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Cable Operators

Malone Locks In Bid for UnitedGlobalCom

1/23/2005 7:00 PM Eastern

John Malone has laid down the law, telling analysts that anyone expecting him to raise Liberty Media International Inc.’s offer for the remaining portion of UnitedGlobalCom Inc. is sorely mistaken.

LMI said on Jan. 18 that it had agreed to acquire the remaining interest in UnitedGlobalCom Inc. it doesn’t already own in a stock swap valued at about $3.5 billion, or $9.42 per UGC share, below UGC’s Jan. 18 closing price of $9.60.

LMI wants to combine with UGC as a subsidiary of a newly created entity, to be called Liberty Global Inc.

'ZERO FLEXIBILITY’

Discussing the proposal in a conference call with analysts last Tuesday, LMI chairman and CEO Malone said there was “zero flexibility” on the exchange ratio for UGC.

“If the deal does not get approved by the shareholders, the deal will terminate, and LMI will do what is in LMI’s best interest to do, as will [UGC],” Malone said on the call.

Each share of LMI would be exchanged for one share of Liberty Global. Each share of UGC would be exchanged for either 0.2115 shares of Liberty Global or $9.58 in cash.

But LMI will limit the cash awards to 20% of the total deal.

The combined Liberty Global would include LMI’s interests in Japanese MSO Jupiter Telecommunications Ltd., Japanese programmer Jupiter Programming Co. and cable systems in Latin America.

UGC has cable systems in Europe, Asia and Australia that pass about 15.5 million homes.

Liberty Global will have a 10-member board of directors, headed by Malone, the chairman and CEO.

UGC CEO Mike Fries would retain those posts at the new entity.

LMI already owns a 53% equity interest in UGC and controls 90% of the vote.

Despite that firm control, LMI needs to receive the OK from a majority of UGC’s minority shareholders.

HOLDERS ARE SUING

Analysts first called for LMI to pay more, and some UGC shareholders immediately filed a class-action suit over the price, which they said does not adequately offer fair value for the MSO.

Malone, on the call, sounded firm. “We went as far as we could go, because going any further on this exchange ratio would have meant essentially giving away Japan at a really bargain basement price,” he said. “We’re just not prepared to do that on the LMI side.”

Adding to the value for the 47% holders of UGC stock is that although their stakes will be diluted to around 31% of Liberty Global, they will have more than twice the voting control of the new entity — 25%, as opposed to their current 10% voting interest in UGC, Fries said.

Combining the two companies also could create windfalls for present UGC and LMI shareholders.

LMI already trades at a 10% to 15% discount to the sum of its parts, Fries said on the call, terming it a holding-company discount. If J-Com were valued at the same multiple of operating cash flow as UGC, LMI stock would be worth about $49 per share.

Adding in the average research analyst valuation of J-Com to the at-market valuation of UGC raises LMI’s valuation to $50 per share, a 13% bump from its Jan. 18 closing price of $44.23 each.

The combined Liberty Global also would have a large store of cash — about $3.6 billion — and a market capitalization of between $10 billion and $11 billion. UGC’s market cap is about $3.7 billion; LMI’s market cap is $7.4 billion.

With the additional cash and a more liquid deal currency in Liberty Global stock, Fries said, both companies would be able to make acquisitions more easily.

“We’ll now have one stock, one strategy, one story,” Fries said.

J-COM IPO UPDATE

While the deal appears to squash the potential spin-off of J-Com in an initial public offering later this year, Malone said that is not necessarily the case. Late last year LMI and Sumitomo Corp. pledged its 45% and 20% interests, respectively, in J-Com to a newly created holding company, LMI/Sumisho Super Media LLC. It was believed that creating that holding company was the first step in taking J-Com public.

Malone said on the call that the UGC deal will have no effect on future plans for J-Com.

“At the point that Japan has a public float, our deal with our partners allows us to consolidate and control the Japanese business,” Malone said. “We have an incentive to do that. We also have always said that having a public Japanese security would help in the roll-up of the 'mom and pops’ [cable operators] in Japan and give the company a clear Japanese identity. We’re still in favor of doing something there, however we can’t really discuss the current plans.”

September