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With Spin-Off, Malone Thinks Globally

3/21/2004 7:00 PM Eastern

Liberty Media Corp. last week said it would spin off its international cable assets, a move that would simplify its balance sheet and provide its global cable operations with a currency to make acquisitions.

Liberty said the spin-off of the international unit — including European cable powerhouse UnitedGlobalCom Inc., Japanese cable and programming leaders Jupiter Telecommunications Co. Ltd. and Jupiter Programming Co. Ltd. and cable assets in Latin America — would come in the early summer. Just how those assets will be distributed to shareholders has not yet been revealed.

UNLOCKING OVERSEAS VALUE

Liberty chairman John Malone will serve as CEO of the spin-off, to be called Liberty Media International. Liberty has been toying with the concept of an international spin-off for about three years.

In 2001, it considered creating an international tracking stock to unlock the value of its cable assets overseas, but scrapped that idea after plans to acquire two German cable companies fell through. Apparently the climate has changed, and Liberty appears encouraged that the spin-off could create a large player in the international cable market.

Besides the International division, Liberty has two other operating units that will remain inside the Liberty Media fold: the Interactive division, which includes QVC Inc., Ascent Media, On Command Corp., OpenTV Inc. and its investment in InterActiveCorp; and the Networks division, including Starz Encore Group LLC, Discovery Communications Inc., Court TV, GSN (formerly Game Show Network) and its investment in News Corp.

On a conference call with analysts to discuss the spin-off and Liberty’s fourth-quarter results, Malone said that the international arena is ripe for a big consolidator. Malone likened Liberty Media International to his last foray in the U.S. cable market, Tele-Communications Inc.

“Absolutely we see the opportunity to build another TCI, perhaps quite a bit bigger and more diversified,” Malone said. “I don’t see any reason why LMI and UGC together can’t turn out to be the dominant international cable operator, if they’re careful about where they expand and prudent with respect to how far they go on debt leverage.”

UGC is currently the largest cable operator in Europe, with about 10 million video subscribers.

Jupiter Telecom is the dominant Japanese MSO, with 1.5 million video subscribers. For the year ended Dec. 31, Jupiter Telecom’s revenue rose 28.9% to $1.2 billion and operating cash flow more than doubled to $429 million from the prior year.

Jupiter Programming is the dominant cable programmer in Japan, with 41 million cumulative subs.

TAKING NETWORK STOCK

Malone also offered some insight into Liberty cable network holdings.

“Clearly, Liberty’s investment in things like E! Entertainment [Television] and Court TV have a limited life expectancy as Liberty assets since Liberty’s co-investors have certain take-out rights with respect to those, which we would expect would probably be exercised over the next several years,” Malone said.

Liberty owns a 10% interest in E!; The Walt Disney Co. and Comcast Corp. own the rest. Liberty is also a 50-50 partner in Court TV with Time Warner Inc.

He added that GSN could be a core holding of Liberty’s ITV unit.

“We believe a big differentiator between cable and satellite will be real-time interactivity, including interactive advertising and merchandising,” Malone said.

But Malone wasn’t quite as optimistic about Starz Encore Group LLC, Liberty’s premium cable service.

“Starz Encore we believe, has got to prove itself,” Malone said, adding that it has to deliver on the investments it has made in video-on-demand and in acquiring movie rights.

“The jury is a little out on Starz, in terms of its long-term future and who it should or would combine with, if was going to combine with somebody,” Malone said. “We tried to merge it with Showtime 10 or 12 years ago and it took the Justice Department two and a half years to give us approval. By then, nobody was interested in putting them together.”

STARZ DECLINE?

Malone isn’t the only one who is concerned about Starz Encore. In a research report, Fulcrum Global Partners media analyst Richard Greenfield noted that the premium channel expects cash flow to decline sharply in 2004 and programming costs to rise 25% in 2005.

“This implies that Starz Encore’s growth will no longer recover in 2005 as we had expected,” Greenfield wrote. “The recovery is now pushed out until 2006 at the earliest.”

September