Cable Operators

Malone Renews German Ambitions

2/01/2010 2:00 AM Eastern

 Liberty Global chairman John Malone's nearly decade-long quest to consolidate Germany's cable market could be coming closer to reality after a pair of recent moves, most recently last week's deal to sell off its interest in Japanese cable operator Jupiter Telecommunications to KDDI, a cellular carrier in Japan, for $4 billion in cash.

The Jupiter deal comes on the heels of the $5.2 billion acquisition of Unitymedia, the second-largest cable operator in Germany, which Liberty Global agreed to in November. Coupled with the surprising decision to sell the J-Com stake — most analysts believed Liberty would try to increase its holding in the Japanese company — speculation that Malone has set his sights once again on Germany is beginning to gain steam.

Malone's last effort to consolidate Germany — a $7.7 billion offer for Deutsche Telekom's national cable system in 2001 — led to the deconsolidation of the second-largest television market in Europe.

In rejecting the DT deal, the German monopoly commission forced that company to split its cable assets into three separate entities: Kabel Deutschland, Unitymedia and Kabel BW.

With the acquisition of Unitymedia expected to be completed soon, that leaves only two remaining pieces of the puzzle.

Liberty Global senior vice president of investor relations and corporate communications Rick Westerman tried to play down any thoughts of company plans for German domination, saying Liberty is concentrating on getting its most recent deals completed.

“There are lots of consolidation opportunities for us in Europe outside of Germany,” Westerman said. “We're in many markets and our strategy has been and will continue to be to consolidate these markets.”

Westerman didn't rule out the possibility of more deals in Germany. Any move would depend on price and the regulatory climate, he said.

“The German regulator hasn't been very supportive of cable consolidation,” Westerman said. “If they are not going to support consolidation, the conversation is moot.”

On its own merits, the Unitymedia deal, which closed Jan. 28, makes sense. Adding those 4.5 million German video customers completes a Liberty cluster that spans from Ireland to Belgium, the Netherlands, Switzerland, Austria, the Czech Republic, Slovakia, Slovenia, Hungary, Poland and Romania.

After the J-Com and Unitymedia deals, about 88% of Liberty Global's customers, or about 13.5 million subscribers, will be in Europe. The company's remaining assets are in Chile, Puerto Rico and Australia.

Miller Tabak media analyst David Joyce said in a research note that more deals could be on the horizon for Liberty – particularly for Austar, its Australian MSO — as it focuses its efforts on Europe.

Citigroup analyst Jason Bazinet agreed that acquisitions are a possibility, but said that proceeds from asset sales also could be used for share buybacks. Liberty Global has repurchased nearly $6 billion of its own shares since the fourth quarter of 2005, Bazinet estimated.

Joyce wrote that while share buybacks are an option, “we expect Liberty to retain some firepower as the M&A market is clearly heating up.”

Kabel Deutschland's controlling shareholder — Providence Equity Partners — has signaled it might be willing to shed its interest. In October, Providence hired former Time Warner Inc. chairman and CEO Richard Parsons as a senior adviser. A press release about Parsons' appointment said the former TWI executive (and current chairman of Citigroup) will “advise Providence on new investment opportunities and on certain of its existing investments.”

Liberty Global likely would have competition for Kabel Deutschland. Private-equity players including Apollo Management, CVC Capital Partners and Carlyle Group are expected to launch bids, according to several reports in the German press.

For now, Liberty Global will focus on closing the J-Com deal, expected by Feb. 10.

Liberty Global first became involved in the Japanese market in 1995, pairing up with Asian banking giant Sumitomo to buy a minority interest in J-Com. Liberty Global later raised that interest to 37.8% after forming the Sumisho Super Media LP partnership with Sumitomo in 2005.

The Sumitomo partnership was scheduled to expire this February and some analysts had suspected Liberty Global would attempt to gain full control of the Japanese asset.

Instead, KDDI, which has about 900,000 cable subscribers to go with its 30 million wireless customers in Japan, swooped in with an offer.

“Liberty Global zigged when we thought they would zag,” Joyce wrote.

Westerman said Liberty was not looking to divest the J-Com stake until it was approached by KDDI.

“We love the J-Com business,” Westerman said. “We like the Japanese market very much: we think it's got several years of good growth ahead of it. But the deal KDDI made was an offer at the end of the day we couldn't refuse.”

The $4 billion price tag represents a 65% premium to J:Com's stock price on Jan. 22 and a multiple of more than 8 times cash flow.

Wunderlich Securities analyst Matt Harrigan estimated Liberty Global's initial investment in J:Com was $700-$800 million.

“If his estimates are right, that would be a very large gain,” Westerman said. “We do have a significant amount of losses that we can use to shield the majority of the gain [from taxes].”

The J-Com deal practically pays for the Unitymedia deal by itself — Liberty Global is paying $5.2 billion for the German operator, including $3 billion in equity and the assumption of $2.2 billion in debt.

Even after such a large acquisition, Liberty Global is capable of even more M&A activity.

GRAND TEUTONS
Liberty Global is reportedly looking to consolidate cable assets in Germany, on the heels of its deal to acquire Unitymedia. A snapshot of the German cable landscape:

Company Majority Owner Subscribers
SOURCE: Company and published reports
Kabel Deutschland Providence Equity 9 million
Unitymedia Liberty Global 4.5 million
Kabel BW EQT (Swedish private-equity group) 2.3 million

March