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UPC Reorg Trims $7B In Debt

Almost three months after it first attempted to restructure its bonds, United Pan-European Communications N.V. — the Dutch cable subsidiary of UnitedGlobalCom Inc. — has worked out a deal that will reduce its debt from $10.5 billion to $3.4 billion by the first quarter of next year.

UPC, which has about 7.2 million basic-cable subscribers in Europe, said Sept. 30 that it has reached an agreement with bondholders to exchange their debt for about 32.5 percent equity in UPC.

UGC, which is 75 percent-owned by Liberty Media Corp., will retain 65.5 percent of UPC stock. Shareholders with preferred, common and priority stock will receive about 2 percent of the outstanding equity.

UPC also has restructured its bank facility. Its major lenders have granted it a waiver for defaults on debt interest payments until March 31, 2003. In addition, the banks have agreed to reduce a $4 billion loan commitment to $3.5 billion and ease certain covenants regarding UPC's ratios of cash flow to total cash interest and cash flow to senior debt service.

UGC first proposed the debt-for-equity swap back in July, but its troubles reach back further than that. In October 2001, Liberty proposed buying about $1.58 billion of the bonds in a modified Dutch auction, but later withdrew the offer. The difficulties in reaching a deal were not lost on UGC executives.

"None of us expected it to take this long," said UGC chairman Gene Schneider on a conference call with analysts. "But your patience is going to pay back in a big way."

Chapter 11 step

In order to facilitate the restructuring, UPC NV — the financial holding company for UPC assets — will file a pre-packaged Chapter 11 bankruptcy petition in both the U.S. and the Netherlands. UPC expects to emerge from Chapter 11 by the end of first-quarter 2003.

UGC also has agreed to underwrite up to $98.8 million in additional funding through the issuance of new stock after the restructuring is completed.

The changes will fully fund UPC to operating free cash flow, expected to be $209 million by the end of 2003. Operating free cash flow is earnings after capital expenditures are made.

"This has clearly been a long road," UGC president and chief operating officer Mike Fries said on the conference call. "But I think we all agree that the finish line is in sight."

On the news, UnitedGlobalCom stock rose more than 29 percent, or 37 cents each, to $1.64 per share on Sept. 30, and continued to climb in subsequent days. The stock reached $1.85 in 4 p.m. trading Oct. 1, but lost some ground on Oct. 2 to $1.75 per share.

Trading in UPC shares was suspended on the Euronext Exchange in Amsterdam all day on Sept. 30. The stock had traded at about 5 cents per share on Sept. 27. It closed at 6 cents each on Oct. 2.

Janco Partners cable analyst Matt Harrigan was encouraged mostly by UPC's expected performance after the restructuring. On the conference call, UPC said revenue is expected to grow 15 percent to 18 percent per year, and cash flow should nearly double in 2003 from $278 million to $547 million.

In addition, operating free cash flow is expected to more than double from $209 million in 2003 to $457 million in 2004.

UPC intends to do that by aggressively cutting costs and placing added emphasis on its higher margin broadband-data service, called chello.

In the conference call, UPC chief financial officer Charlie Bracken said chello is the company's first priority, coupled with cost savings from increased scale economics and better purchasing power as a result of being continental Europe's largest cable operator.

"Our model is very flexible," Bracken said on the conference call. "New products on stream will drive revenue growth, which in turn will drive [cash flow]."

Harrigan said that estimated cash flow — or earnings before interest, taxes, depreciation and amortization — of $547 million for 2003 and $792 million in 2004 is about $100 million higher than his original projections.

"They are doing an aggressive job in cutting costs and an aggressive job in containing the capital budget," Harrigan said. "They're in a good situation in that their ARPU is so low and they don't have satellite competition in most of their major markets. I think there is a pretty decent story here. If you want to deal with a leveraged name and still sleep at night, this would probably be a pretty good choice."

With a new focus on growing its chello broadband data offering, which has an ARPU of about 35 euros ($34.55) per month, UPC has an opportunity to significantly boost its current ARPU of about 13 euros ($12.83) per month.

"They have a lot of head room," Harrigan said.