UGC, Liberty Rework Merger

Faced with the potential bondholder rejection of a proposed $4.02 billion merger with Liberty Media Corp., UnitedGlobalCom Inc. has opted for plan B.

Liberty and UGC agreed last year to a merger that would give Liberty an 82-percent voting stake in UGC in exchange for Liberty's programming assets in Latin America and elsewhere.

That deal was subject to approval from bondholders, who balked at a provision that would require them to waive their rights to be paid in full in the event of a change in control at the company, in return for an undisclosed amount of cash.

Liberty had had a contingency plan in the event that bondholders would not agree to the waiver and exercised that option last week.

Officials at UGC declined comment, but one source at the company said the contingency plan was expected all along.

"This doesn't really make a big difference," the source said. "Everybody ends up the same."

The bondholders represent about $1.4 billion in UGC debt.

The new deal is the same in spirit as the old agreement, except the assets of both companies will now be placed in a separate holding company called "New United." In addition, UGC will retain its 25-percent stake in Telewest Communications plc, the U.K's No. 2 cable company.

In the original agreement, UGC was to sell that stake to another subsidiary-United Pan-European Communications-which would then sell it to Liberty.

According to a Securities and Exchange Commission document filed in January, UGC said once "New United" was created, shareholders in UGC would receive stock in the company equivalent to their UGC shares.

In a research report, UBS Warburg high-yield cable analyst Aryeh Bourkoff downplayed the revised deal, but added that the decision by UGC to hold onto its Telewest stake could force some credit rating agencies to downgrade UPC's debt.

"In our opinion, this modification could lead to a ratings downgrade at UPC by Moody's [Investors Service Inc.] and/or [Standard & Poor's]-unless UPC were to attract incremental financial and/or strategic equity in order to fill its funding shortfall," Bourkoff wrote. "Additionally, we believe that [UGC] could potentially divest its pro forma stake in [Telewest] to raise cash."

Although the UGC assets will be placed in a new holding company, Liberty will still have a 45-percent economic stake in them.

Liberty will have 82-percent voting control of the new entity, but UGC's assets will be controlled by its founders.

According to the deal, Liberty will be bound by 10-year voting and standstill agreements with UGC and certain controlling shareholders. Liberty will have the right to appoint four of the 12 members of UGC's board of directors.

UGC's stock price was down $1.07 on Feb. 20 to $13.31. UPC's share price was off 94 cents, to $9.56.

When first announced, the deal was valued at about $5.5 billion. Since then, UGC and Liberty shares have dropped considerably, along with many others.

Since the transaction was first disclosed June 26, Liberty has lost about 34 percent of its value and UGC has dropped about 74 percent.

UGC shareholders are expected to vote on the new structure in April. The deal is expected to close by June 30.