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Malone looks to Euro cable

Recently bought stake in Deutsche Telecom franchises

Dealmaker extraordinaire John Malone looks poised to become the Euro cable industry’s great liberator.

The Liberty Media mogul, who built his Tele-Communications Inc. into one of the biggest U.S. cable operators, then sold it to AT&T, is at it again — this time in Europe, where he’s amassed cable platforms with some 40 million subscribers. That’s much bigger than TCI ever was, and it’s made Malone a cable giant on the other side of the Atlantic.

Wall Streeters say the network he’s collected would be a terrific overseas launching pad for newly merged AOL Time Warner, which badly wants to beef up its operations outside the U.S. The two companies may be hashing out a deal already.

Such massive distribution also mingles happily with Liberty’s varied content assets, promising to create an international juggernaut.

“Think of all the value he will create on the programming side. This could be huge,” says one New York fund manager. He and others are big fans of Malone and the returns he’s brought them.

Malone’s latest venture is the $2 billion acquisition of 55% of six Deutsche Telecom cable franchises. He also poured another billion in fresh cash into ailing continental cabler United Pan-European Communications. Both deals were announced Feb. 23.

Liberty is also the dominant force behind the U.K.’s No. 2 cabler Telewest (Malone owns 24%) as well in UPC (he holds 43% of UPC parent UnitedGlobalCom). The German deal was the first time he’s taken a majority stake in any of the assets.

Dealmaker

Malone’s move into Germany looks like yet another shrewd deal for the ultimate media player. The Denver-based tycoon has a reputation for being three moves ahead of rivals on the global media chessboard, and the Byzantine deals he constructs can remain opaque even after completion.

His sale of TCI to AT&T, retaining Liberty plus billions of dollars in cash, was a marvel of ingenuity.

Known for building value, Malone is certain to revamp the properties and, as is his wont, eventually sell them for a hefty profit.

No man’s land

Yet Liberty is stepping where many fear to tread. European cable is in some ways the troubled cousin of the U.S. industry — heavily in debt, in need of expansion and/or upgrading, and challenged to hang on to subscribers. Since DT has been floating a $5 billion figure for the Liberty deal, one can assume Malone may have agreed to spend as much as $3 billion to upgrade the infrastructure, to prepare the cable lines for such new services as telephony, broadband and digital.

But the price was right. The move into Germany accesses a potential 10 million households and includes an option for Liberty to up its stakes by another 20%. The price is considered far more attractive than the sums paid for some of DT’s seven other franchises.

Callahan Associates Intl., for example, is paying $3 billion for 55% of the North Rhine-Westphalia franchise. That only represents a possible 4.2 million homes, and, like the rest of the DT system, it also is in need of upgrading. The fresh investment is expected to invigorate the whole sector.

At a disadvantage

DT was a disadvantaged seller. The company was forced to divest its cable systems by the government — and by its own need to cut its heavy debt load.

“Malone is extremely opportunistic,” says Merrill Lynch analyst Neil Blackley. “He steamed in to buy these assets cheaply.

“We estimate he paid $800 per subscriber, which is a fair price in this marketplace, though we think European cable is generally undervalued,” he adds.

It is understood that Liberty has no current plans to combine its three European cable assets, but they will certainly create a critical mass for pan-European content initiatives.

“He’s obviously preparing a platform for something,” says Tim Grimsditch, an analyst with Forrester Research.

Programming assets includes stakes in everything from the Discovery Channel to Starz-Encore to USA Network, Sci Fi, Home Shopping and MTV. Liberty’s reach is global, with channels in Argentina and programming assets in Japan and elsewhere.

In the U.K., Telewest has merged with multichannel programmer Flextech and also has a joint-venture channel bouquet with the BBC in UKTV. UPC has its UPCtv subsid and interactive platform Chello. But in Germany, the DT system has functioned largely as a utility — clearly the potential is enormous.

The big picture also includes News Corp., in which Liberty holds an 18% stake, and Rupert Murdoch’s worldwide satellite venture Sky Global Networks, of which he owns 5%. That makes Liberty a major force in both cable and satellite in Europe.

So either way the wind turns, the consummate investor is covered.

(Liza Foreman in Berlin contributed to this report.)

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