Morgan Stanley analysis of UPC, anyone out their with access to MS or GS research
Copyright 1999 Phillips Business Information, Inc.
CABLE EUROPE
January 20, 1999
SECTION: Vol. 4, No. 2
LENGTH: 1313 words
HEADLINE:
UPC TO BUY OUT TELEKABEL PARTNER
BODY:
United Pan-Europe Communications (UPC) is to buy out its partner
in its Dutch operations, making it the country's leading cable
operator. UPC has acquired the 49 per cent stake held by Nuon, its
partner in United Telekabel Holdings (UTH), in which UPC already holds
51 per cent) for Gld550 million (Pounds 175 million), following the
latter's merger with other power companies (also with cable
interests). UPC executives last week had also talked up their interest
in acquiring MediaOne's 50 per cent stake in Amsterdam operator A2000,
in which UTH (and now UPC) already has a 50 per cent stake.
The deal is expected to be concluded by mid-February, with
payment in the form of a yet to be decided mix of shares and cash.
Henk Koning will replace Nuon's Ferdie Hetterschijt as CEO of
Telekabel on February 15.
Electricity utility Nuon has merged with ENW in the north-
western part of the country, EWR in the middle West and Gamog in the
eastern part of The Netherlands. Each company has its own cable
interests, but it is possible that all those networks could be folded
into United Telekabel. Gamog has about 120,000 subscribers, while ENW
is a 26.4 per cent partner in Multikabel with 220,000 subscribers.
UPC is now expected to place its IPO, which is expected to raise
$650 million, in February, with the marketing campaign beginning last
weekend. The company filed an amended registration statement in the US
on January 13. UPC had been expected to launch the offering in
November last year, but market conditions were unfavourable and the
necessary preparations also evidently took longer than originally
thought. UPC will list on the AEX Amsterdam stock exchange, with a
smaller listing on NASDAQ.
UPC CEO Mark Schneider told journalists in Amsterdam last week
that the placing would leave parent company United International
Holdings with a majority, and possibly a significant majority, in the
company, although he declined to be more specific. He pointed out that
there had only been two public offerings in the history of its parent
company United International Holdings (UIH) and that UPC was
determined to get a "fair value" for its shares. The offering is being
co-ordinated by Goldman Sachs and Morgan Stanley Dean Witter.
UPC executives declined to say whether any of the proceeds of
the offer could be used for further acquisition purposes. "At this
point the majority of the proceeds will go to network development,"
said UPC COO Tim Bryan. "The major priority is to get services
launched."
"We are interested in consolidating [A2000], but it depends on
what MediaOne wants to do," added Schneider.
Schneider admitted that UPC was "an acquisitive company" and
said that he did not believe finding cash would be a problem. "The
debt market is excellent in Europe," he said. "We hope to have access
to more debt capacity." He emphasised UPC's general belief in
consolidation of its holdings, and admitted that the company faced a
choice in countries where it had a relatively small presence. On the
Belgian market he said that "if we do not see acquisition we may very
well sell out" but argued that France still offered interesting
prospects for growth.
Bryan meanwhile said he expected UPC to see positive EBITDA
within two years.
Meanwhile UPC is moving ahead with plans (revealed in Cable
Europe vol.3 issue12) to roll out a bouquet of (initially) six
channels, beginning with a number of launches in The Netherlands and
Belgium this year. UPC is already involved in programming ventures
with HBO in Hungary and the Czech Republic and Multicanal in Spain and
Portugal.
"Our bouquet will be branded UPC TV in the next six months,"
said Simon Oakes, managing director of programming. May should see the
launch of UPC Sports (with programming supplied by ESPN) and a premium
film channel, UPC Film (which will ultimately develop into two time-
shifted versions). Scheduled for launch in September are: Extreme
Sports (with content from X-Dream); women's interest channel UPC Club
(with content from E! and Carlton Food Network); action and adventure
channel QuestTV (involving a licence and revenue-sharing agreement
with the production company of the same name) and Wingspan (a channel
devoted to air and space with material from Wingspan International).
In 2000 UPC plans to launch UPC Plus (a nature channel) and UPC Film 2
(featuring cult and B-movies in addition to time-shifted material from
the main film channel). Five of the channels will be 100 per cent
owned by UPC, while three (Extreme Sports, UPC Film 2 and QuestTV)
will be joint ventures.
"Extreme Sports will launch in May in Benelux," said Oakes. He
added that the channels would be marketed to non-UPC systems as well
as the UPC affiliates in The Netherlands and Belgium, Austria, France
and Norway. "In some cases other cable operators may act as partners,
providing finance for the channels in their regions," said Oakes.
Casema in The Netherlands was likely to participate in the film
channel, he said, and wanted to carry four of UPC's channels in total.
UPC is also in talks with operators such as Telia and Deutsche
Telekom.
Oakes admitted that most of the continent's major football
rights had already been sewn up. UPC Sports 1 will carry "premium
sports" from ESPN, and Oakes said UPC would be acquiring second and
third run rights for European football.
"We have to be realistic about what we can afford to acquire,"
he said. He emphasised the "relationship building" aspect of the
exercise, so that UPC would have the trust of local federations when
football and other European premium rights came up in the future.
Schneider said that an announcement regarding the company's choice of
prime contractor for the supply of set top boxes was "imminent". He
said that the integrated multimedia terminal would be introduced
"later this year".
It seems that UPC is still interested in making its bouquet
available to DTH subscribers should a suitable opportunity arise.
Schneider identified Scandinavia as one possible market.
Analysts at Morgan Stanley, in a major report on UPC entitled
Uniquely Poised for Convergence said they believe "UPC's multi-service
strategy will create substantial value for shareholders, since
relatively low incremental investment is required to provide these new
services." Moreover, Morgan Stanley's analysts said "UPC represents a
unique way to play convergence in a digital world." The analysts
believe UPC will see revenues rise from Gld492 million (Pounds 157
million) this year, to Gld2.594 billion during 2007. These increased
revenues, says Morgan's Sarah Simon, will come from new activities,
which will help create an average 23 percent CAGR between 1997-2007.
UPC Pro Forma Consolidated P&L*
1999E 2000E 2001E 2002E 2003E 2004E
Revenue 492 719 1,031 1,346 1,637 1,897
EBITDA 14 13 205 378 552 702 839
Net Income (351) (402) (215) (30) 117 319 460
2005E 2006E 2007E
Revenue 2,126 2,356 2,594
EBITDA 839 970 1,109
Net Income 460 439 565
* Dutch Guilders 000,000 E=estimate Source: Morgan
Stanley/Company Data
UPC: CATV Average Monthly Rev's per Basic Subscriber*
1998E 2007E
Norway 20.31 40.27
France 29.93 50.40
Belgium 19.54 38.05
Austria 30.52 52.08
Eastern Europe 9.69 21.79
UTH 17.52 39.82
A2000 16.95 35.81
*Dutch Guilders E=estimate
Source: Morgan Stanley/Company Data
LANGUAGE: ENGLISH
LOAD-DATE: January 20, 1999
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