John Malone's European Tour

He may soon be the Continent's biggest cable operator

Europe has no equivalent to the U.S. media wheeler-dealer John C. Malone. He rose to dominate the distribution of cable television in the U.S. through his company Tele-Communications Inc., then sold out to AT&T (T ) in 1998 for $52 billion. Of course, a tycoon like this can never leave the game. Sure enough, Malone has quickly accumulated a portfolio of investments through a new vehicle, Liberty Media Corp. (LMG.A ) There were fears, however, that the master had lost his touch. He put $500 million, for example, into ICG Communications Inc. (ICGXQ ) seven months before the telecom company declared bankruptcy last November.

Now, the king of cable is back--but on a different continent. In late June, Malone cut a deal with Deutsche Telekom (DT ) to pay an estimated $4 billion for the German phone giant's stakes in six regional cable-TV companies that serve 10 million households, nearly half the cable-connected homes in Germany. If the deal flies, Malone will be the biggest cable operator not only in Germany but in Europe. He already indirectly owns a substantial stake in UPC, the Dutch cable company that has the biggest subscriber base of any European cable company. "It's a very exciting move," says Adam Bird, leader of the European media and entertainment practice for Booz, Allen & Hamilton Inc. in Munich. "The European cable industry has been very fragmented."

That's not all. Once you tack on the new German customers to Malone's other cable holdings in Japan, Argentina, Chile, and Puerto Rico, he will have controlling interests in companies with wires into 25 million homes worldwide. That's double the 12.5 million households TCI had served when Malone sold it to AT&T. Throw in the number of homes located close enough to Malone's wires to hook up in the future for high-speed data, digital video, and telephony, and the number of actual and potential hookups is 50 million. "What he has done is create a giant footprint again," says Larry Petrella, an analyst with Eminence Capital LLC, which owns 1.3 million Liberty shares.

SLIMMED-DOWN FIELD. Malone is once again living up to his reputation as a consummate dealmaker. Cash-rich Liberty, with just 40 employees operating from a suburban Denver office and assets valued at $50 billion, has seized an opportunity in Europe by making an offer at a time when tough capital markets have slimmed the field of potential buyers. Deutsche Telekom, Germany's former phone monopoly and biggest Internet service provider, is being pushed by regulators to sell its cable business for conflict-of-interest reasons. Industry sources say Liberty will cover a substantial part of the purchase price with its own shares.

It's easy to see why Malone is ready to jump into Germany. Cable is an undervalued and underdeveloped asset in Europe. Malone will have lots of room to upgrade Germany's outmoded cable infrastructure, which Deutsche Telekom neglected, and introduce broadband as well as compelling programming packages. "If there's anybody that knows how to do this, it's John Malone and his team," says Bird. Malone's holdings in programmers such as Discovery Channel and Rupert Murdoch's News Corp. (NWS ), is a big advantage, particularly in Germany where original cable programming has been scant.

The most important member of Malone's team is A. Gary Klesch, a London-based investor who helped broker the Liberty deal. Klesch has an option to buy up to 24.9% of this newly created German cable company and will operate it for Malone.

As impressive as the move is, Malone is taking a huge risk. The fragmented German cable market is full of hazards, ranging from wary regulators to stingy viewers unwilling to pay for premium services. German viewers pay as little as $4 a month for basic cable service. In the U.S., cable operators have used premium services to persuade viewers to shell out an average of $40 a month. Thousands of local cable operators offer rudimentary service across Germany. Because of local laws, private operators ranging from corner electronics shops to building associations control the last few meters of cable that connect the Deutsche Telekom network with some 6.6 million homes. In other words, Liberty will control the pipes, but not always the spigot.

To reach his new customers, Malone will have to win the support of these local players, who may not want to cede turf to a foreign interloper. Petrella predicts Liberty will buy up the smaller operators whose connections he covets. That's the only way he can justify spending the estimated $3 billion needed to upgrade the network he's acquiring from Deutsche Telekom, which never managed to make money on cable. "Malone will suffer his first defeat here," warns Heinz-Peter Labonte, founder of PEPCom, a company based in Bingen, near Frankfurt, that is buying up smaller cable operators in Germany.

That prediction may be too dire. But Malone's move is already stirring opposition from established interests. The Association of Private Broadcasting & Telecommunications, which represents established German players such as Kirch Group, the film distributor and pay-TV operator, has called for regulators to keep a close eye on Liberty Media. One of its demands is that viewers on Malone's cable network be allowed to choose from competing set-top decoders. "Nobody should be shut out," says Thorsten Grothe, deputy director of the broadcasters' group. Regulators are already making sympathetic noises.

TOUGH FIGHT. The broadcasters also worry that they are trading one obnoxious monopoly for another. Malone is known for driving a hard bargain, and they wonder what kind of tolls he may demand once he owns the infrastructure. Moreover, they fear he'll give favorable treatment to his own media holdings, which include a 21% stake in USA Networks (USAI ).

Malone is doing little to assuage the broadcasters' fears. Sources close to the deal say Malone's primary aim is to secure distribution for his company's content. But he's a shrewd political player and likely to make sure there is a fair amount of local content.

Assuming Malone can battle his way through all these obstacles, he'll then face the toughest challenge of all: German couch potatoes. With access to more than 30 free channels on basic cable, including two all-sports channels and movie channels such as ProSieben, German viewers are notoriously reluctant to pay for extra services. Just ask Leo Kirch, who has been struggling for five years to make money with digital pay TV and is still years from breaking even.

No one should underestimate Malone's drive or business savvy. And he seems to recognize the hazards. He initially plans a relatively modest investment of about $400 million a year to upgrade the existing system so it can handle more channels and interactive services. But that's still big money. And Malone will need all his smarts if he wants to see it again.

By Jack Ewing in Frankfurt, with Tom Lowry in New York, Ronald Grover in Los Angeles, and Carol Matlack in Paris

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