Facebook Twitter

Adelphia offering huge pay

Bankrupt company is trying to lure 2 AT&T executives

SHARE Adelphia offering huge pay

Adelphia Communications, the cable television company laid low by the excesses of its founding family, is negotiating to hire the former top executives of AT&T Broadband to bring it out of bankruptcy. And the company is enticing them with the prospect of an exceptionally big payday.

If the terms of the employment contracts are approved at a board meeting Wednesday, Adelphia could wind up paying almost $65 million over two years to the two men, William Schleyer and Ronald Cooper. Schleyer's package alone could be worth nearly twice the $20 million over three years that was recently awarded to Michael D. Capellas, the new chief executive of WorldCom, which entered bankruptcy listing assets four times those of Adelphia when it collapsed.

The Adelphia contracts underline the increasingly rich payouts being awarded to executives who agree to run bankrupt companies. But the structure of the compensation requested by Schleyer and Cooper is also remarkable in several ways, according to Brian Foley, a compensation consultant based in White Plains, N.Y.

Unlike the package given to Capellas, the Adelphia contracts are unusually short term in orientation, rewarding the executives for propelling the company out of bankruptcy but not providing an incentive for them to deliver performance afterward. That makes it likely that one or both of the executives will be back negotiating for more compensation after the company emerges from bankruptcy.

Even more significant, the benchmark used for potentially the largest portion of their compensation — the company's value when it exits bankruptcy — seems to be so low that it will be easily exceeded. This sets up the possibility that Schleyer and Cooper could receive significant payouts for creating little value at the company.

"The real story here is how much possible hidden value there is in this package," Foley said. "Whereas the Capellas package looks to establish a value at emergence and hold onto Mike for several years, this appears to be extremely exit-focused." Moreover, Foley said, Capellas' package was at the high end of executive compensation at a bankrupt company, "and this has the potential to dwarf it."

Gone are the days when executives heading troubled companies would agree to nominal pay up front in the hopes of a higher payout if the company survived and thrived. In 1979, when Chrysler was on the verge of bankruptcy, Lee A. Iacocca, its chairman, accepted an annual salary of $1. (But by the time he left in 1992, Iacocca had made $90 million, tied to Chrysler's performance.)

The terms of the Schleyer and Cooper employment contracts have not been made public. Copies of the contracts, drawn up for both men by Karen G. Krueger, a lawyer at Wachtell, Lipton, Rosen & Katz in New York, were obtained from someone involved in Adelphia's hiring process.

Under the contract, Schleyer stands to receive $3.6 million in a signing bonus, $900,000 in base salary a year and an incentive bonus targeted at $900,000 and based on whether the company reaches unspecified earnings or subscriber growth goals. Cooper will receive a signing bonus of $2.4 million, a base salary of $600,000 and an incentive bonus with a target of $600,000.

None of these payouts is that unusual; it is the success payment that each man stands to receive that makes the packages really stand out. These payments, several analysts said, are unusual in the corporate turnaround world. They resemble the compensation of hedge fund managers, who typically receive a management fee comparable to other portfolio managers but who get an outsized payment when they exceed a specific return in a portfolio.

The success payments are based on the two men beating a $10.3 billion benchmark of Adelphia's value when the company emerges from bankruptcy, as it hopes to do within two years. The value of the company will include the company's assets, bank debt and other securities and will be subject to approval by the bankruptcy court. At $10.3 billion, the benchmark translates to about $1,800 for each of Adelphia's approximately 5.7 million subscribers.

Under the contract, Schleyer will receive 0.9 percent of any Adelphia value over $10.3 billion, up to $33 million. Cooper will receive 0.6 percent of the amount that the company is worth over $10.3 billion, with a cap of $22 million. If it takes the company longer than expected to exit bankruptcy, the caps on the success payments can be renegotiated higher.

Aryeh B. Bourkoff, a cable debt and equity analyst at UBS Warburg, considers the value of $1,800 for each subscriber low. "Depending on the time it takes to repair Adelphia's problems in bankruptcy, we would believe that the company's subscriber base in its entirety could be worth more than $2,000 per subscriber," Bourkoff said. Other cable companies have traded at $2,000 to $5,000 per subscriber, he added.

How much more the company could be worth is not clear, of course. But at At $2,000 a subscriber, Adelphia would be worth almost $11.5 billion. Such a value would give Schleyer roughly one-third of the maximum success payment. To reach his success payment cap of $33 million, Adelphia's exit value would have to grow to just $13.9 billion, or $2,400 per subscriber.

It is intriguing that neither Adelphia nor its creditors, out of whose pockets the compensation to Schleyer and Cooper will ultimately come, are unhappy with the generous terms of the executives' contracts. David Friedman, a lawyer at Kasowitz Benson Torres and Friedman who represents the creditors' committee, said, "The $10.3 billion is a generous market valuation of the company. Should the success payment be earned, it would be earned in the context of these two people having performed a remarkable turnaround at the company."

Adelphia, through its law firm Boies Schiller & Flexner, declined to comment, as did a spokesman for Leonard Tow, the head of Adelphia's equity committee. A call to Kreuger, the lawyer representing the executives in their contract negotiations, was not returned.