Liberty to complete buyout of United GlobalCom; sees lower debt costs, but not investment-grade rating

By Paul Deckelman

New York, Jan. 18 - Liberty Media International Inc. proposed on Tuesday to acquire the 47% of UnitedGlobalCom Inc. that 53% owner Liberty does not already own in a $3.5 billion deal that will be funded mostly by stock.

Executives of the two companies said on a conference call following their announcement that they anticipate that the merger of the two companies - who operate cable systems and other communications systems outside the United States - will create a powerhouse in the global cable industry that will enjoy significant economies of scale, and will be "very well capitalized, with strong liquidity and free cash flow."

Given that liquidity strength - the combined company is expected to have a market capitalization of between $10 billion and $11 billion, and $3.6 billion of cash and liquid short-term cash equivalents - Liberty chief John Malone and his opposite number at UnitedGlobalCom, Michael Fries, told analysts on the conference call that the combined entity, Liberty Global Inc., would have better access to the capital markets than either company now enjoys individually and lower borrowing costs.

Apart from that oblique reference, there was little concrete mention of debt on the conference call. The transaction will mostly be funded by an exchange of stock in the new company to current shareholders of UnitedGlobalCom, with each share of Denver-based UnitedGlobalCom's common stock to be exchanged into 0.2155 of a share of series A common stock of Liberty Global. While UnitedGlobalCom shareholders will have the option, alternatively, of getting $9.58 per share in cash for each of their shares instead of stock, no more than 20% of the UnitedGlobalCom shares will be paid for with cash. Should the cash portion of the offer be oversubscribed, it would be subject to a pro-ration calculation. Liberty estimated that the cash portion would cost it no more than $750 million.

The parties said it was their expectation that given the large amount of cash the combined company would have, some of it would likely be used to buy back shares after the closing of the merger.

In answer to an analyst's question, Malone said that the new Liberty Global would be in a good position to "roll up other attractive [cable] operators, particularly in Japan, where Liberty's JCOM subsidiary is the largest operator and the other cablers are 'mom and pops,' relatively speaking.

"As prices [for these assets] get higher, you probably would want to use more stock and less cash in a transaction," he said. "Most European cable assets that are large that you probably would be looking to buy are already pretty heavily levered," since they are owned by U.S. private equity concerns that have leveraged those properties to the hilt. "So you would be really talking about the equity premium."

Fries agreed that having a big pile of cash available would make consolidation of European cable assets easier. He acknowledged that "we do have a natural limit on the amount of debt we can borrow to make acquisitions, both within our bank deal and, I think, publicly - we've stated publicly where we think leverage should be."

Therefore, he said, "we're not interested in levering up to no end to get transactions down, although we're believers in levered growth."

Not seeking investment grade

Malone, speaking to an analyst who noted that Liberty's predecessor company, TCI, had reached tremendous scale because of high leverage - i.e. it grew through mostly debt-funded acquisitions - said that Liberty Global "is not seeking an investment-grade rating, nor would we feel ourselves able to build the company if we were to adhere to an investment-grade rating."

Fries agreed that achieving an investment-grade rating is not a priority.

"UCOMA sits at a net debt to operating cash flow or EBITDA [ratio] of 3.5 times. We've stated publicly, we think 4x to 5x is our range, our comfort zone. To get to even that level would require some sort of transformational acquisition or other event."

He said that while the company's bank deal provides "a very cheap and ready source of capital for acquisitions," it does have a natural barrier of four [times cash flow/EBITDA]. We sit today at a single-B - and have no aspiration to achieve investment-grade ratings any time soon." Prudent levered growth, Fries declared "is the right way to maximize equity returns - and we're certainly going to do that."

No change of control

Fries said that the transaction would not trigger a change of control event for UnitedGlobalCom's 1¾% convertible notes.

"My understanding is that the exchange of shares itself complies with the covenants and indentures there, and those converts will roll up," he said, and be convertible into all-stock.

"It's my view," said Fries, summing up, "that this company is poised for great things in one of the most exciting sectors you can invest in. From management's point of view, we're focused, and we're going to get it done."

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