HomeMy WebLinkAboutMINUTES - 08171999 - SD2 (2) TRANSFER OF CONTROL
CENTURY COMMUNICATIONS CORP,
T
COMMUNICATIONSADELPMA
I
TLECOMMUNY: ..ACATIONS MANAGEMENT CORP.
5757 Wiishire Blvd.,,Suite 635 o?_os Angeles,CA 90036 (323)931-2600*Fax(323)931-7355
COUNTY OF CONTRA COSTA
EVALUATION OF REQUEST
TO TRANSFER CONTROL OF
CABLE SYSTEM FRANCHISE
July 1999
C:\TMCiCLIENTS\TRANSFERS\Century-Adeip?iatReports\ContraCostaCo\0799(ca).doc
1. INTRODUCTION
A portion of the County of Contra Costa (the County) currently is provided
with cable television service by Century Communications Corp. (Century).
The County recently received a request from Century to transfer its cable
franchise to Adelphia Communications Corp. (Adelphia). Adelphia and Century
have announced that Century will be acquired by Adelphia (see Appendix A).
The request was submitted on Federal Communications Commission
Foran 394, which is the form officially designated as "Application for Franchise
Authority Consent to Transfer Control of Cable Television Franchise." The Form
394 provides specific information to local franchise authorities to assist;hem in
evaluating the transfer request.
The County has retained Telecommunications ;Management Corp. (TIVIC)
to evaluate the requested transfer. TMC's evaluation is provided in this report.
The Form 394 is dated April '19, 1999, but the letter of transmittal is dated
April 27, 1 999. The date is of some significance, since the 1992 Cable Act
requires a local franchising authority to take action on a franchise within 120 days
;see .Appendix B). Consequently, if April 27, 11999 is ;used as the starting date,
the deadline for taking action (usually by means of a Council resolution)would be
August 25, 1999.
It is naffed that the County's transfer review is complicated by the fact that
Century has already notified the County that it is swapping its local cable
systems with Tele-Communications, Inc. (TCI, now a part of AT&T). If the TCI-
Century exchange closes before the Adelphia purchase of Century, the Adelphia
purchase of the County's Century system is rendered moot. However, because
of the possibility that the Adelphia acquisition will close before the TCI-Century
exchange, the County must review the potential qualifications of Adelphia as a
franchise holder.
It should also be noted that the 129-day deadline depends on the receipt
of"such information as is required in accordance with Commission regulations
and by the franchi
il, EVALUATION OF PROPOSED TRANSFER
In any franchise transfer, a number of considerations must be taken into
account, including the following:
0 Whether the transferor has been, and currently is, in
compliance with the requirements of the existing franchise.
® Whether the transferee agrees to comply with the
requirements of the existing franchise, or wishes to change
any of the franchise terms.
0 Whether the transferee is legally, financially and technically
qualified to operate the cable system.
0 What impact the transfer may have on cable subscribers and
the franchising municipality (e.g., the impact upon subscriber
rates or quality of service).
What conditions, if any, the franchisor can legitimately
impose upon the transfer.
These issues are reviewed in this report.
A, transfer and Ownership Structure
he FCC Fora 3394 lists the transferor of the franchise as:
Century Communications Corp.
(Parent of franchise holder, Century Cable of Northern California)
59 Locus Avenue
New Canaan, Connecticut 06340
the transferee is listed as:
Adelphla Communications Corp.
Main at Water Street
Coudersport, Pennsylvania '6915
Adelphia is listed as a Delaware corporation. It is essentially family-
owned, with John J. Rigas and his three sons controlling 69.910 of the voting
shares.
1-he proposed acquisition is described in the "Agreement and Plan of
Merger" between Adelphia and Century. Prior to this acquisition of Century by
Adelphia, however, as noted above, the County received another Form 394 that
requested consent to a transfer of the current Century franchise to TCI.
2
The transfer of the franchise to TCI has been reviewed in a separate
report prepared by TMC for the County (submitted to the County in May 1999).
Figure 1 describes the acquisition structure if Adelphia becomes the
franchise holder. The only way this will happen is if Adelphia`s purchase of
Century (assuming it is finalized) is completed before the TCI exchange 1s_
executed. This is illustrated in Figure 2 where it is noted taut the franchise will
either go directly from Century to TCl or from Century to Adelphia to TC I.'
B. Transferee Qualifications
(1) Legal Qualifications
T he Telecornmunicatiors Act of 1996 repealed the 1992 Cable Act's
prohibition of transfer of cable systems owned for less than three years. Thus,
even though the County's franchise may first be transferred to Adelphia and then
to ; Cil, there is no legal barrier to the two-step process, subject to the County's
right not to consent to the transfer,
(2) Financial Qualifications
Appendix C contains Adelphia's Form 1 O-Q report, filed with the Security
and Exchange Commission for the quarterly period ended March 31, 1999.2 The
Form contains financial statements as of that date.
A.delphia's balance sheet as of 3131199 indicates the fallowing;
,assets $ 3,589,780,000
Liabilities 3,899,124,000
,accumulated Deficit (1,802,666,000)
The company's operating statement for the quarter lists the following;
Revenues 206,194,000
Operating Income 32,973,000
Ilion-Operating Costs (71,069,000)
Net Loss (50,288,000)
` This assures that the County will not require a resubmission of the Century to TCI Forum, 394
which technically would be inaccurate when it lists"Century"as the"current"franchise holder.
2 The Fora I o-Q was obtained from Adelphia's web site, and was not part of the Form 394 filing.
3
FIGURE 1
ACQUISITION STRUCTURE
.Adelphia
Communications
Corporation
i
i
Adelphia acquisition
Subsidiary, Inc.
(101% Adelphia
3
Century
Commu.n!cations Corp,
i
7
Dote: At the closing, Century Communications Corp. will cease to exist, and
Adelphia Acquisition Subsidiary, Inc. will be the surviving corporation.
4
FIGURE 2
TRANSFER PROCESS
B
Century Cabe off
Northern California e
Adeipn;a 3
Communications Corp. f
z
a
TC< (AT&T)
1
5
Net Cash Provided (used)
Operating Activities (41,861,000)
Investing Activities (375,982,000)
Financing Activities 188,851,000
Decrease in Cash and Cash (228,992,000)
Equivalents
In addition to the above current information, Adelphia's latest Annual
Report. for the fiscal year ended Larch 31, 1993, indicates net operating losses
and negative net worth for each of the last three fiscal years.
-""his, for the cable Industry, is not uncommon. The industry is capital-
Intensive, with large expenditures for plant construction and upgrading. In
addition, historically cable operators have minimized taxes (particularly these,
like Adelphia, that were privately owned), so that net losses are not unusual.
Usually, the investors receive their return on investment when the cable systems
are sold, as in Century's case. (Century also shoves a shareholder's deficiency in
its financial statements, yet it is being acquired for approximately $5.2 billion, as
Indicated in Appendix A).
Consequently, so long as Adelphia continues to utilize debt funds, there is
no reason to assume that the continued operation of the County's cable system
will be it jeopardy. Adelphia is considered financially qualified to operate
Century's cable systems. More relevant, however, is the anticipated impact of
the Century acquisition on subscriber rates. Century's rates already are
considered high, based on industry norms, and the acquisition oasts will Increase
the pressure on Adelphia to Increase rates, possibly even at a more rapid rate
Shan would have occurred under continued Century management.
(3) Technical Qualifications
Rhe FCC form 394, in Section N, requests "a narrative account of the
transferee's/assignee's technical qualifications, experience and expertise
regarding cable television systems, including, but not limited to, summary
information about appropriate management personnel that will be involved in the
system's management and operations. The transfereelassignee may, but need
not, list a representative sample of cable systems currently or formerly owned or
operated."
In response to this, the submitted Form 394 refers to Adelphia's annual
report for the fiscal year ended March 31, 1998, and the Form 10-K for the same
period.
6
The annual report (pages 2-11 are extracted in Appendix D) lists
accomplishments of the company, including:
Cable system upgrades
Digital video service
® High-speed Internet access service
Personal paging service
Long distance telephone service
Local telephone service.
This information, plus the tact that Adelphia, after the Century acquisition
(and purchase of other cable operators), will be the fifth largest cable operator in
the U.S., serving approximately 4.7 million cable subscribers, indicates that, on a
general basis, Adelphia could be considered technically qualified to manage and
operate the County's cable system.
The annual report and the 10-K, however, provide no indication as to the
quality of Adelphia's cable service and the relations it has with the subscribers
and communities that it serves. The information provided also does not include
details that are of specific interest to the County, such as experience operating
systems west of the Mississippi, constructing state-of-the-art cable systems, and
compliance with franchise obligations. In terms of the potential impact that a
franchise transfer may have on the cable subscriber in the County, this
information is significant.
In an attempt to elicit such information, TMC requested that Century
and/or Adelphia respond to a survey questionnaire regarding Adelphia's cable
systems (see Appendix E). As Appendix E indicates, Adeiph a's counsel initially
declined to provide the requested information. TMC requested that Adelphia
reconsider, and on June 29, 1999 TMC received some responsive information
(cover letter also in Appendix E). The provided information, along with the
additional information to be provided, will be evaluated in a separate report.
Appendix F indicates that, at least in Vermont, there are a number of
outstanding cable franchise issues, with state regulators imposing a $5.26 million
fine on Adelphia for "alleged franchise infractions." There may be other such
situations relative to Adelphia's cable operations.
Consequently, the County roust determine whether Adelphia's operating
history is a significant issue in the County's consideration of the requested
franchise transfer.
7
C. Corrioliance with Existing Franchise
It is beyond the scope of this report to determine whether issues exist with
respect to possible Century non-compliance with the requirements of the existing
franchise. If, in the County's opinion, any significant non-compliance issue
exists, this should be settled prior to or concurrent with, the County's granting of
consent. A less desirable option is for the County, in the transfer resolution, to
specifically reserve all rights to determine whether a non-compliance issue has
existed, and resolve the issue with County or Adelphia or both.
D. Other_Issues
A number of other issues are related to the transfer, including the
following:
(1) impact upon Subscribers and the County
The legislative history of the 1992 Cable Act, which established the
current franchise transfer procedures, indicates that franchising authorities, in
considering whether to grant their consent, can take into account any potential
negative impact that the transfer may have on cable subscribers or the
community.
The Report of the House Committee on Energy and Commerce (June 29,
1992) contains the 'legislative history of Congressional intent with regard to the
1992 Cable Act. The portion of the Report addressing Section 617 (Sales of
Cable Systems) states:
58The Committee intends that the FCC regulations will be designed
to ensure that every franchising authority receive the information
required to begin an evaluation of a request for approval of a sale
or transfer. Such information may include detailed financial
information showing the effect of the transfer or sale on rates and
services, the contracts and agreements underlying the sale or
transfer; information concerning the 'legal, financial and technical
qualifications of the transferee, and information concerning the
transferee's plans for expanding (or eliminating) services to
subscribers. This amendment is not intended to limit, or give the
FCC the authority to limit, local authority do require cable operators
provide additional information or guarantees with respect to a cable
sale or transfer" (emphasis added).
Since Adelphia does not have a history of operating cable systems in
California (or in the Western part of the United Mates), it is difficult to predict
what its future position maga be with respect to rates and quality of service. Here
again, an Adelphia response to TMC's questionnaire would clarify Adelphia's
past performance, and provide the County with some specific information upon
8
which to base its consent decision. Because of the presumed eventual transfer
to TCl, the value of this information in this particular case may be diminished.
However, because the eventual transfer to TCl is not an absolute certainty
(although very likely), this information could be useful to the County in its
decision-making process.
(2) Local Authority
A recent Federal court decision indicates that franchising authorities have
more authority with respect to franchise transfers than the cable industry has
been willing to concede. The Industry's position, in essence, is that if the
transferee's legal, technical and financiai qualifications are adequate, the local
franchising authority must approve the transfer, and further, cannot attach any
conditions to its consent.
When AT&T acquired TCl, the City of Portland, Oregon and surrounding
Multnomah County conditioned their consent to the franchise transfer upon AT&T
opening" its cable systems to other Internet access providers, apart from the
proprietary @'Home service that TCl/AT&T offers. AT&T sued in Federal coin to
invalidate this condition on the transfer consent. As Appendix G indicates, the
District Court ruled that the City and County did have the authority to impose this
condition.
AT&T is appealing this decision. Regardless of the outcome, it appears to
open the door for greater local authority with respect to a franchising authority's
transfer consent decisions. Rather than simply rubber-stamping a transfer
request, as the cable industry prefers, a franchise authority can legitimately take
into account such factors as competitiveness, as well as community impact. This
would lead logically to the County's ability to question a potential transferee on
these issues, and to expect responsive answers.
(3) Counts Reservation of R hes
Even if it appears that Century is in substantial compliance with the terms
of the current franchise, there could be some contingent liabilities that are not
immediately apparent. For example, there may be some franchise fee
underpayment.
Since the transfer consent request contains timetables that are primarily
for the convenience of the transferor and transferee, if the County
accommodates these timetables, it should not be expected to waive its rights to
recover any monies due. Consequently, a reservation of rights, as part of the
transfer consent, appears to be appropriate. Alternatively, if Adelphia will agree
to assume any potential liability, this would resolve the issue.
(4) Reimbursement of Costs
As is very evident, franchise transfers are becoming much more frequent
than in the past, and probably Wil be even more frequent in the foreseeable
future, because of rapidly changing technology and regulation, and the
development of new services that are aimed at large "clusters" of subscribers,
rather than individual communities. ?here is an ongoing trend for the larger
cable companies (or neve entrants) to acquire smaller systems that can enhance
their coverage in selected geographic areas, and also for the large companies to
„swap" systems that they own, that might be located array from their major
service areas, for other systems that are closer. Furthermore, even a vers large
cable operator may be acquired.
Since a transfer is primarily for the benefit of the buyer and seller, and
since municipalities have no control over when such a transaction may occur, or
how many times it occurs during a franchise terra, this process can hardly be
termed a normal regulatory function, whose costs would be absorbed by
franchise fee revenue. Because of this, it appears perfectly justifiable for the
County to require reimbursement of reasonable out-of-pocket costs to evaluate
and process the transfer, as a condition of the transfer.
10
Ill. CONCLUSIONS
Based on the preceding evaluation, the following conclusions are reached:
(I} The County should confirm that the current franchisee,
Century, is in full compliance with the requirements of the
existing franchise. if any significant non-compliance is
perceived, this should be resolved prior to the County
granting consent to the transfer.
(2) Neither Century the transferor) nor Adelphia (the transferee)
has requested any change to the existing franchise
agreement.
;3) Adelphia may be considered financially and technically
qualified to continue to operate the Century cable systems.
However, Adelphia,s operating history information, which has
yet to be provided to the extent requested, must be
evaluated to ascertain Adelphia's technical performance as
demonstrated by the quality of its service and its relations
with its served communities. This technical performance will
be reviewed in a separate report, and may be critical in any
determination as to whether to approve or disapprove the
proposed transfer.
(4) The recent Oregon federal decision confirms that lova:
franchising authorities can consider other relevant factors
beside the examination of the transferee's legal, technical
and financial qualifications.
t5) The County, in any resolution granting consent, should
require reimbursement of its processing and evaluation costs
connected with the transfer. A recommended approach is to
maize the transfer consent contingent upon such
reimbursement,
u (5) Any transfer resolution also should include a specific
reservation of rights, particularly with respect to unknown
Century non-compliance issues existing prior to the transfer
date.
EXHIBIT 99.01
FO .l EDIATE RELEASE
Contact: Adelphia Communications Corporation
Timothy J. Rigas
Executive Vice President
(814) 274-9830
Cen:tttry Co n munications Co .
Scut: N. Schneider
Chief Financial Officer
(202) 972.-2002
ADELPHIA COMMUNICATIONS TO ACQUIRE
CENTURY COMMUNICATIONS FOR $5.2 BILLION
TO CREATE STH LARGEST U.S. CABLE COMPANY
Coudersport, PA and New Canaan. CT. March 5, 1.999. Adelphia Communications Corporation
("Adelphia") (NASDAQ:ADLAC) and Century Communications Corp. ("Century") (NAS-
DAQ:CTYA) today ointly announced the signing of a definitive agreement for the merger of Cen-ury
with Adelphia. The transaction is valued at approximately $5.2 billion:, including indebtedness of
approximately $1.6 billion being assumed. Adelphia will become the fifth largest operator of cable
television systems in the United States, serving approximately 4.7 million subscribers.
;?ursuant to the :Merger Agreement, Century's Class A Common stockholders will receive cash of
$9.16 per share and 006122 shares of Adelphia Class A Common Stock (for a total market value of the
consideration of $44.14 based on yesterday's closing price of $57',A) for each share of Century Class A
Common Stock that they own, and Century's Class B Common stockholders will receive $:1.81 in cash
and 0.6360 shares of Ade'phia Ciass A Coarnmon Stock (for a total market value of the consideration of
$48.14 based on yesterday's close) for each share of Century Class B Con-L-n-on. Stock that they own.
Following the Merge.-, the former stockholders of Century will own approximately 48.7 million shares of
the Class A Common Stock of Adelphia.
John Rigas, Chairman and CEO of Adelphia, said "Leonard Tow and I nave been friends for more
than two decades. Adding IM Tow to our Board of Directors and as one of Adelphia's largest
shareholders brings its incredible opportunities. With the acquisition of Cent::ry, Adelp^ia's annual
revenues will exceed 2 billion and we will serve nearly 5 millions customers. This transaction
strengthens the company financially and adds significant talent to our management team.. Adelphia's and
Century`s similar histories and cultures will facilitate a rapid and smooth integrations of our operations."
Leonard bow, Chairman and CEO of Century, said "We are extremely pleased to be merging
Century, after twenty-live Years in operation as an independent and innovative cable system operator.
with Adelphia. Adelphia shares our views with respect to the future of the industry, the opportunities
for cur shareholders and the importance of our employees. The combination creates a first-tier cable
operation with approximately five million subscribers and enormous potential for the future. More than
9C% of the company's customers will be concentrated in eleven major clusters,"
After announcing in December 1998 that it was exploring strategic alternatives to maximize
siareholder value. Century's Board determined that the combination of its cable operations with these
of Adelphia provides the most €avorable outcome in terms of value to shareholders, as well as the
potentia: to provide enhanced value through the creation of a nationwide cable operator capable of
delivering advanced video and data services.
Donaldson, Lufkin & Jenrette served as financial advisor to Century. Daniels & Associates served
as advisor to Adelphia.
Century Communications Corp. owns and operates cable television systems with significant
concentrations of subscribers in California, Colorado and Puerto Rico. Century recently entered into an
agreement with Tele-Communications, inc. ("TCI") to create a 70%-owned joint venture which will
S
overate a cable systema group serving approxinnately 800,0W subscribers in the Los Angeles, CA area.
Pro forma for the TO venture, Century systems will serve some i.b million subscribers.
Pro forma for the cornpedtion. of the acquisition of Century and the recently announced acquisition
of Frortie-Vision Partners, L. R. Adelphia Com.—nunications Corporation has grown to become the fifth
largest cable television company in the U.S., serving nearly 5 million customers. Adelphia's current
business operations include cable entertainment, competitive vocal exchange telephone services,
high-speed Internet access, long distance telephone service; paging and security.
The Merger is subject to certain customary conditions, including tate approval of Century's
shareholders and regulatory and rather approvals. The transaction is expected to close der ng the third
calendar quarter of 1999.
2
Multichannel News
march 8, 1999
-----------------
0
RIGA U An L A` F T11 UtNTURY
Adelphia Stays on Buying spree with 2B Purchase
By NT GIBSGNS operate in r os.�_ngeles,home of
s 17der wit( ;2uberCnturys '
hLnz Adelphia 3
O Ylt veAt`.irey with Teie-Com-
^s iLIY:�^.,."'.t,on�s l_O—T r' u ��irlC t 02Is _1C.
double in S12ein about 'ZA Eww
antury C2`,0 Bernard Gal-
0 i0 days, ydall Streoters ;were _ . . I agher timid analysts that chair-
Leo xrkg the;-, heads Over C:$F tLlry�`G6FYi1Y iS1f�"a 2d7r°3 man I a.tt 1Qw. t71 6 CQ 1Cr0iS
the compa nV s sudden bold- COM14-45-t?�fit w"•$6 xSSLE fS C°'i.0 ry, saw 'signiEcan up-
ness and wondering where it's 3199: side pcssiblrities'in Adelphia.
headed. abl � Brit-P. to rw.. For that reason.Tow chose to
Adelphia emerged last Fr. C�a�ec.Gc�ttttas e tit�,�� take about S1.6 billion. or -D-
dav as the surprise winner at ,:- percent of his consideration. in
- Million s::br��e ,�T,�98'
auction of CentU17 Corm- i1Ti- Adelp:aa stock. which 'he has
b
cations Corp.. agreeing to pay no mcendon oz seliirz>' Gal-
about 85.2 bi?iion in stock.cash Marcus Cable .1 r sll`sbr lagher said."i ow will join Adel-
and assub-ned debt for Century subscribers, 4/98 phia•s board of c'�rectors.
and its 3..6 million subscribers. $2A billion,Adelphlc to buy Tow put Charter up for sale
Ana ysts considered then ce rcr. ser�/is+cn partners .P., in December. hien g Donald-
sagh — about $3,600 per sub- 700,000 subscribers, 2/99 son. Lufkin xin :Tenrette Inc. to
scriber or around a5 t:---nes ca- $70o rmillon..Co?nvast Corp. �e�p=ore strategic alter^a
ble cash mow---and Ade:phaas s tines." "alias came ager To-
share price lel: early Friday and Microsoft Corp. cofounder
while other?!iSG shares rose. ir}tercab:e Inc., i rnit93on sub Paul.Ailen, principal owner o:
Coudersport,Pa.-based Adel- scribers,8/98 Charter, were unable to corne
phia presumably outbid the to terms on a sale price, ac-
'likes of MIediaGne Group Inc. source:MCN research cording to sources.
and Charter Cos 4r-unications See .ADEL HIA, page 66
—a pair of suitors that already
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