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WARNING: LONG POST

headmotty wrote:
dataSlave - if you're out there, and since it was apparently you who turned a rat on to this, what might you have to tell about UCOMA or UPCOY?

Guess I'll have to take the rap for this one. Headmotty, you certainly have the right idea. UPCOY is a very attractive property, sort of like Comcast + @Home in Continental Europe (they own the cables and the internet service). The nice thing is that European PTTs (former state monopolies, roughly equivalent to our RBOCs) are inefficient, high-cost entities. UPCOY will be able to easily undercut them by offering telephone service at $50/month. Believe it or not, that's a significant discount in most of Europe. The internet service (called Chello) is the icing on the cake. Only 40,000 subs as of the first quarter but growing fast. It is being offered for $50 or so (Euro is near parity to the dollar now).

Recent acquisitions bring the total number of subscribers on UPCOY's video service to 7.7 million. Their systems are largely upgraded to 860 MHz HFC (compared to 750 MHz in the US). The Chello service is supported by an OC-3 (155 Mbit/sec) backbone called Aorta which was built for them by Hermes. From the UPCOY S-1:

In the above diagram, chello broadband's pan-European backbone, branded AORTA, will interconnect the 155 Mbps ring to three major Internet exchange points -- Amsterdam, Stockholm and Vienna. Each of these major European Internet exchange points will provide chello broadband with Tier 1 Internet connectivity, which is the highest level of interconnection performance on the Internet backbone, when chello broadband expands to strategic Internet exchanges. Tier 1 Internet peering offers transit network rights to and from the large Internet providers throughout Europe. chello broadband intends to interconnect to the U.S. network access points in Washington D.C. and New York via a 45 Mbps transatlantic fiber link.

I know that 45 Mbit/sec doesn't sound all that impressive to RBB regulars, but remember that trans-Atlantic capacity is still very expensive. The OC-3 pan- European backbone is pretty good. It only looks like a small pipe because most of you are accustomed to reading about the @Home firehose with dual OC-48s at 2.5 Gbit/sec each. Chello is a solid system.

So it's certainly fair to ask "Why should I buy UCOMA instead of UPCOY?" The answer is in the relative misvaluation of the two stocks given the parent/subsidiary relationship. The March 1999 10-Q lists 44.9 mil fully diluted shares for UCOMA (UIHIA at the time). At Friday's close of $76, the market cap of UPCOY is $3.4 bil. UPCOY's 10-Q for the same period lists 129.2 mil shares outstanding. The closing price of $64.50 gives a total market cap $8.3 bil. The UPCOY S-1 (IPO filing) lists UIHIA (now UCOMA) ownership as 83,087,469 shares. At current prices, UCOMA's stake in UPCOY is worth $5.3 bil.

If the UPCOY was the only asset of UCOMA it would be undervalued by $1.9 bil. But that is not the case. UCOMA also owns Austar, which is a cable, satellite and LMDS video service in Australia and New Zealand. An IPO has been filed in Sydney to bring the company public at a valuation of $2 bil. Australian (about $1.3 bil US). UCOMA will own 77% of Austar after the IPO.

http://biz.yahoo.com/rf/990628/dk.html

Then there is VTR, which is UCOMA's subsidary in South America with nearly 500,000 subscribers. It's hard to value this property but it clearly has some value. VTR's operations are centered in Chile, with one of the highest per capita incomes and economic growth rates in the region.

I come up with $5.3 bil for the UPCOY stake, over $1 bil. for the Austar stake (could be significantly higher after the stock begins trading) and likely a few hundred mil. for VTR. With ownership in all of these properties, UCOMA should be worth at least $6.5 bil or nearly double the current valuation.

I see two possible explanations for this. The first would be that the subsidiaries are wildly overvalued. I don't think this is the case. With 7.7 mil subscribers, $8.3 bil market cap and about $1 bil in debt, UPCOY is valued at $1,300/subscriber (using enterprise value or LT debt + equity). This compares to many US cable companies which are valued at over $4,000/sub. Austar will have a $1,200/sub valuation. If the subsidiaries are fairly valued, then the parent (UCOMA) is undervalued. UCOMA could double just to close the valuation gap with its holdings. In addition, those holding have a long way to go before they reach the valuations of their US counterparts.

The real valuation kicker could come with an IPO of Chello (the European broadband service). The management has stated their explicit intent to follow the @Home model by using equity incentives to sign up cable affiliates not contolled by UPCOY. In this context, they could play the same role for Chello that TCI played in launching @Home. Because of high per-minute charges for telephone service in most of Europe, a flat-rate cable offering would be CHEAPER and SIMPLER as well as faster than telephone access. The service is definitely being configured as a portal, BTW. If you want to check it out go to (being configured for broadband, it does take a while to load):

http://www.chello.com/
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