Kate Bulkley, Media Analyst.

Three strikes and out

By Kate Bulkley

Cable & Satellite Europe

Sept 1st, 2001

As the US baseball season reaches its annual climax, cable communications company UPC is hitting a pretty severe losing streak. The Netherlands-based firm once boasted a strong batting line-up, built on borrowed money and a soaring stock price. In a market drunk on ever-increasing values for communications companies, UPC was in the All-Star bracket, building up Euro8bn in net debt to buy a collection of European cable assets that stretch from The Netherlands to Germany. The company set up separate internet and telephone units and even had its own programming group.

UPC even coined one of baseball's most-loved terms - triple-play - to describe its telephone, TV and high-speed internet service strategy. UPC had been playing in the big league and it looked good: triple-play had a compelling ring both to bankers and equity analysts. The beauty of the triple-play was that it spread the risk of one business to three, but now all three of these sectors have been sent down to the minor leagues.

Although it's not a completely flawed strategy, the triple-play has struck out for UPC. In the cold reality of the post-boom market, UPC has seen its share price plummet to under Euro1 a share, a fall of over 95% since its March 2000 high of Euro84.40. Analysts estimate the company will need an extra Euro4bn in funding to reach profitability in 2004, although UPC says the funding gap is more like Euro850m. In early August UPC's CEO Mark Schneider resigned after a strained quarterly financial call with investors. The fate of the debt-burdened company now lies with one of its biggest creditors, John Malone's Liberty Media.

It has been a disastrous season for European cable. Yet UPC still stands out as a company that has called some really bad plays. It's high-speed internet unit Chello stumbled spectacularly in Holland when local consumer groups complained bitterly about lousy service and won financial concessions.

More dealmaker than operator, Schneider tried to rescue Chello by sealing a merger with Excite At Home. The deal began to fall apart when the stock prices of both firms began to plummet and was called off in December 2000.

Meanwhile, telephony unit Priority Telecom never seemed to get off the ground. In the wake of Schneider's resignation in early August, a plan to float Priority resurfaced, seen as a way to separate the unit's debt and losses from the parent. But an IPO in this market?

It soon became clear that Priority was under the gun from a put option that will force UPC to pay $200m to a minority shareholder if the unit fails to list by October 1, 2001. Given that at the end of August the entire market capitalisation of UPC was less than $400m, this put option now looks very, very expensive indeed. Something has to be done. UPC is burning Euro129m a month. There will probably be a fire sale of Priority's assets if not a full-scale write-off. But the assets of alternative telecom operators are under pressure from a market wondering how to value them in a market with over-capacity and unclear market demand. Look at Energis and Colt, which have much more established businesses than Priority, and have nevertheless seen big falls in their own stock prices, triggered by a worried market.

Meanwhile, UPC's plan to consolidate its German cable assets is also faring badly. A merger with local cable operator Primacom has faltered over valuations and regulatory concerns about Liberty Media's deal to buy five cable systems in Germany from Deutsche Telekom.

Liberty Media actually holds the key to all of UPC's problems and, as Malone has proved himself again and again to be a pretty good scout of valuable assets, the next innings in UPC's game should prove pretty interesting.

Liberty is not only one of UPC's biggest creditors, but also owns a huge chunk of UPC's parent company United Globalcom. Malone's injection of capital via a Euro1bn loan to UPC earlier this year was, in retrospect, both a last-ditch effort to shore up Mark Schneider's position in Europe as well as a guarantee that Malone would be calling the shots if UPC stumbled again.

Malone is increasingly focusing on Europe. Liberty Media already has a stake in the UK cabler Telewest as well as a commanding position in UPC and its own pending German cable deal. It's time to sit up and take notice because Big John has great instincts. If anyone can figure out a way to re-value European cable and kick-start its recovery, it's Malone.

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