From Microsoft Investor - 10/29/99
Company Focus
UnitedGlobalCom wants to be 'king of the world'!
The telecom is gobbling up cable companies worldwide, making it the best likely global broadband play. Its stock has soared eightfold in 12 months and money managers believe it can fly higher.
By Michael Brush
While AT&T is snapping up cable systems in its bid for center stage in the potentially huge U.S. broadband market, a lesser-known company based in Denver has been up to the same trick overseas.
For the past several years, UnitedGlobalCom (UCOMA) has been busy taking over the world, or at least its cable systems. Having built up critical mass, the company is now poised to focus on pushing through the triad of services that represents the Holy Grail for broadband believers. They are, of course, telephone, Internet access and a broader array of "tiered" video programming. So much for the good news.
The bad news is that investors have already taken notice, thanks to UnitedGlobalCom's acquisition campaign, some high-profile alliances and clever financial re-engineering. The stock is up more than eightfold in the past 12 months. Despite this run, many analysts see more value ahead in UnitedGlobalCom shares.
To understand why, it helps to take a quick tour of UnitedGlobalCom's geographic reach. Chief Executive Gene Schneider has built up cable assets in three parts of the world: Europe, Asia (mainly Australia) and Latin America. To date, the company's European division, United Pan-Europe Communications (UPCOY), has been the most aggressive buyer.
Buying up cable in Europe
Since that company went public in February, it has made more than 10 acquisitions, adding more than 5 million homes. The Amsterdam-based company now reaches 8.5 million homes in Europe, making it the biggest pan-European broadband cable operator. By the end of the year, about 3 million of those homes will be two-way capable, meaning they can handle Internet and telephone service, as opposed to video services alone. Its customers are mainly in Holland, Belgium, France and Austria. But it also has cable systems in Norway, Sweden, Eastern Europe, Israel and Malta.
Elsewhere in the world, UnitedGlobalCom finished off its acquisition of Chilean cable company VTR Hipercable S.A. last April, gaining access to the country's fast-growing cable phone market and 1.6 million homes. It also controls Austar, a television satellite system that reaches more than 2 million homes in Australia. There are also cable assets in New Zealand and several Latin American countries.
All told, UnitedGlobalCom's cable now reaches 14 million homes in 22 countries. The company has 7 million customers, including 1 million businesses, which are "absolutely ripe for phone and Internet services," says Stanley DeSico, UnitedGlobalCom's director of finance.
In short, the company looks like the single best global play on cable's potential to deliver voice, video and Internet access. "No one seems to have collected a more attractive arsenal of networks around the world," says Eric Semler, the managing director of Georgica Advisors, a New York-based money management firm that has a position in the company. "In Europe, UPC is doing what AT&T (T) is trying to do here. But they are better positioned because their systems are further along in terms of being upgraded."
UnitedGlobalCom probably will keep on buying. But now that it is ready to make a go at building revenue by pushing more services through its pipelines, will it succeed? There are several reasons to think it will have an easier time of it than AT&T, at least.
"No one seems
to have collected
a more attractive arsenal of
networks around
the world (than UnitedGlobalCom)."
-- Eric Semler,
Georgica Advisors
Why it might work
The economics of European Internet and phone service.
Speed is nice, but Europeans have a bigger incentive to get to the Internet through their cable lines: It's cheaper. Most Europeans still pay by the minute for local phone calls. It will cost less for them to connect through "chello," the name of UnitedGlobalCom's Internet service (similar to Excite@Home (ATHM)), which runs about $40 a month. That's one reason why chello was popular when it was introduced in Vienna recently. "We hit some of our targets six to nine months earlier than anticipated," says DeSico. UnitedGlobalCom's cable phone service, called Priority Telecom, meanwhile, costs about 10% less than competitors' services.
Friendlier regulatory environment.
It's counterintuitive, but regulators in Europe are friendlier to broadband than regulators in the United States are. Europeans are in the process of liberalizing their once-Byzantine telecom markets. In the United States, for the moment at least, AT&T is being forced to open its cable system to competing Internet access providers in places such as Portland, Ore., Broward County, Fla., and Fairfax, Va.
Significant content partners.
Investors drove up UnitedGlobalCom shares in early September when Liberty Media Group (LMG.A) and MSN MoneyCentral publisher Microsoft (MSFT) announced they were forming a joint venture with the group's European division. Analysts such as Merrill Lynch's Neil Blackley saw this as a good mix of United Pan-European Communications' distribution system and the content and financing that Liberty Media and Microsoft can offer. Money raised in United Pan-Europe Communications' follow-on issue in Amsterdam (where the stock also trades) last week will be used to develop and sell content as well.
Details
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UnitedGlobalCom
key ratios
Price Ratios
Growth Rates
Profit Margins
And don't forget Latin America. True, the region only accounts for about 15% of UnitedGlobalCom revenue. But cable phone systems there are hot, especially in Chile. "We can't install them fast enough," says DeSico. "We are hooking up about 7,000 or more phone customers a month." Next year, UnitedGlobalCom will start offering cable Internet service as well.
Plenty of risks
To be sure, there is considerable risk in the UnitedGlobalCom story. Who knows, for example, whether it really will be able to execute its business plan and deliver decent service day in and day out? If the company does succeed, won't competitors step in? Alternative technologies like satellite could present a problem. The regulatory environment might change.
Despite these risks and the huge run-up in UnitedGlobalCom shares, analysts still see value in the stock on a purely mathematical basis. To see why, just walk through some simple math with Ted Henderson, an analyst who follows the stock for Janco Partners in Denver.
First, take the value of UnitedGlobalCom's share of its European subsidiary, United Pan-European Communications. UnitedGlobalCom owns about 77.1 million shares of UPCOY, worth a total of $4.9 billion when UPCOY trades at $63 a share. Next, add the value of UnitedGlobalCom's 361.3 million-share position in Austar, which trades for about $3 a share, or about $1.1 billion total. Then add the value of the company's Latin American assets, or $500 million. Finally, add UCOMA's cash ($400 million) and take out debt ($1.59 billion). On paper, UCOMA is worth about $5.3 billion, or $116 a share with 46 million shares outstanding. That's around 40% more than where the stock currently trades ($80).
Asset or liability Value (in $billions)
77.1 million shares of UPC @ $63 each 4.9
361.3 million shares of Austar @ $3 each 1.1
Value of Latin American investments* 0.5
Cash and other assets 0.4
Debt (1.59)
Total 5.3
* Current value probably higher
Company Focus
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Dizzying activity
What might make the market drive UnitedGlobalCom shares closer to its theoretical value? More spinoffs. Once UnitedGlobalCom's European and Australian companies started trading publicly, investors were better able to realize the value of cable assets behind those shares, says Semler. This helped move up the value of UnitedGlobalCom stock. Semler thinks more spinoffs are around the corner, and he is not alone. Analysts like Henderson expect UnitedGlobalCom to spin off its chello broadband service during the first three months of next year. Latin American assets will be next, perhaps 12 months out.
As with the other two spinoffs, UnitedGlobalCom will keep enough shares to maintain control. But the financial re-engineering should add value to the shares of the parent company. If that is not enough, some other developments soon may help. Equity analysts at several U.S. brokerage houses are said to be preparing to start coverage of UnitedGlobalCom. It might be hard to put a "buy" recommendation on a stock that has run up so much already. If they do, the fresh attention will attract new investors.
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