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John Malone Will Be Back Over There

For months now, John Malone, the former chairman of cable giant Tele-Communications, has been struggling to create the world's largest cable empire. His Liberty Media owns an 18% stake in News Corp. and smaller slices of media heavyweights Viacom, AOL Time Warner, and Vivendi Universal. He also has investments in Discovery, Court TV, E! Entertainment, and about three dozen other program outlets. But for much of the past year, the man widely acknowledged as a dealmaking whiz has been unsuccessful in attempts to expand his world to include cable systems from Latin America to Israel.

Just since February, Malone has been forced to pull out of a $4.8 billion deal to buy six Germany cable systems and to walk away from talks to buy a piece of NTL, Britain's largest cable operator. Along the way, he has met other disappointments, including a missed bank payment and potential bankruptcy for United Pan-Europe Communications, the Dutch company that has 7.2 million cable subscribers in 18 countries from Austria to Israel. Liberty Media has already put about $2 billion into UPC and its parent, UnitedGlobalCommunications, giving Liberty a 72% stake in UGC.

Has Malone lost his touch? Don't bet on it. He may very well be preparing yet another assault on many of the same markets. Where everyone else sees bloated debt, mounting losses, and looming bankruptcies, a pure dealmaker like Malone sees a chance for an even better deal than he was looking at before.

A CHEAPER ENTRY? "Sure, we've had some disappointments," says Miranda Curtis, president of Liberty Media International and a longtime Malone dealmaker. "But as John says, 'The worst thing you can do is to fall in love with a deal.'" Curtis says Liberty may well return to Germany, Britain, and elsewhere -- and for a better price.

Take Britain. Liberty already owns a 25% stake in Telewest Communications, the country's second-largest cable system, with 1.3 million homes. Malone sees great value in combining his holding in Telewest with a stake in NTL. A combined company would have the ability to lower the costs of buying set-top boxes and guarantee him more customers for his stable of programming and interactive-TV assets.

Malone walked away from one deal with NTL -- he wouldn't go higher than $2 billion for 30% of NTL's bonds. But he recently offered to pay $500 million in cash to buy NTL's Swiss unit, Cablecom, which he could then swap for a piece of NTL. Since Cablecom is facing its own financial issues, it needs Malone's money. Thus, Malone could end up paying less to get his foot in NTL's door than he planned in the first place. NTL and Telewest would likely merge some of their operations, assuming regulators allowed it.

MASTER PLAN. The British deals are just a piece of Malone's larger plan to buy into European cable at far cheaper prices than he would pay for stakes in U.S. cable companies. The $4.8 billion he offered for the German cable systems came to about $600 per subscriber, compared with the $4,500 a head Comcast agreed to pay to buy AT&T's cable operations in the U.S.

The reason for the disparity is that subscribers pay only about $11 a month in most of Europe for 30 or so channels, vs. the average of around $30 a month they paid in the U.S. last year, according to the National Cable & Telecommunications Assn. Of course, most Americans get 54 or more channels, the NCTA says.

Malone's European master plan is about more than just TV. Liberty executives envision what they call "the triple play": getting cable-TV users to also log onto the Internet and place their phone calls via the local cable company. Liberty is making great headway in Britain. Telewest collects money on some 1.8 million residential phone lines, meaning more households use its phone service than its cable service, and it has some 388,000 Internet users. (By comparison, the NCTA says about 2% of the U.S.'s 73 million cable users also get phone service from their cable operators, and about 10% of cable subscribers also get Internet access via cable modems.) In Britain, cable subscribers pay as much as $50 a month for a package of services.

"THE SMARTEST THING." Malone & Co. sees similarly huge opportunities in Germany, Europe's largest TV market, although antitrust regulators put onerous conditions on Liberty, saying it must upgrade phone service using the same switching equipment that's now in use. Liberty instead wanted to use more sophisticated and cheaper equipment. "Malone saw a way to make a 20% return on his investment, and the regulators wanted to take it down to nothing," says Christopher Dixon, the UBS Warburg analyst who follows Liberty. "The smartest thing he ever did was to leave that deal."

Not that his exit is necessarily permanent. "Oh, I think we might take another look at Germany," says Curtis, especially with the presidential elections being held in September. "If there's a new regulatory environment in Germany, we could very well be back."

It stands to reason that Malone might revisit any number of places. Liberty Media is blessed with a ton of cash -- nearly $3 billion, counting short-term investments and receivables -- and its executives say the company has the borrowing capacity to swing deals of up to $10 billion if it chose. One current play may be UPC, which is struggling to refinance its debt after missing a $35 million payment on May 1. It also missed a $102 million payment in February. UPC is renegotiating most of its $6 billion in debt and has offered its bondholders stock in place of the debt.

HOT FIRE SALES. Who would be the largest beneficiary? Malone. Odds are that as the talks drag on, bondholders will turn instead to him for cash. And he'll end up paying cents on the dollar to increase his stake in UPC. Last year, Malone paid roughly 20 cents on the dollar for $1.7 billion of UPC's debt. When it comes to fire sales, they don't come much hotter than that.

Malone is also said to be looking at buying cable systems in France, Spain, and elsewhere. Liberty officials say only that "we're looking at opportunities in Europe and elsewhere" but won't talk about specific deals. Still, in nearly all of Liberty's potential deals, the situation is pretty much the same: A company other than Liberty will have spent the billions to upgrade the systems -- putting in the miles of fiber-optic lines that are needed to provide data, phones, and interactive-TV service -- and then Malone will get all that fancy stuff at a deep discount.

Right now, no one else seems to have either the cash or the appetite to bid against him. So it will just take Malone a little longer to conquer the world -- and he'll do it a better price. Grover is Los Angeles bureau chief for BusinessWeek. Follow his weekly Power Lunch column, only on BusinessWeek Online

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