Cable Operators

Liberty Unit Tackles Worries

3/17/2006 7:00 PM Eastern

Liberty Global Inc. CEO Mike Fries tried to allay investor fears on a fourth-quarter analyst call March 13, but despite reporting strong results for the period, it seemed to have the opposite effect on the stock.

Liberty Global, which was spun off from Liberty Media Corp. in 2004, includes European cable giants UnitedGlobalCom Inc. and United Pan-Europe Communications Inc., as well as Japanese cable operator Jupiter Telecommunications Ltd.

In the quarter, revenue rose 9.5% to $1.4 billion and operating cash flow rose 12.2% to $471 million. LGI’s guidance for the full year is that it will add 1.6 million RGUs, revenue will increase 32% to $6.8 billion and operating cash flow will rise 36% to $2.4 billion.

LITTLE IMPACT MADE

But despite those strong results and the CEO’s attempts to ease investor concerns, LGI’s stock price was up just 10 cents in 4 p.m. trading Tuesday, to $19.73. It declined in subsequent trading, falling to $19.30 on March 15 (down 43 cents) and hitting a new 52-week low ($18.65) before closing at $18.67 on March 16.

Fries started by addressing what he believes are four investor concerns that have impacted the stock — competition; the complex structure of the company; increases in capital spending and the notion that LGI is losing ground to disruptive technologies like IPTV, mobile telephony and “over-the-top” video and voice service providers like Google Inc., Skype Technologies and Vonage Holdings Inc.

On the competitive front, Fries pointed to LGI’s strong subscriber growth in the quarter and for the year (it added 500,000 RGUs in the quarter and 1.5 million for the year).

Regarding capital spending, Fries said that while 2005 capex was more than double that of 2004 ($1.2 billion versus $485 million), it is largely tied to revenue generating products. Fries said that roughly 75% of total capex is tied to RGU additions and of that about 55% went to the purchase of customer premises equipment.

Fries said LGI’s complicated capital structure is actually a benefit. He said the structure, unlike single-market providers, naturally hedges the company from a financial, political and operating point of view. Recent acquisitions have allowed it to rebalance its footprint tax efficiently and its balance sheet puts leverage as close as possible to operating cash flows in the same local currencies.

“All of which in our view are going to help drive equity returns in the long term.” Fries said.

IPTV: MINIMAL SO FAR

Fries said several European telephone companies have launched or are in the process of launching IPTV services, but so far the impact has been minimal.

He said Internet companies attempting to move into the video space, like Google Inc., are also in for a rude awakening.

“Putting aside for the moment that the vast majority of our 15 million customers are not techno-savvy bloggers — these are regular folks — we still think these services are going to find some challenges,” Fries said. “The economics of streaming video are tough.

“Even before you factor in HD, we can’t forget that video is not voice,” he added. “People are not going to put up with jittery pictures or dropped signals.”

September