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Malone Eyeing More Japan Systems

8/22/2004 8:00 PM Eastern

A highlight of Liberty Media International’s first conference call with analysts as a separate public company last week was word that LMI would like to consolidate cable in Japan.

LMI, the spun-off international assets of Liberty Media Corp., owns a controlling stake in European cable MSO UnitedGlobalCom Inc., 45% of top Japanese MSO Jupiter Telecommunications Inc. and 50% of Japanese programming giant Jupiter Programming Corp.

“There are literally hundreds of smaller cable operators throughout the country [Japan],” LMI chairman and CEO John Malone said. “We believe there exists an opportunity to consolidate a significant number of these smaller operators.”

Also, there is “virtually no bad debt in Japan, and people don’t steal converters, either.”

COULD PAY CASH

Malone said LMI could acquire those smaller companies with cash — the June-born company has about $1.4 billion of cash and cash equivalents and another $1 billion in financial assets. A rights offering expected to raise about $730 million for LMI is expected to close around Aug. 23.

The initial impetus behind the offering was to give LMI the financial firepower to buy out Microsoft Corp.’s 19% interest in J-Com, should that stake become available, said Malone.

LMI’s other partner in J-Com is Japanese banking giant Sumitomo Corp., which owns 32%.

“One of the reasons we wanted to do the rights offering was to have the capacity to buy Microsoft out if it became available,” Malone said on the call. “We are very interested in increasing our stake in J-Com.”

But Malone said Microsoft seems happy with the investment and has not expressed an interest in selling.

LMI could also make acquisitions using a public stock offering of its Japanese assets as a deal currency — a move that LMI has discussed in the past.

No decision has been made about initiating a public offering for the Japanese assets, but Malone said that’s a possibility.

“We have said in the past that it would be useful to have a Japanese public security with which to acquire smaller cable operators and roll them in,” he said.

NOT GREAT FOR LMI

Stifel, Nicolaus & Co. cable analyst Ted Henderson said a J-Com IPO wouldn’t necessarily be good for LMI holders.

“The addition of yet another equity to the Liberty family would add additional complexity to an already complex investment story,” Henderson wrote in a report. “This certainly hasn’t impeded Liberty and [LMI] CEO John Malone in the past.”

LMI also played down speculation that it would buy the remaining 47% of UGC stock it doesn’t already own.

Per its agreement with UGC, Malone said, LMI would be required to buy the entire company if it increases its stake above 90%. LMI currently owns 53% of UGC equity and 90% voting control.

“Other than that, we can do whatever we want as long as UGC shareholders thought it was fair,” Malone said. “There is no barrier [to owning more of UGC], but we haven’t focused on it.”

JBHanauer & Co. cable analyst David Joyce said in a note that although it would be in LMI’s best interest to keep UGC as a separate public company — having a pure-play European cable currency would give it more financial flexibility — Malone’s comments “have not put that speculation to bed.”

J-Com and JPC powered a successful second quarter at LMI.

J-Com revenue rose 25%, to $367 million, and operating cash flow rose 16%, to $146 million.

At JPC, revenue rose 38%, to $138 million and operating cash flow rose 85%, to $24 million.

At UGC, which reported earnings last week, revenue was up 17%, to $545 million. Operating cash flow rose 31%, to $195 million.

The strong results gave a needed lift to LMI stock, which had been trading down as investors continue to fret about the complicated structure of the company.

LMI’s share price ticked up 43 cents on Aug. 16, to $31.50, and gained $1.12 on Aug. 17, to $32.62 each.

LIBERTY STILL SAGS

Liberty Media got little help from the strong results, rising just 4 cents, to $8.67, on Aug. 16 and another 2 cents on Aug. 17.

Several analysts had hoped the LMI spinoff would give Liberty a needed boost by stripping away some complexity. That hasn’t worked out as planned. Liberty is still at $8 to $9 per share, the same level as before the June spinoff.

Malone said LMI wasn’t meant to be a catalyst for Liberty Media’s stock price. But he hinted that more changes could come to further simplify Liberty Media’s structure.

“We didn’t expect that this alone would do that much for [Liberty Media],” Malone said. “[Liberty Media] is still a complex set of businesses and financial structures and needs substantially more simplification in order for it to start to trade much closer to what we think its sum of the parts are.

“The LMI spinoff was just a start and it was done really more to free up the international [assets] to pursue [their] destiny than it was to create a lot of perceived value increase in [Liberty Media].”

September