Liberty, UGC Finally Hammer Out Deal

After about 11 months of negotiations, UnitedGlobalCom Inc. and Liberty Media Group Inc. have reached a deal that would bring about $1.2 billion in cash and cable assets in Latin America to UGC, while giving Liberty 51 percent of the Denver-based international cable operator's stock.

The deal has two stages. The first was a 1 billion euro ($856 million) loan to UGC subsidiary United Pan-European Communications Inc., completed on May 29. That loan will mainly be used to repay about $750 million in UPC debt.

The second stage — which should close in 60 to 90 days, pending shareholder approval — is more complicated.

A new holding company, "New United," will be created to own UGC and the assets and cash contributed by Liberty. In return, Liberty will receive 60 million shares of UGC stock, giving Liberty 44-percent equity.

Liberty might also receive another 26.5 million additional shares of New United — upping its stake to 51 percent — depending on the stock prices of various UGC subsidiaries of the next 12 months.

As payment for Liberty's Latin American cable operations, New United will issue 20.1 million shares to Liberty and $200 million in cash.

The deal strengthens UGC's hold on international cable, giving it a 50-percent interest in CableVisión S.A., the largest cable operator in Latin America with more than 3.4 million homes passed and 1.5 million subscribers. It also gains full control of Pramer S.C.A. and 40 percent of Torneos y Competencias S.A., two of the largest cable programmers in Latin America.

UGC also gets Liberty's 16-percent stake in Crown Media Holdings Inc., which owns the domestic programmer Odyssey Network.

UGC provides voice, video and data services to customers in 26 countries. After the Liberty deal is completed, UGC's video customer base will rise from 10 million to about 12.1 million. UGC currently has about 630,000 telephony subscribers and 578,000 high-speed data customers; its programming businesses reach another 40 million subscribers.

"This change in the structure represents a prudent way for Liberty to invest in UGC and indirectly in UPC," Liberty chairman John Malone said in a conference call with analysts. "The new UGC creates a vehicle with substantially greater financial flexibility to pursue its global cable investment strategies. We clearly look forward to UPC as a major piece of the international cable puzzle as Liberty tries to expand its investment footprint, particularly in Europe."

Malone also shed some light on a separate deal between Liberty and Deutsche Telekom, in which Liberty and private-equity partner Klesch & Co. had planned to buy six regional cable networks from the German operator for a reported $2 billion in cash. That deal was announced in February, but has been stalled as the parties haggle over price.

"Liberty continues to negotiate," Malone said. "We anticipate completing the transaction, but it isn't done until it's done. At the moment, we continue to move forward in those negotiations, and they take on a life of their own in a transaction of this size and complexity."

Liberty and UGC had originally planned a deal to swap assets, stock and cash valued at about $5.5 billion on June 26. That deal was amended in February, after being rejected by bondholders, cutting the price to about $4 billion. The lower price of the current deal reflects the falling prices of UGC and Liberty shares since last June, which have dropped considerably along with the rest of the stock market. Liberty has lost 34 percent of its value and UGC stock fell about 74 percent since June 26.

UGC president Mike Fries said the 1 billion Euro loan to its UPC subsidiary will go towards paying off a bridge loan from Goldman Sachs & Co. Inc. That will save UPC about $120 million a year in tax expenses.

"I suppose that there are some of you still out there wondering how we got here with Liberty," UGC chairman Gene Schneider said in a conference call with analysts. "In my view, it's not important how we got here. The important thing is that we are here."

Under the original June 25 agreement, Liberty was to receive 54.1 million UGC Class B shares in exchange for the transfer of about 724 million common shares in U.K. cable operator Telewest Communications plc.

Under the amended February agreement, Liberty would retain ownership of its interest in Telewest.

"We believe this is extremely positive for all parties involved because it further funds UPC in Europe, it strengthens UGC's Latin American position and it strengthens Liberty's European cable play," Janco Partners Inc. analyst Matthew Riegner said in a research note.