Liberty Media Corp.'s deal to buy cable systems from German telephone giant Deutsche Telekom AG could be in jeopardy, as a German regulatory body has issued a warning letter concerning the acquisition.
According to published reports, German Cartel Authority president Ulf Boege said during a Jan. 31 press conference that Liberty must promise to upgrade DT's cable network to enable high-speed Internet access and telephony services.
Boege's comments came on the heels of a warning letter the Cartel Authority sent to Liberty on Jan. 30. It outlined concerns that the deal would give Liberty too much dominance over the German television market.
Liberty has until Feb. 15 to respond to the regulator. The Cartel Authority is expected to issue a final ruling on the purchase by Feb. 28.
According to German newspaper Handelsblatt, the 72-page letter expresses concern that the Liberty deal would give the company too much dominance over the German TV market. The authority also expressed doubts that Liberty would spend the necessary funds to upgrade the DT network to provide Internet access and telephony services.
"Given the uncertainty about whether Liberty will actually fully meet the requirements of competition in these markets, it cannot be assumed that on balance, improvements in competition will outweigh the negative impacts," the letter said, according to Handelsblatt.
Liberty acknowledged receipt of the letter in a press release, and added that it is currently reviewing the authority's objections.
"We are reviewing the statement by the Cartel Authority to determine whether we can satisfy the concerns that have been raised in a manner consistent with a sustainable business plan and capital structure that would provide appropriate returns to our shareholders," Liberty president and CEO Robert Bennett said in a statement.
Liberty would make a formal response after its review, the company added.
NO PHONE PROMISES
Liberty has said it plans to provide high-speed data service in Germany, but that it would hold off on telephony service until more cost-effective Internet protocol technology is widely available. That's expected in about two years.
Over the past few months, Liberty has been making moves to smooth the path toward German regulatory approval. Last month, it backed out of a plan to purchase a 22 percent stake in German programmer Kirch Group's Premiere TV pay-television network. But it appears that the telephony requirement may be the last straw for Liberty.
In an industry conference last month, Bennett said Liberty would seek to provide a competing telephony service in Germany, but only after IP was more commonplace.
"In all probability we are not going to be very active for the next 18 to 24 months," Bennett said at the Salomon Smith Barney Global Entertainment, Media and Telecommunications Conference on Jan. 9. "We are not willing to make a broad commitment.
"If the response from the regulators is, 'You need by the end of two years to have rolled out telephony to 50 percent of your customer base,' my guess is, we won't make that commitment. I know we won't make that commitment and therefore, we may not get approval."
Losing out on the Deutsche Telekom deal would be a blow to Liberty — which has embarked on an aggressive European expansion plan — but not a crushing one. The Deutsche Telekom deal would have given Liberty systems in six German states. Those operations pass 10 million homes and have 3.5 million subscribers.
But according to analysts, Liberty may shift its focus to smaller acquisitions in Germany — it has a deal to buy 1.5 million subscribers from level-four operator Tele-Columbus GmbH — and a larger deal for U.K. subscribers. On Jan. 30 Liberty completed a complicated deal that would give it a 72 percent interest in UnitedGlobalCom Inc., which has about 10.5 million subscribers in 26 countries.
According to the UGC agreement, Liberty would get four of 12 seats on UGC's board of directors and has agreed to vote with management for the next 10 years.
In a research report, Salomon Smith Barney Inc. analyst Niraj Gupta said that while the DT purchase is important, Liberty is not likely to do a cost-prohibitive deal.
"Should the conditions required to complete the transaction prove to be uneconomical, we fully expect Liberty to walk away from this deal," Gupta wrote. "While we view the proposed acquisition of Deutsche Telekom cable assets as a significant strategic positive, we expect Liberty to generate attractive returns on capital through continued consolidation of European content and distribution, with or without the approval of this transaction."