Liberty Stages European Retreat

By shedding its cable assets in Germany and three central European nations, Liberty Global is effectively cutting its customer reach across the continent by a stunning 50%. Yet Liberty Global officials insist that they have not changed their basic strategy and remain committed to serving as Europe's largest cable TV and broadband provider.

Speaking on the company's first-quarter earnings call Wednesday morning, Liberty Global Inc. (Nasdaq: LBTY) executives offered up a spirited defense of their decision to sell their cable assets in Germany, the Czech Republic, Hungary and Romania to Vodafone Group plc (NYSE: VOD) in an €18.4 billion ($21.8 billion) deal announced overnight. They also deflected charges by Deutsche Telekom AG (NYSE: DT) CEO Timotheus Höttges that the deal would lead to a "re-monopolization" of the cable market in Germany, with 70% of the pay-TV market left in Vodafone's hands. (See Vodafone Pounces on Liberty Cable Assets in €18.4B Deal and DT CEO to Fight Vodafone-Liberty Deal.)

"We all know what the German market needs," said Liberty Global CEO Mike Fries. "It needs a proper challenger." He noted that if the deal is approved by European regulators, Vodafone's German assets would still be only half as large as DT's.

After spending years pumping resources into Germany to build up its Unitymedia cable property there, Fries defended the decision to sell Unitymedia and cable systems in the Czech Republic, Hungary and Romania as the right move "strategically and financially" for Liberty Global and its shareholders. Stressing that Liberty Global would receive 11.5 times operating cash flow (OCF) for all four properties, including 12 times OCF for Unitymedia, he called it "an incredibly positive transaction" for the company.

Fries also noted that Liberty Global has previously sold off all of part of its cable assets in Japan, France, the Netherlands and elsewhere and has a pending deal to sell its Austrian cable system to DT. Not to mention the recent spinoff of its sprawling Latin American cable operations into a separate company.

"This is not the first time we've rebalanced" the company's assets, he said. "This is in our DNA."

Nevertheless, the Vodafone deal does signal a drastic retreat from Liberty Global's once-sweeping pan-European strategy. If the transaction goes through as planned along with the Austrian deal, Liberty's reach across the continent would shrink from 11 nations to six. And that number includes Switzerland, where the company is also exploring a possible sale of its cable assets. If Liberty also sells off its Swiss property, as seems likely, that would leave it solely operating in just the UK, Ireland, Belgium, Poland and Slovakia.

Similarly, while it would indeed remain the largest cable and broadband provider in Europe, Liberty's total customer base would plummet from 22 million today to 11 million after the two current deals close. And its number of revenue generating units (RGUs) would fall from 46 million today to 26 million afterwards.

Liberty Global's top and bottom lines, though, would take less of a hit because the German and central European cable operations have not been as profitable as its other European asets. The company's annual revenue would decline from $15 billion to $11 billion, while its OCF would shrink from $7 billion to $5 billion.

Questioned repeatedly by analysts on the earnings call, Liberty Global executives declined to say how they plan to use the expected €10.6 billion ($12.7 billion) in cash proceeds from the deal. But Fries indicated that the company could spend much, if not all, of the proceeds on share buybacks if the company's stock price remains "undervalued" then.

"The deal won't be done for over a year," Fries said, noting that he expects the European Union's regulatory review of the deal to take 12 to 15 months. So, he added, market conditions could easily change by then. However, the company, which recently announced a $2 billion stock buyback, remains committed to buying back its shares whenever possible.

"There's no change in our buyback approach," Fries said. "We're obviously not changing our stripes here, guys."

— Alan Breznick, Cable/Video Practice Leader, Light Reading