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New World Order

From its home base in Denver, Liberty Global has toiled away in relative obscurity in the farthest corners of the globe, while turning in the best performance of any cable
operator anywhere.

The international cable operator is the top-performing cable-MSO stock of the past fi ve years:
Its share price has nearly doubled since 2006, closing at $44.92 per share on May 26, compared
to a 78% increase over the same period for Cablevision Systems, the best domestic performer.

And in an economy that has forced some operators to scale back on acquisitions, Liberty Global has
been aggressive. In the past two years, it has spent $9 billion on acquisitions — most recently German cable operator KBW
in March for $4.5 billion — and the company has been circling other assets in the Netherlands and elsewhere. The German
acquisition combined with its existing Unitymedia operation, which Liberty purchased for about $5 billion in 2009, makes
Liberty the solid No. 2 MSO in that market.

Liberty also has made some smart asset sales; it shed its 38% interest in Japanese cable company Jupiter Telecommunications
(J-Com) last year for $4 billion, or about 25 times cash flow.

“They’ve completely done their own thing,” said Miller Tabak media analyst David Joyce.

In a recent interview, Liberty Global CEO Mike Fries said the J-Com sale is a prime example of Liberty’s philosophy
— it used the proceeds to help finance $9 billion in acquisitions and $1 billion in stock repurchases and plans another
$1 billion in stock buybacks this year. And through its strong balance sheet and access to capital markets, the company
still has $4 billion in liquidity left over.

“We don’t believe in sitting on money,” Fries said. “We don’t
think there is any benefit to shareholders by earning 50 BPs
[basis points] on your cash.”

Today, about 80% of Liberty Global’s revenue is generated in
Europe — 66% in four countries — and LGI also has smaller
systems in Chile (VTR), Puerto Rico and Australia (Austar), as
well as a programming arm (Chellomedia) with 46 channels
and 272 million subscribers worldwide.

Wunderlich Securities media analyst Matt Harrigan, who
has followed Liberty Global for years, said the company has
made its mark through a combination of smart acquisitions,
even smarter sales and a focus on providing superior service
at a good value.

“They’ve used DOCSIS 3.0 to drive share and penetration,
highlighting the price/value proposition relative to DSL,” Harrigan
said, adding that LGI has focused on driving highermargin
digital and HDTV subscriptions on the television side
of the business.

That translates into its subscriber numbers. As of the first
quarter, Liberty Global had a total of 17.6 million customer
relationships in 14 countries — including 16.7 million video
subscribers, 6.6 million high-speed Internet customers and 4.8
million phone customers.

Harrigan noted that while European broadband customers
may be a little more savvy than their U.S. counterparts,
there is also a lot of upside for video. HD and digital
TV, nearing the saturation point in the U.S., are just coming
into their own in Europe. For example, Liberty Global’s
digital penetration is about 40% of video customers. The top
U.S. operators have digital penetrations in the 80% to the
high-90% range.

“When you get someone to upgrade to digital, or HD or
DVRs, that’s an enormous step function percentage accruement
in ARPU, relative to where it was for the plain-vanilla analog
product,” Harrigan said. “That’s really the growth factor.”

Harrigan added that broadband has been one of the key
drivers for growth.

Liberty chief technology officer Balan Nair said that on average,
its high-speed Internet customers receive speeds of
about 20 Megabits per second, although top speeds peak at
120 Mbps. As DOCSIS 3.0 continues to be deployed, those potential
speeds climb even higher, nearing 200 Mbps.

Liberty delivers those speeds extremely efficiently; it estimates
its average cost to deliver DOCSIS 3.0 is less than $20
per home passed.

“There are only two levels you can play with: speed and
price,” Nair said. “[Customers] can take advantage of the speed
supplied and the price per Megabit is extremely efficient, too.”

Nair is also spearheading Liberty Global’s much-awaited IP
offering — called the Home Gateway — in a handful of markets
in the second half of this year.

The home gateway will connect video on demand, digital
video recorders, live TV, Web content and phone service,
seamlessly. The company also is working on a second product,
which will make linear and VOD content available on tablet

While deals may grab the headlines, Liberty Global has also
performed off the charts operationally. Revenue in 2010 was up 20% to $9 billion and operating cash flow soared 23% to $4.1
billion, nearly four times the growth rate for domestic cable
operators. That momentum continued into the fi rst quarter of
this year, with revenue up 12% to $2.4 billion. Operating cash
flow in the period increased 15% to $1.1 billion.

Liberty Global has been a stellar operator, but it also should
be noted that it operates in what would be a dream environment
for most U.S.-based cable companies. Programming
costs, a major albatross for most stateside MSOs, are low for
Liberty Global, which helps drive 85% margins on video. (U.S.
cable operators are thankful for 35% to 40% margins on video.)

Fries estimated that Liberty’s content costs work out to between
$4 and $5 per month per customer, versus $35 to $40 per
month per customer for a U.S. cable operator.

“Programmers don’t have the ability to control the game
abroad, like they do in the U.S.,” Fries said.

“Cable channels have had a more difficult time breaking
through,” Fries said.

And the regulatory environment, led by the European
Union, is basically unobtrusive. Fries said the EU recognized
several years ago that cable was the only video competition to
national incumbent telephone companies in many countries
and treated them as such.

“They allowed us to consolidate and build scale. They certainly
have been supportive of the industry as a whole,” Fries said.

On the flip side, Liberty has to do more with less — it averaged
about $40 in revenue per month per customer in its systems,
including revenue from broadband services. U.S. cable
operators average about $120 per month per home.

Liberty is an anomaly in the cable industry. Even as U.S. cable
operators pulled out of foreign markets because of the risk
and cost in the late 1990s, Liberty Global chairman John Malone,
once head of the largest U.S. cable operator, Tele-Communications
Inc., ramped up investments aggressively in Latin
America and Japan.

Fries has been through several ups and downs with Liberty
Global and its various iterations. He started out in business
development in 1990 with United Pan-Europe Communications,
an international cable firm started by Denver cable pioneer
Gene Schneider. He was the fifth person Schneider hired.

In 1998, Malone invested in the company and in 2002 UPC
N.V., UGC’s Dutch subsidiary,
filed a pre-packaged Chapter
11 bankruptcy petition mainly
to restructure its bonds.
By 2004, Malone bought out
Schneider, merging his Liberty
Media International with
UGC and renaming it Liberty
Global. Fries took over that
year as CEO and embarked
on a plan to consolidate its
operations — it was in about
26 countries — and focus on
selling the triple-play bundle
of voice, video and highspeed

“Like a lot of companies, we had a rocky couple of years
after the Internet bubble burst,” Fries said. But he added that
through the reorganization Liberty Global emerged a stronger,
more focused company.

“We’ve been on that path since 2003 or 2004,” Fries said.
“And it’s been the right path; revenue has gone up six

In 2005, Liberty shed operations in Norway, Sweden
and France, putting that money into buying new
systems in Switzerland. Last year Liberty Global sold
the J-Com stake to Japanese mobile-phone giant KDDI
for $4 billion.

The divestitures served two purposes for Liberty
Global: they streamlined the company, allowing it to
focus resources on markets with little outside competition
and growth potential for data services; and it
provided capital for future acquisitions.

“In the last five or six years we’ve been able to supercharge
and ramp up the growth,” Fries said.

The strategy initiated by Fries and his core management
team — some have been with the company for
20 years or more — was simple: drive growth in areas
with little or no satellite competition with a steady
stream of superior products and services. For Liberty Global,
that meant concentrating on high-speed data service, which
Fries said was sorely lacking in European markets.

So far, Liberty Global has stuck to its knitting — satellite penetration
in its four top markets (Germany, Belgium, the Netherlands
and Switzerland) ranges from 0.3% to 10.4%, according
to SNL Kagan — and its broadband market share is growing.

Broadband, according to Fries, has been the foot in the door
for Liberty Global, and even in markets with robust economies,
there is still huge potential for growth.

“We’ve definitely observed if Liberty sees a market as super
competitive, they exit,” said SNL Kagan senior analyst Ben
Reneker. “Particularly if they’ve had a good run.”

Reneker added that although Germany does have stiff competition
in the form of free-to-air satellite service — he estimated
that roughly one-third of German homes watch the free
Sky Deutschland — Liberty is still regarded as the premium
service provider in that country. And in Liberty’s remaining
top three European markets — The Netherlands, Belgium and
Switzerland — cable penetration is nearly 100%.

“Those are saturated cable
markets,” Reneker said,
adding that some of the
national telephone companies
have introduced an
IPTV offering on a limited
basis in those areas. “That
leaves a very small gap for
satellite competition.”

Other areas ripe for
growth include Poland, where LGI is in the process of acquiring
Aster, the largest cable operator in that country
with 368,000 video customers, for about $805 million. That
deal is expected to close in the second quarter.

“With 8,000 cable operators in Europe, it’s like the good
old days in the U.S.,” Fries said. “There is a lot of consolidation,
a lot of M&A opportunity. That’s where we excel.”

Fries pointed out that there are about a dozen assets
in Europe owned by private equity that are either on the
block or could be auctioned off soon. And while that presents
opportunity for an aggressive buyer, Liberty Global
isn’t in desperate need for scale.

Ten years ago, Fries noted, Liberty Global operated in
26 countries and had annual revenue of about $1.3 billion.
Today, Liberty Global extracts $9 billion of revenue from
14 countries.

That may dwindle to 13 soon. Last month, Liberty Global
received a $1.1 billion offer from Foxtel for its 54.2%
stake in Australian satellite TV venture Austar. Austar is
evaluating the offer, but said it would work with Foxtel to
reach a deal.

The Austar deal looks like another smart one for LGI.
Joyce said that the deal is valued at about 10.5 times forward
looking cash flow, more than two full turns above
the 8.2 times value he had expected. Liberty also has made
forays into Eastern Europe, but with few exceptions, that
market is still maturing.

Liberty Global may have a lot on its plate, but Fries said
that his priorities aren’t that complicated.

“No. 1 is to keep the growth engine moving,” he said,
adding that includes driving innovation through products
like its home gateway and advanced video offerings.
“We’re driving the bundle and that is what is going to drive