Malone Digs In

UPC bolsters his position as Europe's cable kingpin

Time was short, and Mark L. Schneider knew it. It was 1999, a period when the promise of Europe's Internet ever so briefly spelled gold. Schneider, the American CEO of United Pan-Europe Communications, a small Dutch cable operator, leveraged it to the hilt. With visions of turning cable TV into dot-com dominance, he grabbed billions of dollars in financing, pulled off the biggest junk- bond issue in European history, and went on a marathon shopping spree. Schneider bought cable companies in France, Sweden--even spent $807 million, in cash, for a company in Poland. "I always want to stay one financing ahead of the curve," said Schneider as he hurried out of an interview on a hot summer day in 1999 to meet with bankers.

He couldn't. Tripped up by technology glitches, walled in by towering debt, and ambushed by the collapse in Net and telecom stocks, UPC registered one of Europe's most thundering collapses. Schneider resigned in August, and the stock, which once fetched $80, is now trading at a pitiful 25 cents. "It's a penny stock," says Michael Kraland, president of Trinity Capital in Paris. "We don't even look at it any more."

But is that the end of UPC? Far from it. Indeed, while the company rode the New Economy roller-coaster in Europe, real management control resided in Denver, Colo. That's the home of Mark Schneider's father, Gene, chairman of UnitedGlobalCom--UPC's parent, with a 55% stake--and his longtime associate, John Malone, chairman of Liberty Media Corp. While UPC's travails have sapped the Schneider empire, they spell opportunity for the deep-pocketed Malone.

PRIME ASSETS. In the past year alone, the cable mogul has snapped up $5 billion worth of prime cable assets in Germany while quietly assuming majority control of UPC's parent company through injections of $5 billion worth of cash and assets. The result? With its $1.3 billion in sales, 7.2 million subscribers, and operations in 18 countries, UPC should bolster Malone's position as the cable king of Europe. Altogether, Malone will boast some 30 million subscribers. "He'll be the biggest one around," says Bert Siebrand of SNS Securities in Amsterdam.

For all the pain it caused investors, UPC's meteoric rise and fall reflects a vital stage in the growth of Europe's tech economy. It was a brief period marked not only by waste and hype but also by vision and frenetic growth. Like other tech shooting stars, such as bankrupt Viatel Inc., UPC drafted a Continental plan, tapped the euphoric markets, and raced across borders to build an empire before the money ran dry.

Now, Europe's season has changed. The arrival of Malone presages the rise of established players, those with the patience, wealth, and experience to cash in on the tech bust. Investors with deep reserves such as Malone can pick over a deserted battlefield, one littered with devalued cable assets and limping phone companies.

Of course, Malone has problems at UPC. The company is spouting red ink: Losses amounted to $722 million in the second quarter, thanks mostly to heavy investments in network upgrades. UPC's debt now stands at a huge $8.5 billion, including a $1 billion IOU to Malone. Its stock likely faces delisting. But Malone has proven a master at turning around troubled cable companies and should have little problem renegotiating UPC's debt. "The bondholders would probably be very happy to get 50 cents on the dollar," says Rene Verhoef, an analyst at Fortis Bank in Amsterdam. Malone and new UPC CEO John F. Riordan were unavailable for comment.

Malone did not have Europe in his sights back in 1995, when UPC began to take shape. Gene Schneider teamed up with Royal Philips Electronics and began picking up bits and pieces of cable businesses in Europe. He later dispatched his son, Mark, a lawyer, to buy out Philips and turn UPC into a Continental power. Mark Schneider had grown up in Wyoming, where his father and Malone pioneered the cable industry. But the younger Schneider wasn't just interested in wiring European homes for TV. He also wanted to offer high-speed Net access and telephone service. Schneider called it the "triple play." And with it, he hoped to triple UPC's monthly revenues per customer, from $12 now to more than $50.

CASH AND CACHET. At the heart of Schneider's grand plans was a black set-top box, dubbed Da Vinci, which would deliver TV, Net access, and phone service. Trouble is, it didn't yet exist. So in early 1999, Schneider enlisted Microsoft Corp. to help develop one. Eager to stake its own claim on Europe's Internet, the software giant took a 6% stake in UPC for $333 million, nearly three times the company's present value.

Microsoft provided UPC with cash--and cachet. The Redmond connection helped smooth the path to UPC's January, 1999, IPO on the Nasdaq and the Amsterdam exchanges, which raised $1.4 billion. Subsequent junk-bond and equity offerings brought in another $2 billion that year. Though Schneider shopped madly, he couldn't buy his way into Europe's biggest cable market: Germany. While the German government had ordered Deutsche Telekom to unload its cable holdings, the former telephone monopoly was reluctant to sell to a potential competitor such as UPC. So while DT held out, Schneider, now 46, scrambled to build a European system with a Germany-size hole in the middle--a crippling weakness.

He also neglected operations, especially in his home market of the Netherlands. This turned customers against UPC when the company launched new services, such as its broadband Internet portal called Chello. "If you disenfranchise the Dutch," says one ex-employee, "they never forgive you." To make matters worse, Schneider's Da Vinci was nowhere in sight. UPC officials blamed delays on Microsoft, and scouted for other software suppliers. "It took longer than anticipated," says Mark Le Goy, marketing director for Microsoft TV.

But even a magical black box could not have saved UPC from the crashing telecom market. The bursting of the Internet bubble, followed by the disappointments of the mobile Web, prompted investors to flee the entire industry, including UPC. In August, Mark Schneider resigned, saying he wanted to spend more time with his family. His replacement, Riordan, a 59-year-old Irishman, spent two years as UPC president--and was widely regarded as Malone's eyes and ears at the company. Riordan is now piecing together a new strategy, says a company spokesman.

Even as UPC shares collapse, the new management has little reason to chart a completely new course. After all, Malone shares the same "triple play" visions as Schneider. UPC continues to work with Microsoft, among others, on the Da Vinci--now scheduled to debut in October. And UPC still has $2.4 billion in cash and loan commitments on hand, including a $1 billion convertible loan from Malone. That should be enough to get the company to 2003. By that point, Malone should be able to decide if UPC's a keeper.

By Stephen Baker in Paris

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