In Adelphia Saga, One Mogul Fights to Succeed Another

Two cable moguls have lost fortunes built over a lifetime in the recent stock meltdown at Adelphia Communications Corp.

The first is John Rigas, the 77-year-old founder of the nation’s sixth-largest cable operator, who relinquished control of Adelphia last week because of his family’s role in a major accounting scandal.

The other is Rigas’ friend of 40 years and fellow cable pioneer, Leonard Tow. In 1999, Tow sold his company Century Communications Corp., including its prized Los Angeles cable operations, to Adelphia for $5.2 billion. Tow wound up with a 12% stake in Adelphia, becoming the second-biggest shareholder after the Rigas family.

Worth about $1.7 billion two years ago, Tow’s Adelphia holdings have evaporated to $23 million in the last three months.

Now with Adelphia teetering on the brink of bankruptcy and with Tow attending his first board meeting today, the 74-year-old cable executive is hoping to wrest control of the company from a group of directors in charge since Rigas and his three sons stepped down last week.

“The entire group of major [Adelphia] shareholders believes the company needs Leonard Tow as CEO,” said Gordon Crawford, senior vice president at Capital Research & Management, a money management firm that owns 4.8% of Adelphia. “The company needs an experienced cable operator to get it through the next stage.”

Tow is locked in a power struggle with Adelphia’s interim chief executive, Erland Kailbourne. Kailbourne, a boyhood friend of Rigas and an independent Adelphia board member, was put into power two weeks ago by the Rigases shortly before they relinquished control of the company.

The Rigases, a clannish family operating out of Coudersport, a Mayberry-like town in western Pennsylvania, face mounting shareholder lawsuits and federal and state probes into $3.1 billion in personal loans backed by Adelphia, supposedly without shareholder or board knowledge.

Kailbourne and Tow seem to disagree about the best way to save the company. Adelphia has been negotiating around the clock to complete a deal with billionaire Paul Allen, who would lend the company $2 billion in exchange for some prime Los Angeles cable systems.

Allen, who controls the nation’s fourth-largest cable company, Charter Communications Corp., has coveted the Los Angeles properties since he lost a bidding war for them three years ago against Adelphia. Tow turned down an all-cash offer from Allen and put Century up for auction, preferring a tax-free stock trade, like the one he got from Adelphia.

Talks between Allen and Adelphia hit a snag Thursday night but were not dead, sources said.

Tow is trying to prevent a hasty sale of cable assets, preferring to rebuild the business and to work out new payment plans with its lenders. In a letter Thursday to Kailbourne, Tow urged him not to sell the “most valuable [cable] assets in an atmosphere of desperation.”

On Friday, Boston investment group Highfields Capital Management urged Kailbourne to put the entire company up for sale, rather than pursue a piecemeal strategy of selling Adelphia’s assets at distressed prices. In a letter filed with regulators, two principals of Highfields, with 6.5% of Adelphia, complained about a lack of leadership at the company and accused directors of trying to shield themselves from “liabilities created by the former controlling shareholders.”

Adelphia’s independent directors have maintained that they were in the dark about many of the Rigases’ questionable activities.

In a regulatory filing last week, the board said the family had failed to seek board approval for many of their insider dealings, including a $150-million loan from the company to finance their professional hockey team, the Buffalo Sabres.

On Wednesday, Tow won two of the three seats on Adelphia’s board he said he was entitled to under the 1999 sale agreement.

“He always had the right but didn’t exercise it because he didn’t want to get in the way,” said Bern Gallagher, former chief executive of Century Communications. “He didn’t think it was necessary because he had an excellent relationship with the Rigases.”

Tow would not be interviewed. But Gallagher said he and his former boss were shocked by the Rigases’ financial dealings.

If Tow took over Adelphia, Gallagher said, he would replace the four independent board members. “They need a new slate of directors who are not encumbered by their relationship with the [Rigas] family,” Gallagher said. “This happened under their watch.”

Tow, however, doesn’t have enough votes to push through changes. He controls only two of the six Adelphia board seats.

He also may be too late to keep Adelphia out of Bankruptcy Court. A liquidity squeeze has forced the company to default on several loans. Nasdaq will delist Adelphia on Monday for failing to meet several deadlines for filing its 2001 annual report, making Adelphia liable for the immediate payment of $1.4billion to bondholders.

Tow also was a target of shareholder suits years ago for his expensive compensation package at Citizens Communications Co., a telecommunications and power utility he controls. And as a cable operator, Tow had a reputation for charging some of the highest rates in the industry and for spotty customer service in Los Angeles.

“I don’t know if Tow gives me hope” for Adelphia, said Oren Cohen, a bond analyst at Merrill Lynch. “I’d question whether he’s the right guy.”