Malone Secures Deal for German Systems


After some last-minute wheeling and dealing that appeared to threaten the sale, Liberty Media Corp. said last Tuesday that it reached a definitive agreement to buy cable systems from German telecom giant Deutsche Telekom AG for about $4.9 billion.

The deal — which German regulators must still approve — will give Liberty access to about 10 million homes in six German states.

With the Deutsche Telekom acquisition and its interests in European cable providers UnitedGlobalCom Inc. and United Pan-European Communications N.V., Liberty will control nearly 20 million cable homes in Europe, making it one of the largest MSOs on the continent.

Even as the DT deal neared a close, Liberty was said to be negotiating to buy 1.7 million subscribers from the German telecom giant's Tele-Columbus unit — the second-largest cable operator in Germany — for a reported $2 billion.

Liberty and Deutsche Telekom first announced their latest deal back in February. But delays in what some press reports said was Liberty Media chairman John Malone's attempt to negotiate a lower price has caused some observers to wonder if the deal would ever be finalized.

Earlier last month, some German press reports said the deal was in danger because Malone was threatening to pull out, unless DT could guarantee approval from German and European regulators.

"He [Malone] is definitely a very good poker player," said Janco Partners Inc. analyst Matt Harrigan.

"If you look at this in the aggregate, this positions them very strongly as the top pan-European cable company," Harrigan said. "The ARPUs [average revenue per unit] are dismal, around 8 euros [per month], but these are very affluent markets. When the economy turns around, this could prove to be one of their best deals ever."

According to the deal, Liberty will pay about $2.7 billion in cash (3 billion euros), $1.3 billion (1.5 billion euros) in Liberty common stock and $886 million (1 billion euros) in a 7.125-percent senior secured note.

Liberty also is guaranteeing a $1.3-billion floor for the stock, but retains any appreciation in price that would take the value above $1.46 billion (1.65 billion euros).

Liberty will have to invest heavily in upgrading some of the systems — at least 400 million to 500 million euros ($354 million to $443 million), according to some analysts' estimates.

"Certainly some of them need substantial upgrades," Harrigan said. "At the end of the day they're looking at the triple play — high-speed data, IP [Internet-protocol] telephony and digital."

This is the third iteration of a deal that was first announced in February. In the February announcement, Liberty was to buy a 55 percent interest in the German systems with a partner, London-based private equity firm Klesch & Co., for about $2.5 billion. But that deal hit snags as Liberty and Deutsche Telekom haggled over price.

In June, Liberty announced a modified deal in which it would buy the systems outright for $4.7 billion in cash and stock. Liberty also cut a side deal with Klesch, giving it the option to purchase 24.9 percent of the systems.

The most recent deal appears to have cut Klesch out altogether, giving Liberty 100 percent of the cable systems and Media Services GmbH, an information-technology service provider and operator of a neutral digital-distribution platform in Germany.

Liberty did not return phone calls seeking comment.