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Buyers Pluck Mallard At Low, Low Prices

After four months in bankruptcy court, Mallard Cablevision LLC called it quits last week, agreeing to sell its systems in two separate deals for a total of $26 million.

While Mallard is not alone among rural cable companies that have filed for bankruptcy, the price it received for its largest block of properties — $272 per subscriber — could be a new low in cable-system valuations.

The sales will not come close to paying off all of Mallard's creditors: The company listed liabilities of $63 million when it filed for Chapter 11 bankruptcy protection in May. The largest equity holder — New York-based investment bank BG Media Investors — will likely be left with nothing.

According to bankruptcy court documents, BG Media owned 50.1% of Mallard's equity and had invested $41 million in the rural cable MSO.

Owner objects

BG Media objected to the sale, claiming past system deals were nearly four times the price it attracted for its largest block of systems. But last Wednesday, the bankruptcy court approved the sale.

Mallard had hoped to reorganize under Chapter 11 and continue to manage its 59,000 subscribers in 11 states. But a lack of capital and the struggle to compete against direct-broadcast satellite service in rural markets proved too much for the MSO.

According to bankruptcy court documents, Mallard agreed to sell its 7,300-subscriber system in Perry, Ga., to ComSouth Corp. for $11.7 million, or about $1,600 per subscriber.

ComSouth, a rural telephone company based in Hawkinsville, Ga. (about 20 miles from Perry), plans to combine Mallard's video service in the town with its own local and long-distance telephone offering and high-speed digital subscriber line service to attract more customers.

ComSouth, headed by W. Mansfield Jennings, had owned the Perry system in the 1980s, selling it to CTI Communications Inc. in 1999. CTI later sold the systems to a subsidiary of Mallard.

Jennings did not return calls for comment.

According to the bankruptcy court documents, ComSouth has secured bank financing from SunTrust Bank, which would help finance the acquisition and support capital expenditures for the Perry system. The amount of the loan was not disclosed.

While ComSouth plans to boost Mallard's video offering with its existing advanced services, the buyer of the rest of the Mallard properties will have their work cut out for them.

The Perry systems are fairly upgraded — they sold for about 12.7 times cash flow, according to some estimates, indicating that they are generating about $115 in annual cash flow per subscriber. That's lower than the $200 per subscriber generated by larger metropolitan systems, but in line with industry estimates for rural systems.

According to the bankruptcy court documents, the Perry systems already provide digital-cable service — they have about 600 digital subscribers — and offer two tiers of high-speed data service. The bulk of subscribers receive service via 450-megahertz plant.

Lehman Bros. in

The remaining subscribers were purchased by LB Cable LLC, a partnership headed by Woodside Capital Partners LLC. New York investment bank Lehman Bros Inc. also is participating in the deal. The systems will be managed by Phoenix Cable Inc., a New Jersey-based company with over 30 years experience in the cable industry.

While the non-Perry Mallard systems may not be as attractive, they were had for a much lower price — about $272 per subscriber, or $13.9 million.

Phoenix had owned several rural cable properties in the 1980s, selling most of them to FrontierVision Partners in the next decade.

Phoenix Cable officials did not return calls for comment.

Some of the reasons for the low valuation are the condition and locations of the systems.

A 15-sub system

According to the bankrupcty court documents, the Mallard systems are located in 175 communities in 11 states and the size of the systems range from just 15 subscribers to as many as 2,531 customers. In addition, the plant is in dire need of upgrades — it currently ranges from 270 megahertz 450 MHz in capacity, with most systems offering just 40 channels.

Vista III Media president and CEO Neil McHugh, who did not bid for the systems, said at an industry conference earlier this month that the low valuation is likely a function of the bankruptcy process and the large number of headends.

He added that if an operator took the time to split up the Mallard properties, the price could be higher.

DH Capital LLC principal Mark Thorsheim, speaking at the same conference, agreed. Thorsheim said that in systems with multiple headends, many buyers ignore the tiny systems, focusing more on the properties that can be tied together.

"If you're looking at a company with 20 headends, you're probably not focusing on 10 of these," Thorsheim said. "Within the Mallard basket, you may find systems that are valued at $1,000 per subscriber."