UPC's first-quarter results prompt mixed reactions
By : Anna Kocinska
Analysts voiced mixed opinions following the release of stronger than expected first-quarter figures by Netherlands-based United Pan-Europe Communications'(UPC) (http://www.upccorp.com), which is in talks with France's Vivendi Universal about merging their Polish digital platforms.
Europe's largest cable company posted negative earnings before interest, tax, depreciation and amortization (EBITDA) of E61 million for the January-March period compared to losses of E131 million in the fourth quarter of 2000 and E57 million a year ago.
"The results were better than we expected and considerably better than most analysts were going for," said Sarah Simon, an analyst with London-based Morgan Stanley Dean Witter. Analysts had predicted a loss of E98 million.
"Basically, the key focus of the company right now is on maximizing and improving cash flow," she said. "There is a lot of integration to be done because of the number of acquisitions they (UPC) have made, so that's clearly coming through. Obviously, the main issue (last week) was more the timing and the form of the (E1 billion) rights issue."
Cash commitment
UPC announced in February a E1 billion shareholder rights offering backed by its largest stakeholder, U.S.-based UnitedGlobalCom (UGC). UGC's cash commitment is subject, however, to completion of yet another deal announced that month, between UGC and Liberty Media (which holds an 11% stake in UGC), involving Liberty's subscription for convertible shares in UGC. The two companies are now renegotiating the terms of that transaction. While UGC said last week that it would go ahead with the investment, some analysts were skeptical about UPC's ability to finance itself. "While I think that the E1 billion transaction will go through, of course the news that the deal will be renegotiated will increase the uncertainty about UPC's (funding capacity)," said Frank Meijerhof of Amsterdam-based Rabo Securities. Meijerhof was less optimistic than other analysts about UPC's first-quarter figures. "Their results are slightly disappointing," he said. "The EBITDA level was excellent; it was significantly better than expected, that was no problem. But I don't know if this is a fundamental change and for how long it will last. And the revenue growth was slightly disappointing."
But according to UPC, revenue growth is ahead of target, surging by 9% to E333 million compared to E305 million in the previous quarter. "But the point is that increase in sales was slightly disappointing," Meijerhof said. "And I think it's more important on a long-term basis than the cost-cutting measures (taken by UPC). If you look at Poland (referring to UPC's digital platform Wizja TV), it's interesting that the number of DTH (direct-to-home) customers decreased. That was really surprising.
"And UPC is also counting on huge revenue from DTH in Poland and if they can't make it, that would be quite negative."
UPC's DTH subscribers in Central Europe dropped from 474,000 in the fourth quarter of last year to 466,300 on March 31. In Poland, UPC has 388,800 subscribers, down from 414,000 in December. Dorota Zawadzka, PR director for UPC in Poland, attributed the decline to a saturated market and a weakening economy. She also cited an April increase in subscriber fees at Wizja TV. "The company's goal is profitability and eliminating some customers (those who refused to pay or renew their subscription) was the price to pay," she said.
Boosting DTH subscribers
Charlie Bracken, UPC's chief financial officer, said last week that the company's immediate goal is to boost its number of DTH subscribers in Central Europe to 575,000. "In DTH services we have so far tried to build scale in order to optimize costs, now we'll be also working hard to reduce costs, for instance on the programming side," he said.
And costs, he added, are one of the main reasons why UPC is negotiating with Vivendi on combining their operations in Poland. "We do have critical mass to break even in Poland this year; actually we broke even in December, but (merging) is a question of optimizing costs," he said.
"And it's a deal that would reduce competition on (the Polish digital) market," Meijerhof added. "While generally (the merger) might not be that positive (for the market itself), it might be for (Vivendi subsidiary) Canal+ and UPC."
Work to be done
Despite improving in the first quarter, Simon said UPC still has more work to do and that merging its digital platform with Vivendi's would be a step in the right direction.
"I think both of them (UPC and Vivendi) want (this transaction)," she said. "Vivendi needs to solve the Polish problem because it's losing a lot of money and is performing much worse than UPC's Polish operations."
