UK Markets close in 2 hrs 20 mins

John ‘Darth Vader’ Malone: The man who bought Virgin Media

By Liana B. Baker and Leila Abboud
SUN VALLEY, ID - JULY 08: John Malone, Chairman of Liberty Media Corporation, attends the Allen & Company Sun Valley Conference on July 8, 2011 in Sun Valley, Idaho. The conference has been hosted annually by the investment firm Allen & Company each July since 1983. The conference is typically attended by many of the world's most powerful media executives. (Photo by Scott Olson/Getty Images)

John Malone has been known as America's King of Cable for more than 30 years. Now, he’s going for global domination too. But what has the man once nicknamed ‘Darth Vader’, who owns more land than anyone else in America, got planned for Britain?

Malone, through his Liberty Global unit, has just struck a £15 billion deal to acquire Virgin Media and its 4.9 million UK subscribers. The deal is Malone's biggest ever in Europe, but certainly not his first.

Liberty Global, which Malone controls, already ranks as the largest cable operator in Europe with 18.4 million subscribers. It also has 1.2 million subscribers in Chile and Puerto Rico for a total of 19.6 million.

The company's position is the result of a decade-long acquisition spree spanning 11 countries from Germany and the Netherlands to Switzerland and Belgium that helped grow Liberty Global into a company with $7.6 billion in revenue and $3.6 billion in operating cash flow from continuing operations in the nine months ended September 30.

But the Virgin deal is not only Malone's largest European acquisition to date, but also one he has been trying to seal for more than a decade. Malone began buying up stock in Telewest and tried to acquire NTL several times at the turn of the century when they were still separate companies.

His plan back then was to merge them, something that happened anyway in 2006 when NTL, Telewest and Virgin Mobile came together to form Virgin Media.

Deals, deals and more deals

Malone timed his European buying spree to coincide with a period where the private equity firms that bought up a string of smaller cable operators in Britain and Germany were looking to sell.

In 2011 Liberty Global bought Kabel BW, Germany’s third-biggest cable operator, from private equity firm EQT for €3.16 billion (£2.7 billion). A few years earlier, Liberty Global acquired Germany's second-largest cable operator, Unitymedia GmbH, from private equity firms BC Capital Partners and Apollo for £3.3 billion, including assumed debt.

In Belgium, Liberty made a tender offer for the 49.6% of Telenet Group Holding NV it didn't already own in September. The bid failed after the group's management deemed it too low. Liberty Global also reportedly looked at buying Dutch cable operator Ziggo in 2011, but private equity firms Cinven and Warburg Pincus eventually pursued an initial public offering instead.

"[Malone] sees the importance of scale in the business," said Evercore Partners analyst Bryan Kraft. "He's been trying to build scale within these markets and also leverage the scale that they bring as a company across all these markets."

But he’s not expanding everywhere. Prior to his buying spree in Germany and the UK, Malone sold out of Scandinavia, France, Japan and Australia. ISI analyst Vijay Jayant said expanding in Western Europe gives Malone a more focused strategy in a market with high disposable income.

Established MO - bigger, cheaper, bundles

The strategy Malone is pursuing in Europe is essentially the same one he used in the United States: Take a patchwork of disparate and technologically outdated cable systems, stitch them together and upgrade their networks, then leverage their combined power to reduce costs.

That is the model he used to found Tele-Communications Inc, or TCI, which Malone grew into the largest cable operator in the United States before selling it to AT&T.

Malone is using that blueprint in Germany, which is Liberty Global's largest and fastest-growing market. There, Malone is offering TV, phone and internet bundles with faster speeds and cheaper rates in a bid to steal market share from Deutsche Telekom.

The rationale for the Virgin Media deal appears to be grounded in the TCI model as well. Cable only passes through about half the homes in Britain, so more investment in infrastructure to provide faster internet speeds could help grow adoption rates.

'Darth Vader'

The aggressive tactics Malone used to build TCI prompted former US vice president Al Gore to label him the cable industry's "Darth Vader". A reference to Malone using his power at TCI to demand stakes in cable networks, particularly start-ups, in return for distribution.

Malone also fought vigorously against US ‘must-carry’ laws that require cable operators to carry free-to-air networks like NBC and ABC and, as a matter of course, structures deals to help him pay very low taxes and has a rather well documented loathing of big government.

Malone, the largest private landowner in the United States with about 2.2 million acres to his name, is no stranger to battles with media titans either.

The reclusive billionaire has faced off with Murdoch numerous times on US soil, at one point acquiring a big slice of Murdoch's voting position in News Corp that came onto the market unbeknownst to the newspaper baron. Malone eventually leveraged that stake to pry satellite TV company DirecTV from Murdoch.

(Writing by Peter Lauria; Editing by Martin Howell, Matt Driskill and Yahoo! Finance UK)

[Source: Reuters]