Growth at Malone's U.K. Cable Business Is Coming at a Price

(Bloomberg) -- Billionaire John Malone’s Liberty Global Plc is paying a heavier price to win British broadband subscribers from dominant rival BT Group Plc.

Liberty Global, which has been focused on boosting income per subscriber, saw average revenue per user in the U.K. and Ireland fell 0.3 percent to 51.36 pounds ($67) in the first quarter, hit by a step-up in promotional pricing and the timing of some pay-per-view events. The company’s shares fell as much as 3.4 percent in early trading in New York.

Asset sales in Germany and eastern Europe are set to make Liberty Global -- the U.S.-listed vehicle for cable baron Malone’s European assets -- more reliant on Britain, where it is rolling out a fiber broadband network to rival former monopoly BT and investing in content to attract new customers.

Liberty Global U.K. Fiber Upgrades Raise Pressure on BT, Sky

Results on Tuesday underscore how tough that market has become. Discounting at Liberty Global’s U.K. unit Virgin Media might have been needed to maintain momentum in adding users, New Street Research analyst James Ratzer wrote in a note to clients. This “is likely to refocus minds back to the post-deal asset value” of Liberty Global, he said.

Liberty Global’s revenue fell 0.2 percent in the first quarter from a year earlier, compared with the 1.3 percent average increase forecast by analysts in a company-compiled survey. Operating cash flow grew 0.8 percent, compared with an analyst forecast of a 0.1 percent gain, underpinned by cost cutting. The figures exclude Switzerland and other businesses that Liberty is selling.

The quarterly performance highlights the challenge for U.K. operations chief Lutz Schuler when he takes over as chief executive officer of Virgin Media next month. Schuler has told investors he’ll focus on selling bundles of internet, mobile and TV services and connecting more big apartment blocks.

What Bloomberg Intelligence Says

“Significant weakness at Virgin Media, with revenue contracting 0.1% vs. consensus expecting 1.9% growth in 1Q, shows the U.K. unit of Liberty Global remains vulnerable to competition.”
--Erhan Gurses, Telecom analyst
Click here to view the research.

Liberty Global Chief Executive Officer Mike Fries said Tuesday he was exploring “creative ways to expand or partner or finance expansion beyond our current plans” at Virgin Media without damaging the company’s balance sheet and cash flow. “It’s smart for us to be creative and flexible and opportunistic,” he said on a call with analysts, without giving further details.

Regulators are weighing whether to approve or block the biggest of Liberty Global’s asset sales in continental Europe, to Vodafone Group Plc. The British-based company sought Tuesday to speed the process by offering rival Telefonica SA wholesale access to its entire German cable network.

“We don’t believe it has any impact on our transaction other than speeding up closing and providing far more certainty than we had yesterday of that closing,” said Fries.

Investors are focused on what Liberty Global will do with the proceeds of up to $17.5 billion, including possible acquisitions to gain a mobile business in the U.K. and widely expected share buybacks. Its shares have risen 22 percent year-to-date, slightly outperforming a 20 percent rise in the U.S.-weighted Nasdaq Telecommunications Index and topping the Stoxx 600 Telecommunications Index, which is flat this year.

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