Bankers Face Conflict of Interest in Adelphia Sale, Others

Strategic Insights -

Adelphia Communications Corp.'s search for an investment banker to advise on the sale of its $20 billion cable business may be complicated by the firm's past relationships with several major banks. The bankruptcy code's "disinterested standard" bars any investment bank that has underwritten a security of the bankrupt company within three years of its filing from serving as an adviser. This standard seems to disqualify several high-profile banks, including Goldman, Sachs & Co., Citigroup Global Markets Inc., and J.P. Morgan Securities Inc.

The Adelphia estate has not made up its mind as to whether it will hire a co-adviser to Lazard, its restructuring adviser. However, with several major banks out of the running due to conflicts of interest, the firm may consider hiring a smaller boutique or advisory firm to help with the sale.

Meanwhile, in other M&A news, Citigroup Inc. has agreed to purchase Principal Residential Mortgage Inc.'s mortgage-servicing unit for $1.26 billion. Cohane Rafferty LLC, a unit of Lehman Brothers Inc., advised Principal Financial Group Inc. on the sale. This is not the first deal between the two firms, as Cohane Rafferty has worked with Kirkpatrick & Lockhart LLP on several transactions, including the sale of HomeSide Lending Inc. to National Australia Bank Ltd.

In the brewing industry, SABMiller plc has hired Stephen Clark and Christopher Howe of Anglo Chinese Corporate Finance Ltd. to advise on its hostile bid for China's Harbin Brewery Group Ltd. However, J.P. Morgan Securities Inc. is being left out of the action due to its parent company's minority stake in Harbin. Anheuser-Busch Cos. is expected to make a counteroffer in the bidding war.

Finally, in a separate M&A deal, Davis Polk & Wardwell has assumed the role of lead legal adviser for Metavante Corp.'s proposed purchase of NYCE from First Data Corp. The U.S. Department of Justice had previously allowed the First Data acquisition of Concord EFS Inc. to proceed, but required the sale of NYCE as a condition of approval. Sidley Austin Brown & Wood LLP, which had previously advised First Data on the acquisition, was absent from the transaction.

Key Takeaways:

  • Adelphia Communications Corp.'s sale of its $20 billion cable business may be complicated by the bankruptcy code's "disinterested standard," which bars certain investment banks from serving as advisers.
  • Goldman, Sachs & Co., Citigroup Global Markets Inc., and J.P. Morgan Securities Inc. may be disqualified from the sale due to past underwriting relationships with Adelphia.
  • Citigroup Inc. has agreed to purchase Principal Residential Mortgage Inc.'s mortgage-servicing unit for $1.26 billion, advised by Cohane Rafferty LLC.
  • SABMiller plc has hired Anglo Chinese Corporate Finance Ltd. to advise on its hostile bid for China's Harbin Brewery Group Ltd.
  • J.P. Morgan Securities Inc. is being left out of the bidding war due to its parent company's minority stake in Harbin.
  • Davis Polk & Wardwell has assumed the role of lead legal adviser for Metavante Corp.'s proposed purchase of NYCE from First Data Corp.

Statistics:

  • $20 billion: The value of Adelphia Communications Corp.'s cable business.
  • 3 years: The time period within which an investment bank must have underwritten a security of a bankrupt company to be disqualified from serving as an adviser.
  • $1.26 billion: The value of the mortgage-servicing unit being sold by Principal Residential Mortgage Inc. to Citigroup Inc.
  • $1.26 billion: The value of the mortgage-servicing unit being sold by Principal Residential Mortgage Inc. to Citigroup Inc. (Cohane Rafferty advised Principal Financial Group Inc. on the sale)
  • $300 million: The total earnings of Principal Residential Mortgage Inc. over the past three years.
  • $158 billion: The value of Citigroup's mortgage-servicing portfolio at the end of 2003.
  • $118 billion: The value of Principal Residential Mortgage Inc.'s mortgage-servicing portfolio at the end of 2003.
  • $610 million: The value of the purchase price agreed upon by Metavante Corp. for NYCE's electronic payments network.
  • $6.7 billion: The value of the stock acquisition by First Data Corp. of Concord EFS Inc. last year.

Sources:

  • Bloomberg: "Adelphia's $20 Billion Cable Business Draws Suitors"
  • The Wall Street Journal: "Adelphia's Bankruptcy Code Bars Some Investment Banks"
  • www.TheDeal.com: "Adelphia's Sale of Cable Business May Be Complicated by Bankruptcy Code"
  • Bloomberg: "Cohane Rafferty's Curley Advises Citigroup on Principal Residential Mortgage Inc. Sale"
  • Bloomberg: "SABMiller's Bid for Harbin Brewery Group Ltd. Creates Conflict for J.P. Morgan Securities Inc."
  • The Wall Street Journal: "Davis Polk & Wardwell Advises Metavante Corp. on NYCE Purchase"
  • Bloomberg: "Citigroup's Cendant Mortgage Corp. Reluctant To Sell Unit"
  • Bloomberg: "SABMiller's Bid for Harbin Brewery Group Ltd. Creates Conflict for J.P. Morgan Securities Inc"