverage ratio.

4.2 DuPont Analysis

DuPont model is a financial ratio based on the return on equity ratio that is used to analyze a
company’s ability to increase its return on equity.

ROE= Net Income/ Equity

= Profit Margin* Asset Turnover * Equity Multiplier

= (Net Income/Sales)*(Sales/Total Asset)*(Total Asset/Equity)

3 Factor DuPont analysis of Adelphia Communications Corp.is presented below to see the
impact of sales, net income, total Asset, and total equity on the return on equity of the company.

Du point 2001 2002 2003 2004

Net Profit Margin -1.84 -2.20 -0.23 -0.46
Total Asset
Turnover 0.19 0.24 0.27 0.32
ROA -0.35 -0.53 -0.06 -0.15
Financial Leverage -5.67 -2.16 -1.87 -1.59
ROE 1.98 1.14 0.12 0.23

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From the above table we can see that profit margin of Adelphia Communications Corp. is -1.84%
in 2001 and 12.7%% in 2001 and -.23% in 2003 and -0.46% in 2004. The total asset turnover is
0.19 , 0.24, 0.,27 and 0.32 in the year of 2001, 2002, 2003, 2004. This means that for every
dollar in assets Adelphia Communications Corp. could generate $0.19 , $0.24, $0.27 and $0.32 in
the year of 2001, 2002, 2003, 2004 which is a moderately good result for Adelphia
Communications Corp . On the other hand financial leverage ratio is -5.67,-2.16, -1.87, -1.59
in the year of 2001, 2002, 2003 and 2004 respectively.

Here is the graph of Du point:

5 Factor DuPont analysis Of Adelphia Communications Corp. is presented below to see the
impact of sales, net income, total Asset, Interest burden, after tax retention rate, total equity on
the return on equity of the company:

2001 2002 2003 2004

Net Profit Margin -1.84 -2.20 -0.23 -0.46
Total Asset Turnover 0.19 0.24 0.27 0.32
Tax Burden 0.97 1.01 1.16 1.00
Interest Burden 1.18 1.50 4.82 11.60
EBIT Margin -1.60 -1.45 -0.04 -0.04
ROE 0.64 1.16 0.01 0.07

In the table of 5 factor DuPont we can see that the interest burden ratio is 1.18,1.50, 4.82 and
11.60 in the year 2001,2002 , 2003 and 2004 respectively. The tax burden ratio is 0.97,1.01,1.16
and 1.00 in the year 2001,2002 , 2003 and 2004 respectively

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Here is the graph of Du point:

4.3 Risk Analysis ( Historical years (2001-2004)

Business Risk Analysis:
Business Risk (Adelphia Communications Corp)
Revenue Variability
Particulars 2001 2002 2003 2004
Revenue 3,325,063 3,268,457 3,569,017 4,143,388
Mean Revenue 3,576,481
Standerd deviation of Revenue 399804
Revenue Variability (CV) 11.18%
Variability in EBIT
Particulars 2001 2002 2003 2004
Income before income taxes and - -
interest 5,307,732 4,748,554 -148,489 -165,004
Mean EBIT -2592444.75
Standerd deviation of EBIT 2821759.51
Variability in EBIT (CV) -108.85%
Degree Of Operating Leverage
Year 2001 2002 2003 2004
- -
EBIT 5,307,732 4,748,554 -148,489 -165,004
- -
Change of EBIT 0.1053516 0.96872964 0.1112204

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 Revenue 3,325,063 3,268,457 3,569,017 4,143,388
Change of Revenue -0.02 0.09 0.16
Operating leverage 6.19 -10.53 0.69
Average -1.21834

Adelphia Communications Corp.’s has low business risk in terms of sales variability and
EBIT variability and its degree of operating leverage is -1.21 which means very low business
risk.

Degree of Operating Leverage

DOL Risk status Risk Premium

0-.5 very low 1.50%
.5 to 1 low 2.75%
1 to 1.5 moderate 3.00%
1.5 to 2 high 3.50%
2+ very high 4.00%

Here is the graph for degree of operating leverage.

Financial Risk Analysis

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 Financial Risk (Adelphia Communications Corp)
Degree Of Financial Leverage
Year 2001 2002 2003 2004
- -
EBITDA 3,878,186 3,595,447 860,447 956,518
- - -
EBT 6,287,809 7,112,208 -715,234 1,913,716
Degree of Financial Leverage 0.62 0.51 (1.20) (0.50)
Average (0.15)
Interest coverage ratio
Year 2001 2002 2003 2004
- -
EBIT 5,307,732 4,748,554 -148,489 -165,004
-
Interest 1,268,466 -748,136 -381,622 -402,627
Interest coverage ratio 4.184371 6.3471802 0.38909969 0.4098185
Table: Degree of Financial Leverage and Interest coverage ratio

Financial risk refers to a risk that the cash flow of a company will not be able to meet its
financial obligations. It is such a situation where company may feel its loans are in risk of
default. A high percentage of debt financing indicates that there is significant level of risk
involved. Adelphia Communications Corp.’s has -0.15 degree of financial leverage which is
very low risk.

Degree of Financial Leverage

DFL Risk status Risk Premium
0-2 very low 1.50%
2 to 4 low 2.75%
4 to 6 moderate 3.00%
6 to 8 high 3.50%
8+ very high 4.00%

Here is the graph for degree of financial leverage.

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 Degree of Operating leverage -1.22
Degree of Financial leverage -0.15
Degree of combined leverage 0.17682325

Risk Analysis Combined (Adelphia and Time Warner) Forecasted

years (2005-2008)

Business Risk (Adelphia and Time Warner)

Revenue Variability
Particulars 2005 2006 2007 2008
Revenue 12,031 13,669 15,307 17,141
Mean Revenue 14,537
Standerd deviation of Revenue 2192
Revenue Variability (CV) 15.08%
Variability in EBIT
Particulars 2005 2006 2007 2008
Income before income taxes and interest 2,021 2,168 2,828 2,880
Mean EBIT 2474.39
Standerd deviation of EBIT 442.97
Variability in EBIT (CV) 17.90%
Degree Of Operating Leverage
Year 2005 2006 2007 2008
EBIT 2,021 2,168 2,828 2,880
Change of EBIT 0.07249 0.304428 0.018

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 Revenue 12,031 13,669 15,307 17,141
Change of Revenue 0.14 0.12 0.12
Operating leverage 0.53 2.54 0.15
Average 1.076

Adelphia and Time Warner has low business risk in terms of degree of operating leverage which
ia 1.076.

Benchmark for Business Risk Premium

Degree of Operating Leverage
DOL Risk Status Risk Premium
0-1 Very Low 0.015
1 to 2 Low 0.0275
2 to 3 Moderate 0.03
3 to 4 High 0.035
4+ Very High 0.04
The graph of DOL is as follows:

Financial Risk (Adelphia and Time Warner)

Degree Of Financial Leverage
Year 2005 2006 2007 2008
EBITDA -252 -509 41 -359
EBT 1,312 1,292 1,957 1,970
Degree of Financial Leverage (0.19) (0.39) 0.02 (0.18)
Average (0.19)
Interest coverage ratio

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Year 2005 2006 2007 2008
EBIT 2,021 2,168 2,828 2,880
Interest 705 868 821 900
Interest coverage ratio 2.8688 2.4977 3.44458 3.2
Table: Degree of Financial Leverage and Interest coverage ratio

Adelphia Communications Corp. and Time Warner has -0.19 degree of financial leverage which
is very low risk.

4.4 Z-score calculation (Adelphia Communications Corp)

We have calculated Z-score to determine the overall riskiness of the firm’s assets. For this, we
have analyzed the historical data provided by Adelphia Communications Corp.’s and determined
weights of several components. We have used Altman’s z-score formula.

The Altman Z-score is the output of a credit-strength test that gauges a publicly traded
manufacturing company's likelihood of bankruptcy. The Altman Z-score is based on five
financial ratios that can calculate from data found on a company's annual report. It uses
profitability, leverage, liquidity, solvency and activity to predict whether a company has high
probability of being insolvent.

One can calculate the Altman Z-score as follows:

Z-Score = 1.2x1+1.4x2+3.3x3+0.6x4+1.0x5

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Where: X1= working capital / total assets

X2 = retained earnings / total assets

X3 = earnings before interest and tax / total assets

X4= market value of equity / total liabilities

X5= sales / total assets

A score below 1.8 means it's likely the company is headed for bankruptcy, while companies with
scores above 3 are not likely to go bankrupt. Investors can use Altman Z-scores to determine
whether they should buy or sell a stock if they're concerned about the underlying company's
financial strength. Investors may consider purchasing a stock if its Altman Z-Score value is
closer to 3 and selling or shorting a stock if the value is closer to 1.8.

Adelphia Communications Corp.’s has scored is below 1.80 in four consecutive historical years
that means that the company is not safe for investment. Details of the calculation have been
provided in appendix section.

2001 2002 2003 2004

-4.728251221 -6.13669859 -4.311701224 -5.854191373
Distress Zone Distress Zone Distress Zone Distress Zone
Probability of Z score 45%

Risk Distribution
Z > 2.9 Safe Zone

1.81 < Z < 2.99 Gray Zone

Z < 1.81 Distress Zone

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We have also calculate Adelphia Communications Corp. Z score on the basis of its forecasted
income statement and balance sheet for four years.

2005 2006 2007 2008

Z Score -5.154115772 -5.154115775 -5.154115772 -5.154115774
Average -5.154115773
Distress Zone Distress Zone Distress Zone Distress Zone
Probability of Z score 0.40%

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Adelphia Communications Corp.’s has scored is below 1.80 in four consecutive forecasted
years (2005-2008) that means that the company is not safe for investment.

Z-score calculation Combined (Adelphia Communications Corp and Time Warner)

Adelphia Communications Corp. received expressions of interest from several dozen

potential acquirers. In January 31, 2005 deadline for receiving final bids, the field had
narrowed to the two highest offers: a $17.5 billion cash–and-stock offer from Time Warner,
Inc.

2005 2006 2007 2008

Z Score 1.133905476 1.225148216 1.459862669 1.66468774
Average 1.370901025
Distress Zone Distress Zone Distress Zone Distress Zone
Probability of Z score 0.45%

Risk Distribution
Z > 2.9 Safe Zone

1.81 < Z < 2.99 Gray Zone

Z < 1.81 Distress Zone

Adelphia Communications Corp. and Time Warner has scored is below 1.80 in four consecutive
forecasted years (2005-2008) that means that the company is not safe for investment.

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4.5 SWOT Analysis
SWOT is a tool for analysis of Strength, weakness, opportunities and threats for a certain
organization. Based on this analysis a company can take proper measures to focus on the
strength, overcome the weakness, exploit the opportunities and minimize the threats skillfully.
The SWOT analysis of Adelphia Communications Corp.’s is given as follows:

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 i) Strength

Strengths are defined as what each business does best in its gamut of operations which can give
it an upper hand over its competitors. The following are the strengths of Adelphia
Communications Corp.’s:

 High product quality increases brand loyalty and improves Adelphia Communications
Corp s Bankruptcy performance in a competitive market

 An organization may own different intellectual property rights that can make the product
offerings unique and exclusive, making it difficult for competitors to imitate.

 Strong online presence on different social networking sites and efficient social media
management can enhance the effect of positive e-WOM and develop strong relationships
with customers.

 Providing clients with unbiased and confidential processing capabilities and permitted
non-exclusionary business relationships with clients.

ii) Weakness
 The decision making in the Adelphia Communications Corp s Bankruptcy takes too much
time, causing expensive delays in introducing new products in the market.

 Despite the strong growth in revenue, Adelphia Communications Corp.’s still had not
reported positive net income.

 The poor customer service can trigger the negative word of mouth about the business and
affect business growth.

 Weak financial position that is created by the lack of strong recapitalization strategy.

iii) Opportunity
 The exponential growth in the population, and particularly in the existing or potential
customer segments is a great growth opportunity for the business organisation.

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 The changing customer needs, tastes and preferences can act as an opportunity if the
business organizatio has good market knowledge.

 The emergence of e-commerce and social media marketing as a trend can be a great
opportunity for Adelphia Communications Corp s Bankruptcy if it can ensure strong
online presence on different social networking sites.

 The emergence of new market segments and new niches provide business and product
line expansion opportunities.

iv) Threat
 The changing regulatory framework and introduction of new stricter regulations impose a
major threat to the Adelphia Communications Corp s Bankruptcy Spanish Version. It
makes compliance with legal standards more complex and challenging for the business
organization . Inability to comply with changed regulations raises the risk of expensive
law suits.

 Shortage of skilled labour in the market can make it difficult for the organisation to
attract talent with the right skills set.

 The increasing number of direct and/or indirect competitors affects the organisation's
ability to sustain and expand the customer base.

The Adelphia Communications Corp,s SWOT Analysis requires Adelphia

Communications Corp s to differentiate between threats having short-term or long-term
implications. Threats with immediate implications need to be addressed on a priority
basis to avoid any possible harm. While threats with long-term implications can be
tackled after addressing the immediate threatening factors.

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Chapter 5 : Problem Statement of the case

5.1 Factors to be noted for Adelphia Communications Corp.

To understand the problem statement, some information regarding Adelphia Communications

Corporation is needed to put greater emphasis. These are-

 A massive accounting fraud and corporate looting scandal involving the founding Rigas
family caused the file of Chapter 11 bankruptcy of Adelphia Communications Corp. in June
2002.

 For this reason, Adelphia was trying to sell off most of its operating assets, possibly through
a “Section 363” transaction. The CEOs of Adelphia chose it, as many creditors believed that
it would produce higher recoveries on their claims.

 Adelphia was considering two highest offers. That are- a $17.5 billion cash–and-stock offer
from Time Warner, Inc. and Comcast Corp.; and a $15 billion cash-only offer from
Kohlberg, Kravis, Roberts, & Co. (KKR) and Providence Equity Partners.

 But in the meantime, Cablevision Company offered $16.5 billion to buy the assets later it
was increased to $17.1 billion. The request to the judge for the approval of a $440 million
breakup fee that Adelphia would commit to pay Time Warner and Comcast in the event, it
agreed to accept their bid but later walked away from it.

 Adelphia’s management had themselves filed the motion to firm up their commitment to the
offer they perceived to be “most likely to maximize the value. But the situation had changed
dramatically in the last few days.

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5.2 Problem Statement
Although competition among the bidders had significantly raised the value placed on Adelphia’s
assets, potentially benefitting all claimholders, Schleyer and Wittman still had a number of
important questions to consider.

i)How serious was Cablevision’s last-minute offer, and did it dominate the other offers?

ii)What was the risk that Time Warner and Comcast might withdraw their offer, and if that were
to happen, did it make any sense to revisit the idea of pursuing a traditional stand-alone
reorganization plan?

iii)And what would be the impact on the bidding process, and Adelphia’s future, if the judge
declined to approve the proposed break-up fee?

Cablevision’s offer had by now been raised, as had the plausibility of a bidding war between the
two—and maybe some other—bidders, which could ultimately lead to a higher price being paid
for Adelphia.

So, what offer was to be chosen by Adelphia among the three bidders? Which would provide the
maximum value for selling assets? What will be the restructuring plan for Adelphia?

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Chapter 6 : Alternative courses of action

Approaches to the solution:

For reaching to the conclusion, three options are found-

 Liquidation

 Stand-alone

 Bidding offer

If the company chooses the option going concern and reorganizing as stand-alone then it has
three options :

 Private placement of equity

 Optimum debt equity structure

 SWAP

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Chapter 7 : Analysis of each Alternative

7.1 Assumptions for the valuation

i) Cost of Equity:
The Building-Up approach has been used for arriving at the cost of equity of Adelphia
Corporation. The formula for cost of equity in Build-Up approach is:

Cost of Equity (Ke) = Rf + Business Risk Premium + Financial Risk Premium.

Here,

Ke = Cost of Equity, Rf = Risk free rate

ii) Cost of Debt:

Cost of debt is the interest to be paid against the debt taken. We have found it by dividing the
interest expense by long term debt.

Cost of debt of the base case 2004 has been calculated.

iii) Weighted Average Cost of Capital (WACC):

To arrive at the value of firm and value of equity, the cost of debt and cost of equity is used to
discount the free cash flows to firm and free cash flow to Equity. Weighted average cost of
capital is used to value the firm and cost of equity is used to value the equity. The calculation
procedure of both cost of equity and cost of debt is as follows.

The weighted average cost of capital is calculated with the following formula:

WACC = Weight of equity × Cost of equity + Weight of debt × Cost of debt × (1 - Tax rate)

The WACC, cost of debt and cost of equity calculation for different alternatives that are to be
followed by Adelphia Corporation is shown in the table below:

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34 | P a g e
 iv) Assumptions:

We calculated the Free Cash Flow to Firm (FCFF) for evaluating each scenario with various debt
to capital structure. The terminal growth rate, wacc and distress cost is different for different
situations. The following assumptions have been made for different valuation.

7.2 Base Case Valuation, simulation and sensitivity analysis

The valuation of base case is as follows:

In the base case, without changing any capital structure or refinancing issue we have found
$6.197 value per share. Here distress cost is assumed to be 70% of the enterprise value and
probability of distress was 80%.

7.3 Alternative 1: Liquidation Valuation

We have conducted the liquidation valuation of Adelphia hypothetically. The table is as follows:

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We have found only $0.66 value per share if company goes for liquidation. We have deducted
chapter 7 fees and breakup fee to find out the value per share. The number of shares is also low
here which is 253.74

7.4 Alternative 2(i): Private Placement of Equity

If the company takes the option to go for private placement of equity, then the enterprise value of
the firm will be increased. Here is the valuation for this alternative.

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We have found $4.605 value per share. Here distress cost assumed to be 65% of the enterprise
value and probability of distress was 70% As by placing equity, the number of share will be
increased and it will be 605,700 and the equity fund needed will be 17,600.

Here is the simulation chart for private placement of equity.

The result of the simulation shows that in 95% confidence level the value per share would be
maximum $7.12 and minimum $4.23.

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From the above sensitivity chart we can know to what extent per share value depends on which
factors. It shows that the value per share is positively related with depreciation as % of revenue,
amortization as % of revenue and terminal growth rate. It is negatively related with distress cost,
wacc, capex as % of revenue.

Here is the statistics chart for sensitivity analysis.

Forecast: Value Per Share (Private Equity)

Forecast
Statistic values
Trials 10,000
Base Case 4.61
Mean 5.5
Median 5.44
Mode '---
Standard Deviation 0.74
Variance 0.55
Skewness 0.5143
Kurtosis 3.67

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 Coeff. of Variation 0.1347
Minimum 3.04
Maximum 9.28
Mean Std. Error 0.01

From the statistic, it can also be seen that the coefficient of variation is .1347 which is less than .
5 which signifies that this result is acceptable and significant.

7.5 Alternative 2(ii): Optimum Debt Equity Structure

Here is the valuation for alternative 2(ii) which is if the company goes for optimum debt equity
structure.

We have found $4.729 value per share. Here distress cost assumed to be 70% of the enterprise
value and probability of distress was 75%. If the company follows this alternative the number of
shares increased than the base case but will be decreased than the alternative 1 and the number of
shares will be 376,900. The structure of equity fund is $12,320 and debt fund is $5280.

Here is the simulation chart for optimum debt equity structure.

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The result of the simulation shows that in 95% confidence level the value per share would be
maximum $6.50 and minimum $1.54. The Sensitivity chart is as follows:

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From the above sensitivity chart we can know to what extent per share value depends on which
factors. It shows that the value per share is positively related with depreciation as % of revenue
and terminal growth rate and negatively with distress cost, wacc, capex as % of revenue.

Here is the statistics chart for sensitivity analysis.

Forecast: Value Per Share

Statistic Forecast values
Trials 10,000
Base Case 4.73
Mean 5.09
Median 4.74
Mode '---
Standard Deviation 12.28
Variance 150.92
Skewness 0.1484
Kurtosis 3.24
Coeff. of Variation 0.241
Minimum -42.18
Maximum 59.53
Mean Std. Error 0.12

From the statistic, it can also be seen that the coefficient of variation is 0.241 which is less than .
5 which signifies that this result is acceptable and significant.

7.6 Alternative 2(iii): Debt-Equity swap

Here is the valuation for alternative 3 which is if the company goes for debt-equity swap.

We have found $5.02 value per share. Here distress cost assumed to be 30% of the enterprise
value and probability of distress was 50% By choosing this alternative, the number of share will
be increased significantly and it will be 21731580 and so share value will also increased.

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Here is the simulation chart for debt-equity swap..

The result of the simulation shows that in 95% confidence level the value per share would be
maximum $6.57 and minimum $4.01.

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From the above sensitivity chart we can know to what extent per share value depends on which
factors. It shows that the value per share is positively related with depreciation as % of revenue
and terminal growth rate and negatively with distress cost, wacc, capex as % of revenue.

Here is the statistics chart for sensitivity analysis.

Forecast: Value Per Share (SWAP)

Statistic Forecast values
Trials 10,000
Base Case 5.03
Mean 5.09
Median 5.03
Mode '---
Standard Deviation 0.66
Variance 0.43
Skewness 0.6397
Kurtosis 3.75
Coeff. of Variation 0.1291
Minimum 3.35

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 Maximum 8.48
Mean Std. Error 0.01

From the statistic it can also be seen that the coefficient of variation is .1291 which is less than .5
which signifies that this result is acceptable and significant.

7.7 Alternative 3: Bidding Offer

(i): TWC Combined with Adelphia

Here is the valuation for TWC combined.

We have found $7.93 value per share. Here distress cost assumed to be 30% of the enterprise
value and probability of distress was 55% Number of shares in this case is only 469.

Here is the simulation chart for TWC combined.

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The result of the simulation shows that in 95% confidence level the value per share would be
maximum $20.19 and minimum $-1.88

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From the above sensitivity chart we can know to what extent per share value depends on which
factors. It shows that the value per share is highly positively related with COGS as % of revenue
and negatively related with distress cost, wacc, depriciation as % of revenue.

Here is the statistics chart for sensitivity analysis.

Forecast: Value Per

Share
Statistic Forecast values
Trials 2,000
Base Case 7.93
Mean 8.32
Median 7.92
Mode '---
Standard Deviation 5.66
Variance 32.06
Skewness 0.4521
Kurtosis 3.49
Coeff. of Variation 0.4809
Minimum -6.86
Maximum 35.18
Mean Std. Error 0.13
From the statistic it can also be seen that the coefficient of variation is .4809 which is less than .5
which signifies that this result is acceptable and significant.

(ii) Others

 Adelphia demands payment of $17.5 billion but KKR offers only $15 billion cash for the
entire company.

 Cablevision also offers less than $17.5 billion that is $17.1 billion.

 Other bidders want to buy cluster of cable TV systems that will decline the number of
subscribers as well as the revenue of the company.

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7.8 Restructure

Alternative of Debt-Equity Swap gives the highest value per share for Adelphia -

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Chapter 8: Recommendation, Conclusion and Appendix

Recommendations
As the company can earn highest value through swap, it should go for it.

So, Adelphia will have to pay $8800 million to its debt-holders by DIP financing and remaining
will be paid through debt-equity swap.

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Justification:

Why Debt-Equity swap is to be the reorganization plan?

 Creditors want the winning bidder must pay at least $17.5 or else they would prefer to bring
Adelphia out of bankruptcy as a stand alone company.

 Though the company has a massive account fraud and looting scandal, it has a greater
potentiality in cable TV systems and is one of the largest Cable television companies.

 As the management body has been changed and the new CFO is Vanessa Wittman who had
just finished overseeing the bankruptcy broadband startup 300netowrks. She has the
capability to run the company successfully.

Terms:

There were a number of important question in this case-

 What will be the traditional stand-alone reorganization plan?

Answer: Cable Vision’s offer dominates other offers. Because it bids more cash offer than TWC
and other companies. But the company offers less amount of cash than the demand of the
creditors of Adelphia.

 How serious was Cable vision’s last minute offers?

Answer: Debt-equity swap will be the stand-alone reorganization plan. Creditors will get per
share at the offer price of $.0.80 that is worth of $5.03 value per share.

 What would be the impact on bidding process?

Answer: Adelphia will have to pay the break up fee $440 million as the company wants to get
out from the auction.

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Though in the case a largest bondholder said that if the company were combined with another
company it’s assets would be worth even more. But when we have done the valuation, combined
with Time Warner and Comcast it gives lowest value to the firm. On the other hand for
restructuring DIP financing is easily available to the bankrupt company, so we have chosen this
financing method. Another point is the company is able to reduce its debt-holders by providing
them equity in exchange for 1 unit of debt.

Conclusion:
This case gives us the idea about the restructuring plan of a company. While conducting the
valuation of the alternatives, we have calculated the best option which is debt-equity swap that
will be suitable for Adelphia’s creditors to mitigate their loss and help them to recover from the
bankruptcy that was occurred in June, 2002 in USA.

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Appendix:
Forecasted IS for Adelphia:

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Forecasted BS for Adelphia

Forecasted IS for TWC+Adelphia

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Forecasted BS for TWC+Adelphia

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