Malone Digs In
From the Oct 8th, 2001 issue of Business Week (Thanks goes to irxvd for uncovering it)
UPC bolsters his position as Europe's cable kingpin
Time was short, and Mark L. Schneider knew it. It
was 1999, a period when the promise of Europe's
Internet ever so briefly spelled gold. Schneider, the
American CEO of United Pan-Europe
Communications, a small Dutch cable operator,
leveraged it to the hilt. With visions of turning cable
TV into dot-com dominance, he grabbed billions of
dollars in financing, pulled off the biggest junk- bond
issue in European history, and went on a marathon
shopping spree. Schneider bought cable companies
in France, Sweden--even spent $807 million, in
cash, for a company in Poland. "I always want to
stay one financing ahead of the curve," said
Schneider as he hurried out of an interview on a hot
summer day in 1999 to meet with bankers.
He couldn't. Tripped up by technology glitches, walled in by towering debt,
and ambushed by the collapse in Net and telecom stocks, UPC registered one
of Europe's most thundering collapses. Schneider resigned in August, and the
stock, which once fetched $80, is now trading at a pitiful 25 cents. "It's a
penny stock," says Michael Kraland, president of Trinity Capital in Paris. "We
don't even look at it any more."
But is that the end of UPC? Far from it. Indeed, while the company rode the
New Economy roller-coaster in Europe, real management control resided in
Denver, Colo. That's the home of Mark Schneider's father, Gene, chairman of
UnitedGlobalCom--UPC's parent, with a 55% stake--and his longtime
associate, John Malone, chairman of Liberty Media Corp. While UPC's
travails have sapped the Schneider empire, they spell opportunity for the
deep-pocketed Malone.
PRIME ASSETS. In the past year alone, the cable mogul has snapped up $5
billion worth of prime cable assets in Germany while quietly assuming majority
control of UPC's parent company through injections of $5 billion worth of cash
and assets. The result? With its $1.3 billion in sales, 7.2 million subscribers,
and operations in 18 countries, UPC should bolster Malone's position as the
cable king of Europe. Altogether, Malone will boast some 30 million
subscribers. "He'll be the biggest one around," says Bert Siebrand of SNS
Securities in Amsterdam.
For all the pain it caused investors, UPC's meteoric rise and fall reflects a vital
stage in the growth of Europe's tech economy. It was a brief period marked
not only by waste and hype but also by vision and frenetic growth. Like other
tech shooting stars, such as bankrupt Viatel Inc., UPC drafted a Continental
plan, tapped the euphoric markets, and raced across borders to build an
empire before the money ran dry.
Now, Europe's season has changed. The arrival of Malone presages the rise of
established players, those with the patience, wealth, and experience to cash in
on the tech bust. Investors with deep reserves such as Malone can pick over a
deserted battlefield, one littered with devalued cable assets and limping phone
companies.
Of course, Malone has problems at UPC. The company is spouting red ink:
Losses amounted to $722 million in the second quarter, thanks mostly to heavy
investments in network upgrades. UPC's debt now stands at a huge $8.5
billion, including a $1 billion IOU to Malone. Its stock likely faces delisting. But
Malone has proven a master at turning around troubled cable companies and
should have little problem renegotiating UPC's debt. "The bondholders would
probably be very happy to get 50 cents on the dollar," says Rene Verhoef, an
analyst at Fortis Bank in Amsterdam. Malone and new UPC CEO John F.
Riordan were unavailable for comment.
Malone did not have Europe in his sights back in 1995, when UPC began to
take shape. Gene Schneider teamed up with Royal Philips Electronics and
began picking up bits and pieces of cable businesses in Europe. He later
dispatched his son, Mark, a lawyer, to buy out Philips and turn UPC into a
Continental power. Mark Schneider had grown up in Wyoming, where his
father and Malone pioneered the cable industry. But the younger Schneider
wasn't just interested in wiring European homes for TV. He also wanted to
offer high-speed Net access and telephone service. Schneider called it the
"triple play." And with it, he hoped to triple UPC's monthly revenues per
customer, from $12 now to more than $50.
CASH AND CACHET. At the heart of Schneider's grand plans was a black
set-top box, dubbed Da Vinci, which would deliver TV, Net access, and
phone service. Trouble is, it didn't yet exist. So in early 1999, Schneider
enlisted Microsoft Corp. to help develop one. Eager to stake its own claim on
Europe's Internet, the software giant took a 6% stake in UPC for $333 million,
nearly three times the company's present value.
Microsoft provided UPC with cash--and cachet. The Redmond connection
helped smooth the path to UPC's January, 1999, IPO on the Nasdaq and the
Amsterdam exchanges, which raised $1.4 billion. Subsequent junk-bond and
equity offerings brought in another $2 billion that year. Though Schneider
shopped madly, he couldn't buy his way into Europe's biggest cable market:
Germany. While the German government had ordered Deutsche Telekom to
unload its cable holdings, the former telephone monopoly was reluctant to sell
to a potential competitor such as UPC. So while DT held out, Schneider, now
46, scrambled to build a European system with a Germany-size hole in the
middle--a crippling weakness.
He also neglected operations, especially in his home market of the
Netherlands. This turned customers against UPC when the company launched
new services, such as its broadband Internet portal called Chello. "If you
disenfranchise the Dutch," says one ex-employee, "they never forgive you." To
make matters worse, Schneider's Da Vinci was nowhere in sight. UPC officials
blamed delays on Microsoft, and scouted for other software suppliers. "It took
longer than anticipated," says Mark Le Goy, marketing director for Microsoft
TV.
But even a magical black box could not have saved UPC from the crashing
telecom market. The bursting of the Internet bubble, followed by the
disappointments of the mobile Web, prompted investors to flee the entire
industry, including UPC. In August, Mark Schneider resigned, saying he
wanted to spend more time with his family. His replacement, Riordan, a
59-year-old Irishman, spent two years as UPC president--and was widely
regarded as Malone's eyes and ears at the company. Riordan is now piecing
together a new strategy, says a company spokesman.
Even as UPC shares collapse, the new management has little reason to chart a
completely new course. After all, Malone shares the same "triple play" visions
as Schneider. UPC continues to work with Microsoft, among others, on the
Da Vinci--now scheduled to debut in October. And UPC still has $2.4 billion
in cash and loan commitments on hand, including a $1 billion convertible loan
from Malone. That should be enough to get the company to 2003. By that
point, Malone should be able to decide if UPC's a keeper.
By Stephen Baker in Paris |
