* 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
By Liana B. Baker and Leila Abboud
Feb 6 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.
DEALS AND MORE DEALS
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
A EUROPEAN TCI
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
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
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