NEWSMAKER-With Virgin deal, Malone set to be European cable king

Liana B. Baker and Leila Abboud
Reuters Middle East

* Virgin Media deal largest and latest for Liberty Global

* Liberty Global already ranks as largest cable operator in


* Replicating Malone's past strategy with TCI in United


* Liberty Global has more than $10 billion in annual revenue

Feb 6 (Reuters) - For more than three decades, John Malone

has been known as America's King of Cable. Now, he is gaining

that title in Europe as well.

Malone, through his Liberty Global Inc unit, has

made his most audacious bet yet on the burgeoning European cable

market, striking a deal for about $15.75 billion to acquire

Virgin Media Inc, the cable group in which fellow

billionaire Sir Richard Branson holds a 3 percent stake. The

deal is Malone's biggest ever in Europe and puts him in direct

competition with Rupert Murdoch, the News Corp chairman

who controls Britain's BSkyB.

Liberty Global, which Malone controls with a roughly 40

percent voting stake despite only owning 4 percent of its

equity, already ranks as the largest cable operator in Europe

with 18.4 million subscribers. It also has 1.2 million

subscribers in Chile and Puerto Rico for a total of 19.6


The company's position is the result of a decade-long

acquisition spree spanning 11 countries from Germany and the

Netherlands to Switzerland and Belgium that helped grow Liberty

Global into a company with $7.6 billion in revenue and $3.6

billion in operating cash flow from continuing operations in the

nine months ended Sept. 30.

Virgin Media was created by the merger of cable operators

NTL, Telewest and Virgin Mobile in 2006. It will be not only

Malone's largest European acquisition to date, but also one he

has been trying to seal for more than a decade. Malone began

buying up stock in Telewest and tried several times to acquire

NTL at the turn of the century when they were still separate

companies. His plan even back then was to merge them.

Virgin Media's 4.9 million subscribers significantly trails

BSkyB, the UK market leader, which has 10.7 million subscribers.

Indeed, battles with BSkyB over access to channels and content,

coupled with heavy losses from a network upgrade, forced Virgin

Media into a precarious financial situation that prompted a debt

restructuring to help it stabilize. The company posted its first

annual profit in 2011.


Malone timed his European buying spree to the exit plans of

private equity firms that have rolled up smaller regional cable

operators in Britain and Germany in recent years.

For example, Liberty Global in 2011 bought Kabel BW, the

third-biggest cable operator in Germany, from private equity

firm EQT for 3.16 billion euros ($4.30 billion). A few years

earlier, Liberty Global acquired Germany's second-largest cable

operator, Unitymedia GmbH, from private equity firms

BC Capital Partners and Apollo for $5.2 billion,

including assumed debt.

In Belgium, Liberty in September made a tender offer for the

49.6 percent of Telenet Group Holding NV it didn't

already own. The bid failed after the group's management deemed

it too low. Liberty currently owns 58.3 percent of Telenet.

Liberty Global also reportedly looked at buying Dutch cable

operator Ziggo in 2011, but private equity firms Cinven

and Warburg Pincus eventually pursued an

initial public offering instead.

Liberty Global CEO Michael Fries recently told a Citigroup

Inc investment conference that the group would be looking

for acquisitions in Europe to both bolster existing markets and

enter new ones.

"He sees the importance of scale in the business," said

Evercore Partners analyst Bryan Kraft of the rationale behind

Malone's European acquisitions. "He's been trying to build scale

within these markets and also leverage the scale that they bring

as a company across all these markets."

The Kabel BW and Unitymedia deals marked Malone's return to

the German market, which ranks as the second-largest cable

market in the world behind the United States. In 2001, he tried

to acquire cable assets from Deutsche Telekom and Deutsche Bank,

but the deals were eventually blocked by German regulators,

forcing Malone into a temporary retreat.

Malone's M&A activity suggests that he is trying to make

Liberty Global a Western European cable play. Prior to his

buying in Germany and the UK, he sold out of Scandinavia,

France, Japan and Australia.

ISI analyst Vijay Jayant said expanding in Western Europe

gives Malone a more focused strategy in a market with high

disposable income.


The strategy Malone is pursuing in Europe is essentially the

same strategy he used in the United States; take a patchwork of

disparate and technologically outdated cable systems, stitch

them together and upgrade their networks to leverage their

combined power to reduce internal costs and reduced external

costs such as programming. That is the model he used to found

Tele-Communications Inc, or TCI, which Malone grew into the

largest cable operator in the United States before selling it to

AT&T Inc.

Malone is using that blueprint in Germany, which ranks as

Liberty Global's largest and fastest-growing market. There,

Malone is offering TV, phone and Internet bundles with faster

speeds and cheaper rates in a bid to steal market share from

incumbent Deutsche Telekom.

The rationale for the Virgin Media deal appears to be

grounded in the TCI model as well. Cable only passes through

about half the homes in Britain, so more investment in

infrastructure to provide faster Internet speeds could help grow

adoption rates.

The aggressive tactics Malone used to build TCI prompted

former U.S. Vice President Al Gore to label him the cable

industry's "Darth Vader," a reference to the popular head of the

Evil Empire in the "Star Wars" film saga. The nickname

referenced Malone's power at TCI, which he used to demand equity

stakes in cable networks, particularly start-ups, in return for


Malone also fought vigorously against must-carry laws that

require cable operators to carry free-to-air broadcast networks

like NBC and ABC and, as a matter of course, structures deals to

help him pay very low taxes and has a rather well documented

loathing of big government.

Indeed, Jayant said Malone is likely to leverage Liberty

Global to get stakes in channels in Europe in return for

carrying them. The company already has programming partnerships

with CBS and MGM overseas. Liberty Global also owns Chellomedia,

a European producer and distributor of 66 TV channels, including

movies, sports, lifestyle and entertainment programming.

Malone, the largest private landowner in the United States

with about 2.2 million acres to his name, is no stranger to

battles with media titans.

The reclusive billionaire has faced off with Murdoch

numerous times on U.S. soil, at one point acquiring a big slice

of Murdoch's voting position in News Corp that came onto the

market unbeknownst to the newspaper baron. Malone eventually

leveraged that stake to pry satellite TV company DirecTV

from Murdoch.