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Mallard, Galaxy Break Off Sale Talks

11/12/2000 7:00 PM Eastern

Houston-based startup Mallard Cablevision LLC has dropped out of the running for Galaxy Telecom Inc., a troubled rural MSO with about 123,000 subscribers.

Mallard, which was Galaxy's third potential suitor in a year, broke off negotiations with the embattled operator earlier last month, said Earl Macomber, a partner in BG Media Investors Inc. BG Media holds an equity stake in Mallard.

Galaxy is still trying to find a buyer. In a U.S. Securities and Exchange Commission filing earlier this month, it said it hired New York City investment banker Donaldson, Lufkin & Jenrette Securities Corp. as financial adviser.

Among DLJ's duties, according to the filing, is to seek out new financing for Galaxy's $120 million in debt, including an outright sale of the company.

Galaxy has been on the block for more than a year, and was unable to close two other potential deals that would have given it new owners. In January, Adelphia Communications Corp. allowed a letter of intent to purchase Galaxy to expire after the two companies could not agree on terms, according to sources.

In March, Classic Communications Inc. also let an LOI expire, according to SEC documents.

Mallard appeared to be Galaxy's last resort. Although Mallard's letter of intent with Galaxy expired in July, Macomber said the two companies continued to negotiate. But it became apparent last month that those negotiations were getting nowhere, Macomber said last week.

"We just couldn't pull it all together," Macomber said. "There were a number of moving parts in that transaction. It became an exercise in futility to a certain extent, and we've decided to go on to other things."

Those other things include negotiations to purchase systems with between 20,000 and 30,000 subscribers in Nevada and Utah from Cox Communications Inc. A deal could be reached sometime in the first quarter, Macomber said.

Currently, Mallard has about 75,000 subscribers in the Southeast and Midwest.

Macomber said talks never reached the stage at which a specific price for the Galaxy systems was on the table.

Galaxy president James Gleason did not return phone calls seeking comment.

The MSO's options appear to be limited. Its systems are largely in rural areas and require upgrades. Most operations have a capacity between 330 and 450 megahertz, with headends that serve between 700 and 800 customers apiece.

The company is in the middle of a $20 million rebuild, which it hopes to complete in about three years.

It was the poor shape of the systems that made the expected sale price so low. Most observers expected Galaxy to be sold for well under $2,000 per subscriber-less than half the industry average of between $4,500 and $5,000 per subscriber.

UBS Warburg LLC high-yield analyst Aryeh Bourkoff placed a balance-sheet value of $1,200 per subscriber on the Galaxy properties-essentially its total debt divided by the number of customers-but said the market value is more like $700 per subscriber.

"At the current levels where the subscribers are trading, there are buyers out there," Bourkoff said.

But just who those buyers would be remains to be seen.

Galaxy is largely owned by three venture-capital companies: Spectrum Equity Associates, T.A. Associates and Fleet Equity. Those entities have held positions in the company since 1994 and were widely believed to be looking to cash out.

According to its most recent financial statement, Galaxy reported revenue of $13.8 million for the three months ending June 30, down 4.8 percent from $14.5 million in the same period last year. Cash flow for the quarter was $5.1 million, down 8.9 percent from $5.6 million for the prior year.

The company also posted a net loss of $4.8 million in the quarter, versus net income of $2 million in the prior year.

Galaxy ran into more trouble last month when its lead banker, Fleet National Bank, said in an SEC filing that it would suspend interest and principal payments on Galaxy's $120 million of 12.38 percent senior notes. Analysts said Fleet makes payments to the bondholders based on money received from Galaxy.

The document said Fleet was taking this action because Galaxy violated an earlier agreement to find a buyer for its cable operations by July 31.

According to some observers, the October filing means Galaxy most likely missed an interest payment due Oct. 1-for 12.38 percent of the $120 million, or about $15 million. In most bond offerings, companies are required to make interest payments to bondholders every six months-in Galaxy's case, on April 1 and Oct. 1.

When the company does not make that payment, it could trigger a default event in which the bank that handles the payments can ask for the full amount of the bond offering, $120 million.

Though Fleet still has the option to do that, the SEC filing showed the bank has given Galaxy up to 179 days to come up with the money.

September