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A Dutch Auction for Euro Cable Bonds

Liberty Media Corp. has made a tender offer for about $1.58 billion in United Pan-European Communications N.V. debt, a move that some analysts believe could be the first step toward Liberty gaining equity control of the European MSO.

In a statement Tuesday, Liberty said it has created a wholly owned subsidiary — Liberty UPC Bonds Inc. — to pay cash for the UPC debt. The deal would include about 13 different classes of UPC bonds, with maturities ranging from 2007 to 2010.

Salomon Smith Barney Inc. is serving as dealer manager for the offer.

Although it's unclear just how much Liberty would actually pay for the debt, UPC bonds have been trading at between 14 cents and 18 cents on the dollar, according to some analysts.

UPC's stock hasn't fared much better. Mainly because of a debt load of 8 billion euros, shares in UPC have been trading under $1 for months. The company's 52-week high was $21.06.

UPC stock received a slight lift on the news, rising 2 cents to close at 31 cents on Oct. 9.

Liberty said it would make the bond offering in a modified Dutch auction, which means the company would pay the lowest price in a range offered by the UPC bondholders.

In a statement, Liberty said the offer was valid until Nov. 6, unless the company decides to extend that time frame.

The offering caps a period of intense speculation that Liberty chairman John Malone would attempt to gain control of UPC by buying up its debt. Liberty spokesman Mike Erickson did not return calls for comment.

UPC bonds have been under pressure for months, as European bond analysts have questioned the company's ability to pay its bills.

Things came to a head in mid-August, when UPC chairman Mark Schneider resigned to spend more time with his family, according to a company press release. Schneider's resignation came as UPC reported a $788.4 million loss in the second quarter, on sales of $326.2 million.

Although UPC has said it has enough cash on hand to fund operations through 2003, analysts have speculated that it needs another $3.7 billion to reach free cash-flow positive status by 2004. UPC has said its funding gap is between $320.2 million and $776.5 million.

In a research note, UBS Warburg LLC high-yield cable analyst Aryeh Bourkoff estimated that the Liberty deal would reduce UPC's debt by as much as $1.3 billion and could save UPC about $161 million in annual interest expense and another $93 million in annual cash interest expense.

Gaining control of UPC would make sense for Liberty, which has been cutting deals to accumulate European cable companies over the past year. The biggest of those deals is a pending $1.2 billion acquisition of 51 percent of UPC parent UnitedGlobalCom Inc.

According to some analysts, the Liberty bond offer is the first step in the company's bid to gain control of UPC, which has about 11 million cable subscribers in Europe and Japan. By gaining control of the bonds, Liberty could conduct a debt-for-equity swap and possibly end up with the majority of UPC shares.

Janco Partners Inc. analyst Roger Metz, who follows UPC, said that while he did not know of Liberty's ultimate plan, the offer is a step in the right direction.

"It's a signal that Liberty is still committed to the European cable end," Metz said. "It brings them one step closer to deleveraging UPC's balance sheet."

Although a Liberty debt-for-equity swap would be dilutive to current UPC shareholders, Metz said, that should be the furthest thing from their minds at this point.

"As a shareholder I would rather have a diluted share of a solvent company than a full share of an insolvent one," Metz said.