In a world where cable systems regularly sell for $5,000 per subscriber, can an operator with debt of just $1,200 per sub get into trouble? It can if its systems aren't worth even that much.
That question has credit analysts scrutinizing Galaxy Telecom, a Missouri-based MSO with a looming financial crisis and a possible fire sale. Galaxy is squirming under a harsh deadline from its banks: Find a buyer by May 31, or they'll call in their $25 million in loans.
That would, in turn, prompt bondholders to demand repayment on $120 million in junk bonds and threaten to force the company into Chapter 11 bankruptcy protection.
The 125,000-subscriber company is the 24th-largest MSO, according to Broadcasting & Cable's survey (see story, page 24). But it has been trying for a year to find someone to put money in, take out the company's three existing institutional investors, and infuse enough new equity to refinance its bank loans. After a long courtship of Adelphia Communications Corp. cooled in January, Galaxy executives tried to cut deals with at least two other groups. They contend they are close to a deal with one private equity investor and sound confident.
"We're working on another deal right now,'' said Galaxy CFO J. Keith Davidson. "I don't think we'll have any trouble making it.''
Still, auditors from Deloitte Touche were nervous enough to declare in a securities filing that "the Partnership's inability to meet its cash-flow needs and to comply with certain debt covenants raises substantial doubt about its ability to continue as a going concern.''
Such "going concern''language is a bright red flag for any company. "All hell breaks loose if they don't make the May 31 deadline," said Orren Cohen, a media junk-bond analyst for Merrill Lynch & Co. But even if creditors do try to foreclose, Cohen believes, there's enough value in Galaxy to repay both bankers and bondholders.
Most outsiders are wowed by the operator's promise to deliver sexy new Internet and interactive services to cities and suburbs, driving system prices to new heights. Systems regularly sold for 20 to 24 times cash flow, or $4,000 to $5,000 per sub, last year, and one deal went for $5,550.
That cable universe is far, far away from this Galaxy. After liquidating one partnership in 1995, Chairman Tommy Gleason and other Galaxy executives started from scratch, concentrating on buying rural and small-town systems, ones with limited channel capacity but a captive audience that has no other way to receive distant broadcast signals. Those properties sell for as little as $700 per subscriber and regularly go for just $1,200 to $1,400.
But they can also fetch much more. In March, Galaxy sold a 1,100-subscriber Kansas system for $2,400 per subscriber.
The rest of Galaxy won't sell for that much. It was trying to bring Adelphia in for about $1,800 per subscriber, according to one industry executive.
But even that was considered a premium price for rural systems scattered across 13 states with very few subscribers per headend and many systems of 300- to 450-MHz capacity, vs. the 750- to 860-MHz target of suburban and urban operators. That makes Galaxy very vulnerable to competition from DBS companies.
Galaxy's predicament brings out the vulture in any investor. But the company's annual cash flow comes to approximately $162 per subscriber. A $1,200-per-subscriber sale or equity infusion would value the company at 7.4 times yearly cash flow. That's not a big number.