News

German Deals Dashed, Malone Eyes U.K.

3/03/2002 7:00 PM Eastern

Liberty Media Corp.'s planned push into the German cable market is off, as regulators have rejected the Englewood, Colo.-based programming giant's $4.8 billion deal to purchase cable systems in six states from Deutsche Telekom AG.

In a statement issued last Tuesday, the Federal Cartel Office — Germany's top regulatory body — said it would not approve the deal because it "would clearly worsen the competitive structure of the German cable markets."

That rejection also scuttled a separate deal — Liberty's pending acquisition of 1.5 million TeleColumbus GmbH subscribers from Deutsche Bank. The TeleColumbus deal was predicated on regulatory approval of the DT transaction.

On Feb. 14, the cartel office issued a warning letter about the TeleColumbus deal, stating that it would also give Liberty undue dominance in the German market.

In a statement, Liberty said it would not appeal the regulator's decision, and that it would terminate its agreements for both the DT and TeleColumbus systems.

The Deutsche Telekom deal has been on thin ice for months, as the Federal Cartel Office had issued at least two warnings on the deal, claiming it would give Liberty too much control over the German market.

On Jan. 30, the cartel office sent a letter to Liberty which stated that the deal would be blocked unless Liberty agreed to provide high-speed Internet service and cable telephony to customers. Liberty — which said it planned to offer high-speed data service — drew the line at telephony, claiming it would be cost prohibitive.

NO SURPRISE

Most investors expected the German cartel office to block the DT deal, said Janco Partners analyst Matt Harrington. In the end, he said, it may prove to be a boon for Liberty, given the amount of investment that was needed to upgrade those cable systems.

"It [the plant] was a complete fixer-upper," Harrington said. "To commit to a rollout schedule on telephony, particularly circuit-switched telephony, right out of the blocks, just didn't make sense."

Although Liberty's plans to enter the German cable market — the second largest television market after the U.S. — appear to have been quashed, chairman John Malone may be looking toward the U.K.

Speculation has been rampant for weeks that Liberty would try to engineer a deal that would give it a majority equity stake in troubled U.K. service provider NTL Inc. and combine it with Liberty's 25 percent interest in the second-largest U.K. MSO, Telewest plc.

According to a number of British news reports, Malone has been meeting over the past few weeks with NTL president Barclay Knapp to hammer out a deal that would give Liberty a 51 percent stake in NTL. Those same reports said Liberty could face some competition from AOL Time Warner Inc., which also is reportedly weighing an investment in NTL.

For months, NTL has been under pressure to pare down its debt load, currently at about $17 billion. The company has tried to sell assets to pay down debt – most recently its broadcast tower division – but a deal to sell the tower unit to France Telecom for $3 billion fell apart late last year.

NTL TALKS CONFIRMED

On Feb. 22, NTL said it had reached an agreement to sell its Australian tower holdings to Macquarie Bank for about $441.4 million. That money will go toward debt payments.

Liberty vice president of investor relations Mike Erickson confirmed the company has been in discussions with NTL and Telewest, but declined to give specifics.

Harrington said a NTL/Telewest combination would make sense, adding that Liberty has the motivation and the balance sheet to do a deal.

"Malone has certainly indicated to the Street that this is a great environment for doing international media deals," Harrington said. "Does he have to [do a deal]? I think the way to top out value is to look at the U.K. right now."

Through its 73 percent voting stake in UnitedGlobalCom Inc., Liberty effectively controls about 10 million subscribers in Europe. Adding the U.K. properties to his portfolio will only strengthen Malone's grip on the international cable market.

Although a combined NTL and Telewest would join the No. 1 and No. 2 U.K. cable providers, Credit Lyonnais Securities Inc. cable analyst Richard Read said he did not expect a merger to run into regulatory problems, mainly because of the presence of Rupert Murdoch's British Sky Broadcasting plc satellite service.

"You've got a gatekeeper there, which is Rupert," Read said. "The reason the U.K. cable telephony industry was created was to provide meaningful residential loop competition to the phone companies. I think the regulators are going to see these companies will eventually go belly up if they aren't restructured and combined. It is not out of keeping with the goals of the formation of the industry to have them merged."

But Liberty has a large stake in News Corp., the parent of British Sky Broadcasting plc, which could give some U.K. regulators qualms, Harrington said.

"My gut reaction is [that] even though NTL is a U.S.-based company, the British wouldn't want AOL or Liberty to be completely dictating the shots with either Telewest or NTL," Harrington said.

March