One Step Forward, One Back for UPC

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United Pan-Europe Communications N.V. (UPC) has both the silver lining and the cloud to go with it these days.

The company, Europe's largest private cable operator, is readying the launch of a direct-to-home platform for Central Europe. At the same time, it's pulling out of an agreement to swallow SBS Broadcasting S.A.-an acquisition that would have made it a programming powerhouse in the region.

UPC plans to launch a DTH service in Hungary, the Czech Republic and Slovakia this fall as part of the company's continuing expansion of services in Eastern Europe.

No firm date has been set for the launch, but UPC is moving its way through the regulatory process in each country, and it hopes the service will debut simultaneously in the three markets.

UPC-the dominant cable-TV provider in Hungary, the Czech Republic and Slovakia-already provides satellite television in Poland, where it is at loggerheads with France's Canal Plus S.A.

Michael Moriarty, UPC's managing director of corporate development in Central Europe, said the move into satellite won't interfere with further cable expansion.

"There are certain places where we will never be able to run cable because they are too remote," he said. "This is complementary, not competitive."

Initially, UPC's satellite service will offer the same programming as its cable platforms, but that may change. Moriarty said the satellite service will be priced comparably to cable, so it may draw customers away from competing hardwire systems.

Other cable operators said it's too early to predict how UPC's move will affect the market. "A lot will depend on what kind of programming they offer and whether people are going to want to pay for the [set-top] box," said Ferenc Hamori, director of media program and business development at Hungarian telecommunications company MATAV.

That telco is also the country's No. 2 cable operator, with about 150,000 subscribers. UPC has about 500,000 subscribers.

Hamori said MATAV's management has considered entering the DTH business, but it isn't sure that the market can support two players. Indeed, many analysts in Poland said not even that country-with a population of 40 million-can support two satellite platforms.

Hungary and the Czech Republic have populations of about 10 million each. Slovakia has about 5 million people.

Moriarty wouldn't comment on how much UPC will invest in the DTH service, saying only that the investment was "significant."

But it's not all expansion, as one more victim of the beleaguered market for telecommunications and media stocks emerged last week-UPC announced that it shelved its plan to buy European station owner SBS.

When UPC announced its agreement March 9 to buy SBS, the cash-and-stock deal valued each SBS share at $85.14. Soon after, however, tech and telecommunications shares began to tank, with UPC stock tumbling about 75 percent from its high of $79.44, which it reached in early March.

On May 22, when the termination was announced, the buyout would have valued each SBS share at about $44. The original agreement included a collar that would give each SBS share a minimum value of $77.50.

"Because of the continuing turmoil in the financial markets, we have reluctantly taken the decision not to proceed with the acquisition of SBS," UPC CEO Mark Schneider said in a prepared statement. "Given UPC's current share-price levels, it is simply not practical to complete the transaction." At press time last Wednesday, UPC shares traded at $18.88.

Added SBS CEO Harry Evans Sloan, "It's unfortunate that the decline in the financial markets has forced UPC to abandon a transaction that made great sense for both companies. But given SBS' strong operating performance and continuing growth prospects, we simply could not entertain anything less than a superior transaction for our shareholders."

However, the two companies added that they still plan to work together to develop television and Internet programming. What's more, UPC remains SBS' biggest shareholder, with about 23 percent of the company.

Analysts noted that the cancellation of the merger will let UPC keep about $670 million in cash on hand, which could prove valuable with the company unable to use a high-flying stock as an acquisition currency.

The announcement of the merger termination came one business day after UPC shares fell 22 percent amid an announcement that the initial public offering of its Chello Broadband N.V. unit would raise up to $417 million.

Despite market turmoil, Chello executives have said that the sale, scheduled for this week, will proceed.

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