Liberty Global Ltd (LBTYA) 2004 Q2 法說會逐字稿

We thank you for your patience and would like to welcome you to the Liberty Media International conference call. Today's call is being recorded. During this presentation there may be certain forward-looking statements about business strategies, market potential, future financial performance, news service and product launches and other matters. These statements involve many risks and uncertainties that could cause actual results to differ materially from such statements, including without limitation, possible changes in market acceptance of new products or services, competitive issues, regulatory issues and continued access to capital on terms accessible to the Liberty Media International or LMI.

Please refer to the publicly filed documents of LMI including the most recent form 10-Q for additional information about LMI and about the risks and uncertainties related to LMI's business. And now I would like to introduce LMI's Chairman, President and Chief Executive Officer, Mr. John Malone. Mr. Malone, please go ahead.

Thank you. Good morning everybody, and welcome to the first ever Liberty Media International quarterly conference call. I'd like to spend a few minutes discussing LMI's results for the second quarter as well as some thoughts on our larger business units, UGC, J-COM and JPC. After that I'll open things up for questions. Before we get started I'd like to introduce some of the people joining me on the call today.

We have Mike Fries, CEO and President of UGC; Miranda Curtis, President of LMI's Asian division; Dave Leonard, President of our Latin American division; Graham Hollis, Senior Vice President and Treasurer; and Bernie Dvorak, Senior Vice President and Controller. Now I would like to start with a look at our second-quarter consolidated financial results.

The results are primarily the operating results from UGC who reported their earnings last Monday. We also consolidate the results from our Puerto Rico cable operations Promer (ph) our Argentine programming company and Chorus, a cable company operating in Ireland. We began consolidating UGC at the beginning of this year when we acquired the controlling interest from the founders; therefore results are not very comparable with the prior year.

On a consolidated basis revenue for the quarter came in at 581 million and operating cash flow at almost 200 million. Between UGC and LMI, we maintain a very strong liquidity position with 1.4 billion of consolidated cash and cash equivalents, and another billion of financing assets, including our new Zay (ph) shares, our family Channel preferred stock, our stock in Telewest UK, and our shares in SBS and Off Star (ph) through UGC. This is of course before the estimated 730 million of cash that we will raise in our rights offering, which is currently ongoing.

Consolidated debt at June 30th was a little under 4.3 billion the majority of which 4.1 billion was at the UGC level. First UGC. Turning now to our three largest operating businesses beginning with UGC, UGC had a very good quarter. As I mentioned earlier UGC reported their second-quarter results last week, so I won't spend much time covering what Mike has already covered. Needless to say, we were very happy with the results. A few headlines. Solid double-digit revenue growth to 545 million; 30 percent growth in operating cash flow to 195 million; over 102,000 net RGUs added and a record quarter for free cash flow generation of roughly 87 million.

With the completion of the News acquisition in Paris, rate increases in selected markets and strong RGO (ph) growth UGC is on track to meet or exceed all of their 2004 guidance targets. Overall a very solid quarter for UGC and the free cash flow coming off the business has given them the flexibility to announce a $100 million share repurchase program. UGC was also able to lower its borrowing costs as a result of a very successful refinancing of their European bank debt.

Now on to Japan. Before getting into the detailed financials, I would like to explain a little bit of my fascination with the cable business in Japan. First of all, Japan is a very dense situation. The plant is arial. It tends to average around 400 homes per mile. So density which has always been very important in the capital structure of cable is very high. Second of all, Japanese consumers are first movers when it comes to adopting new technologies. We think this tendency will result in strong consumer acceptance of our broadband services. For instance, already 20 percent of our Internet customers in Japan subscribe to our 30 Mb service. And recent survey results suggest that J-COM consistently delivers higher speeds to more customers than all other providers, including those fiber to the home providers who claim they can provide 100 Mb of service.

The anomaly there seems to relate to fiber to the curve of high-rise apartment buildings rather than fiber to the individual consumer. Up until now J-COM's video revenue effectively came from analog basin. We think significant additional revenue potential exists for high-definition television, VOD, SVOD and interactive television. The first phase of J-COM's digital launch was successfully rolled out in April. And as announced last week, J-COM surpassed 100,000 digital customers as of the end of July. It is actually going very well, very high customer acceptance and it is not free, by the way.

From the capital standpoint our very high housing densities throughout the country create a very efficient environment for capital deployment. In addition, leverage financing is available in the marketplace at very economical interest rates, roughly 2 percent per year. And to top things off, the Japanese consumer tends to have a higher level of discretionary income. Churn is relatively low, especially when the customer signs up for bundled services.

Video only average monthly churn was approximately 1.5 percent, and the triple play bundle typically reduces that by more than half. By the way our triple play customers increased to 16 percent of managed homes up from 11 percent last year. Interestingly enough, if we look at the average monthly churn, video only for the first six months was 1.5 percent. Internet only was 1.3 percent and voice only was 0.9 percent. And our customers pay their bills and pay them on time. There is virtually no bad debt in Japan. Most of it is direct debit, and people don't steal converters, either. So a very sound situation when it comes to billing and collection.

Another reason we love Japan is the industry consolidation opportunities. J-COM is far and away the largest MSO by a factor of six or seven times. There are literally hundreds of smaller cable operators throughout the country. We believe there exists an opportunity to consolidate a significant number of these smaller operators. As the smaller operators look at the changes occurring in the industry, including the Japanese government's initiative to encourage the rollout of digital services nationwide and the potential capital and expertise that will be required to grow and compete, we believe they will make a decision at this time to either sell or find a partner like J-COM.

The smaller operators simply don't have the scale economics or the technological competence; it takes the next step forward in development of the business. Even when those operators are not ready to sell yet we believe J-COM is well positioned to provide turnkey digital services to third parties, including high-definition, video on demand, VOIP and of course our full array of JPC programming services, which I will get to later. This type of transaction will help to increase J-COM's own operating efficiencies and leverages J-COM's national fiber backbone that extends from Saporo in the North to (indiscernible) in the south. We basically span the country and provide the most cost-effective way for smaller cable operators to receive these various signals and connectivity.

While we won't get into pricing specifics we are confident that acquisitions will be reasonably priced and highly accretive. Given that many of these smaller operations are still owned by the original owners, the prices are based more on getting the return on original invested capital than on the future economic potential of the business. And finally, we have the luxury of owning both content and distribution in this fantastic market. In markets such as Japan where the multichannel video industry is still in its growth phase, this is the most powerful combination. When you consider all of these items in the context of a friendly regulatory environment and a market where cable advertising is yet to be tapped, I think you will agree with us that Japan is one of the finest cable markets in the world.

In addition we have one of the finest partners in the world in Sumitomo Corporation; we have been together with them for over ten years, and it's been a wonderful relationship. With that as background, let's discuss our two largest Japanese operating businesses, J-COM and JPC. First J-COM, the cable company. J-COM had another very strong quarter driven by continued distribution gains for all services. Favorable changes in the yen versus the dollar and increased average monthly revenue per home; in summary 25 percent revenue growth to 367 million. 46 percent growth in operating cash flow to 146 million, more than 2.9 million managed RGUs, more than 1.8 million managed households, a 9 percent increase over last year. Average services per household increased to 1.6 from 1.49 at June 2003 and growing free cash flow currently at 42 million for the quarter.

You may have noticed that homes passed (ph) increased dramatically this quarter. This is for the best of all possible reasons. As you can imagine with Japan's population density keeping track of homes is not always easy. As part of J-COM's effort to automate their network monitoring systems a detailed mapping audit identified an additional 700,000 homes passed in the J-COM franchise. Most of these by the way represent tear downs of smaller units and construction of larger, more high-rise housing units.

To summarize the J-COM results, despite intense competition in the delivery of high-speed data and customer confusion over a new Japanese digital video platforms, J-COM has been able to grow subscribers substantially, raise penetration, increase average monthly revenue per household, increase services per household and reduce churn. In the past two years J-COM has moved from being operating cash flow positive to net income positive, to free cash flow positive and is essentially fully funded for all the capital required to roll out advanced digital services.

As a result of the successful first half of the year we are modestly raising OCF guidance to mid-20s, which is essentially the higher end of our previous estimate of 20 to 25 percent. And last month, the J-COM shareholders converted 276 million of shareholder loans to equity at a price of almost $540 per share or approximately 10.5 times '04's estimated cash flow.

Now on to JPC our programming arm in Japan. We experienced equally impressive growth with JPC. Gains were primarily driven by success at the shop channel which made up almost 87 percent of the increased revenue. We were up overall 38 percent for the quarter, operating cash flow increased 85 percent. Shop channel increased (inaudible) time equivalents by 11 percent and sales per full time equivalent by 14 percent and JPC had subscriber increases of between 9 percent and 16 percent at the majority of their consolidated equity affiliated channels.

Despite the confusing video landscape with half a dozen or so digital platforms, JPC remains ahead of plan and is the largest single supplier of content to Japanese cable, to Japanese satellite and to Japanese broadband. Last month's launch of Online TV, a partnership with the ADSL operator NTT (indiscernible) puts JPC in the driver seat as the key content aggregator for broadband. JPC also has strong channel representation across all the key genre.

For instance, on a consolidated basis JPC has Movie Plus, which is a movie channel, LaLa TV which is a women's channel, Golf Network which is of course sports, and the Shop Channel which is home shopping. On an equity basis JPC has Discovery Communications in Japan, Animal Planet, Jay Sports a Sports Channel and AXN, which is movies and general entertainment. In addition we have investments in the kid's station for children of course, ATX which is an automatic channel, Jedi Gecki (ph) which is a Japanese drama channel, and Nikkei CNBC which is a news and business news channel.

In the meantime, the management team is focused not only on the continuing performance of the existing businesses but also developing high-definition, VOD and interactive services to support the next aggressive phase of digital rollouts in Japan across all platforms. And the final point on Japan, in addition to our cable play through Jupiter, in the second quarter we increased our ownership of Mediatti to 33 percent by investing additional 18 million to fund the acquisition of Edagawa Cable. As I mentioned earlier we have two vehicles to pursue acquisitions in Japan and Mediatti is a nice incubator alongside J-COM. It is basically seeking to roll up smaller operators in another financial vehicle that's a little more flexible than J-COM.

Finally, as I've noted above all three of our largest operating businesses had very good quarters. Financial results are on or ahead of plan and each business continues to lead and extend their lead in their respective markets. On a consolidated basis LMI is very well capitalized even before the rights offering to take advantage of acquisition opportunities. Within the LMI group we have several different capital structures and balance sheets providing enormous flexibility to structure and execute accretive transactions.

And with that, I will conclude the formal part of my representation, and I'd like to address any questions you may have.

(OPERATOR INSTRUCTIONS) Niraj Gupta Citigroup Smith Barney.

Nice to have you back on these conference calls. It's been a long time. Could you talk about your view on given the concern in the market about competition from the Bells (ph) both domestically and internationally, can you talk about your view on the possibility of facilities-based competition from the telcos in Europe and Japan in terms of video over IP using, as you talked about fiber to the home or video over DSO? Just kind of where you think that is going, what the reality is that we can expect going forward.

We are already of course experiencing some of that competition primarily in Japan and in France. I think that the reality of it is that the IP settop has not been perfected yet, we probably won't see a competitive IP settops for maybe another 18 months. I think a lot of the competitiveness for delivery of video over broadband IT will depend upon the status of the plant, regulatory environment, things such as that. We don't see any huge CapEx or cross structure advantage that IT delivery would have. And in fact we think in most cases there would be a substantial incremental capital investment in plant and transport plant for anybody trying to provide full time streaming IT video.

We think it is an interesting initial supplement; should make high-speed connectivity more valuable. And of course in Europe where we are already going up in our speeds and featuring higher speed connectivity, the ability to do VOD random access and video seems very important. Its no surprise, roughly half our research says roughly half of the bits going downstream on a high-speed connection today is a video primarily music video, but also pornography and some feature night movies. It is already there. It is kind of awkward in terms of its use strictly on a PC today, and its kind of awkward to get it over the TV set but it's definitely there and coming, but we don't see it as having any particular advantage over the cable infrastructure.

In fact we think the cable infrastructure is more efficient overall and providing the triple play of services. And we think the cable companies generally have more efficient operating structure, better scale and video certainly for the acquisition of content and lower overheads, generally non-union, more flexible work for us and so on. So yes, competition is definitely coming. As we said earlier in Japan our service is now 30 Mb which the experience to the consumer is actually better than they're getting from any other high-speed vendor. And we certainly expect to offer video services across both platforms, both the IT platform and the cable platform. So life gets a little more complicated, but I don't think we're in any particular cost disadvantage when we get into that competition.

Can I ask one more follow-up if I may? This one is about the parent, can I ask you that question?

You sure can.

At the time of the announcement that you wer doing the spin of LMI, you guys said you and (indiscernible) that if the performance of Liberty didn't improve materially post spinoff of LMI, that you would look at other simplification mechanisms and that you were on that path anyway. L has kind of treaded water and actually gone down since the spin if you look at an apples-to-apples basis. Can you just give us an update on your thoughts about how the stock is trading and what steps being seen maybe from here?

I should say this is an LMI call, I thought you were speaking about LMI as the parent, but I'll just mention briefly my view of L first of all everything has been going down in case you haven't noticed. And second of all, yes, we didn't expect that this alone would do that much for L. Clearly L is still a complex set of businesses and financing structures and needs substantially more simplification in order for it to start to trade much closer to what we think is some of the parts of. So I think LMI spinoff was just to start one, and it was done really more to free up the international to pursue its destiny than it was necessarily to create a lot of perceived value increase in L.

(indiscernible)

My question is on strategy. As you go forward here can you give us an idea whether you're going to be focused more strategically on content or distribution as you look at the landscape? Where do you see the focus going forward to leverage whatever in the synergies you see out there and I have a follow-up. Thank you.

Sure. I think our number one strategy, of course for investment would be to increase where we have lots of synergy, so its much easier for us to grow in Japan by buying adjoining mom-and-pop cable systems or starting new or taking equity interests in new channels than it would be to go into a new territory where we would have no startup synergies. So our first priorities I think would be to look at incremental cable and incremental programming investments and acquisitions where we already exist. And I wouldn't want to prioritize one over the other. I think they go hand in glove with each other. We can enhance the cable business and its competitive posture by making programming investments we can also take advantage of our already existing scale economics by adding to our cable footprint. And then of course in Europe I wouldn't forget about the satellite play, which UGC has in Eastern Europe which I think is also quite important to a programming distribution play.

I think you answered my follow-up question as well. Thank you very much.

Mark Asset Management, Morris Mark.

Good morning. Welcome back. First a question on competition in Japan. Doesn't the central focus of the population also provide a tremendous competitive advantage at DSL because it can be delivered so how would you evaluate DSL as a competitive broadband product versus your product and how that is likely to evolve over time? And then I've got a follow-up on strategy in Japan.

I think we regard DSL as a very vibrant competitor. It really depends on how it gets resold by the telephone company. As we get into offering IP telephony along with switch circuit telephony and bundled with data services it kind of puts some pressure on the phone company not to resell too cheap because they start undermining their own revenue streams. So once again I think on a capital structure point of view, there is no particular edge that DSL has over cable. They do have a bigger footprint in the sense that they are more broadly available right now.

But on the other hand, we've been able to maintain our market share and actually grow it in our footprint. Now admittedly, there is a lot of Japan that does not have advanced cable that isn't being competitive. And that is both an opportunity and a challenge for us to expand our coverage.

May I add a follow-up comment? Mark, I just have a follow-up comment in response to your question. I think we are a lot more concerned about the flood of ADSL competition 18 months ago than we are now. What we have seen is brutal price wars between the major operators that have been slugging it out with a very volatile subscriber base bouncing from one to the other in response to ever more attractive offers. And I think the really encouraging sign to the market has been that high-speed data growth has remained constant. In fact, our churn is down year-on-year and it has not seen any serious pressure to reduce our prices. We made an additional (ph) price cut because we felt we should, but there has been no further pressure to reduce price.

We are also now beginning to come out extremely well in consumer survey in terms of the actual speeds that we deliver compared providers not only to the ADSL providers but also to some of the fiber to the home operators. And overall, we are seeing growth in ADSL just beginning to flatten out in the last couple of quarters. So we think the major surge in DSL growth is over -- again a lot of noise, and a lot of focus both on DSL and DTH. But by maintaining a steady course, we think that J-COM has managed to remain relatively immune.

I think Morris, the conclusion that I've come to is that the hybrid fiber (indiscernible) infrastructure can meet virtually any service level required of it if it is properly deployed and does have a cost advantage and a service advantage because it is all under one service provider. So bundling, packaging, taking care of service calls and so on can be managed by one provider whereas the DSL is generally a reseller, can't supply the other services. Efforts to do video over DSL so far in Japan have not gone very far. We know because we sell them the programming so we know how they are doing. We did decide to farm both sides of the fence, but so far it looks like the cable infrastructure properly managed, properly deployed and managed provides better and more stable service than the other technology.

Can I just follow it up, what about satellite competition in Japan?

Satellite competition in Japan is very confused, not well organized, spread over three different systems, not really organized or run by any one provider. As a result it really is a good customer for our JPC programming and it is a pretty cost effective way to distribute our programming but so far has not proven to be difficult for us to replace satellite with (inaudible). This is particularly true now as we get into high-definition and the ability to provide basically all the services over cable rather than having to have multiple dishes to see multiple satellites. So at this point we think that the triple play combined with the ability to consolidate the video programming is a huge advantage for us over satellite.

Just a question on strategy. Can you review briefly what percentage of ownership you have in J-COM and JPC? How much Microsoft owns, whether there is any possibility that they may sell their investment with either you or a potential buyer and whether your goal is to consolidate and/or go public and/or both.

I will say first of all we own 44 percent of the cable company, J-COM. And we own 50 percent of JPC the programming company. Microsoft I believe owns roughly 14 percent. Correct me if I wrong or -- 19 percent. We have had discussions from time to time with Microsoft about acquiring their stake. At the moment they seem to be quite happy with the investment and have not expressed an interest at this point in selling it. We of course, one of the reasons why we wanted to do the rights offering was to have the capital to buy Microsoft out if in fact that block became available. Either ourselves or jointly with Sumitomo. We would be very interested in increasing our stake in J-COM if that position was for sale.

With respect to taking Japan public, it has been discussed. We really don't have anything to say on the matter at this point. We will just I think continue to discuss it. But we really don't have any decisions that have been made at this point to pull the trigger on that. We have said in the past that it would be useful to have a Japanese public security with which to acquire smaller cable operators and roll them in. And that may be ultimately one of the things that would weigh in that direction.

What about the question of consolidation?

Of us consolidating?

That's correct.

That would require a change in our relationship with Sumitomo, which we have discussed from time to time, but we once again don't have anything specific to say on that subject at this time.

Thanks a lot, John.

David Goldsmith with a BSG Capital.

Are there any legal reasons that you could not take (inaudible) of UGC at this point and at what point would you think that would be useful?

There are certain restrictions we agreed to with UGC with respect to our ownership; one is that we can't go over 90 percent without offering to buy the whole company. Other than that, I would guess we could do whatever we want as long as UGC shareholders thought it was fair. So there is really no bar to us consolidating with UGC. We really haven't focused on that at this point. We wanted to get in and (indiscernible) operating and get our legs under us before we turn our minds to those kinds of questions.

Logically with them running all that free cash flow wouldn't it make sense for you to do that?

I would think that in due course we will focus on that and it probably will make sense for us to at least consider something like that.

Janco Partners, Matthew Leonard.

Two questions albeit a pretty nascent margin on the multichannel programming side, do you have any sense where you would be if you folded in the proportionate equity interest in Discovery and Animal Planet as far as multichannel viewing share in Japan? Are you almost where Viacom is in the U.S.? On a proportionate equity basis? And secondly, you made the point about how tech happy or gizmo happy the Japanese are and how many homes are taking 30 megs. Do you see any effort -- I think Mike Fries talked about getting speeds up to 4 megs in certain areas of the Netherlands. Do you see any progress in Europe in terms of getting people to think a little higher as far as what their requirements are as far as the services they are taking for broadband?

The first question I will kick to Miranda because I've never looked at (indiscernible) market share in terms of viewing of our in (multiple speakers) Japan.

It is hard at the moment to give you a hard and fast answer on that question. The reason for that is that video research and multichannel are still in a very primitive state, one of the reasons why we've been held back in developing the cable advertising business as well as getting really accurate ratings data on (inaudible). But if you think of the fact that we -- I think our cumulative subscribers to old APC channels in the last quarter started to get to the 45 million units. That is a pretty substantial chunk of the market. We do know that in terms of absolute volume we are the largest single supplier to the Japanese cable industry, the single largest supplier for Japanese satellite industry and the single largest supplier for Japanese broadband. So we consider ourselves to be ahead of the game in relation to any other cable and satellite provider.

What we are not yet doing is matching in absolute terms the viewership of the established traditional Japanese over the air broadcasters and HK (ph) with its core channels and its multichannel services are clearly ahead of us on that front. But in terms of multicable and satellite multichannel providers we are clearly very ahead of the game.

And with respect to Europe and higher speeds, I think the focus for the last 12 months particularly in the Netherlands has been to take the speeds down at lower price points and offer people a bouquet of choices. I think that there are certainly going to be some users who will be fascinated by higher speeds, particularly as services emerge for which higher speeds are quite appropriate, such as video.

I think that is right, as we said on our call a week ago, we think that the data business in a place like Holland is at an interesting inflection point and whereas over the last 18 months or 12 to 18 months we have been focused on bringing speeds and prices down to meet the massive dial-up market conversion, we see -- and I think this echoes John's earlier comments about the benefits of cable infrastructure we believe the time is right to take it to DSL and demonstrate the advantages of our infrastructure by taking speeds up on the basic or classic product to as high as 8 meg in fact because we can. And it's unclear whether they can or will. So rather than continuing to slice and dice the product by speed and price because we think we have gone just about as low as you can go on either end.

We are on that end -- we want to start taking the speeds up on that EUR50 product, retaining more of those customers and then opening the door to this sort of content opportunity streaming and otherwise that we think higher speeds provide. So I think you'll find the cable at least where we operate taking it to DSL this year or next 12 months with faster speeds precisely because we can. We've rebuilt the infrastructure -- we will be 100 percent Euro boxes to (indiscernible) by the end of the year, and that is our competitive advantage today.

I wouldn't be surprised to add to that that what emerges at the low end is an IT voice product that is bundled with say a 256 kilobit data product at the low end of the market to go directly to the telephone customer and his dial-up and then try and sell them up from there. So that I think you'll see that at the low end and then I think at the high end of the market it will be a promotional bit war with people trying to develop services that are really enhanced by the higher bit rates, principally video and other interactive things.

From Merrill Lynch, Jessica Reif Cohen.

Are there any legal limitations to owing, or what are the legal limitations to owning more cable and programming? How big are you allowed to get in Japan? And Miranda I think you said that you're still not selling advertising on cable networks. How big do you need to be to do that? And then separately and last question, what happens to your interest in Latin America as News Corp or DirecTV -- I guess the same entity basically -- what happens is they consolidate Latin America satellite, what happens to your interest?

Let's see what --.

The first question was on the regulation initiative of cable and content in Japan. We are aware of no limitations and are no formal restrictions (inaudible).

On both distribution or programming?

(inaudible) Restrictions on broadcast and on ownership of BS capacity (inaudible) but they begin to go away or maybe to start to relax over time (multiple speakers) current business is there is no restrictions at all.

I think Jessica one way to look at the advertising is to say that the Shop channel, as is QVC Japan, are effectively doing commerce very successfully in generating good revenues. But in terms of traditional advertising competing with the broadcasters in Japan, I don't think we have enough scale yet to be meaningful, although it is -- there is some.

I would add to that I don't think actually constraint of scale because we are bigger than everybody else and we do see channels like Golf Network, beginning to get to the point of generating 25 percent of income from advertising. The constraint is much more flat but we don't have the technical research tools available in the market, and there has been a lot of resistance from some of the established (indiscernible) involving (indiscernible) Japanese advertising to enabling really effective research tools being developed in the market channel market and is something we continue to press forward on, but it is not a direct function of scale particularly.

What was the third?

What happens with consolidation in Latin America on the Sky platform.

There clearly the combination of direct and Sky is something that we have a say in, let's say. And Dave, do you want to say anything about that, Dave Leonard.

As you know we have a small interest in Sky Latin America in three different legal entities down there. And nonetheless, our interest does give us certain contractual rights and commitments, which we continue to monitor very closely. We do have an open dialog with people from DirecTV and with our partners at Sky. As that situation clarifies I think we will evaluate our alternatives and choose the best one whether it is to continue our participation in the combined entity or to look at the means of liquidating that interest.

The combined entity should be substantially more successful than it has been with the competition. Basically Sky looks like it would be the surviving entity with Direct getting a small equity stake in the combined entity. The situation in Mexico is already very profitable. It is approaching profitability in Brazil, and it is still struggling a little bit in the multicountry piece. So we think it is gaining economic value quite rapidly at this point, and the elimination of the competitive platforms should really give it quite a boost.

Is that a 2005 event?

It could be as early as later this year. It might not take until next year. It is a private entity. It is really a question of what the parties decide and obviously Rupert is now on both sides of the discussion. So to some degree he's got to argue with himself.

Artemis Advisers, Andrew Gundlach.

Quick follow-up to Morris Mark's question on J-COM and consolidation, could you just run through this strategy of rolling up Japan without a publicly traded security and rolling up Japan with a publicly traded security?

Without a publicly traded security most likely we would use cash. And then if J-COM was the vehicle, our partners would either have to put up cash or be dilutive, which they may or may not be wanting to do. With a public security one could use the public security with smaller operators in Japan. They would be more comfortable with the Japanese trade and security and presumably would be willing to take that security in preference to cash. So that is really the thought process.

And should you not have a public security, who controls the Board in such a way that you can make those cash calls?

As always it really requires (technical difficulty) to agree. And so far over these what seems like forever we've always agreed.

(inaudible) that also looking it as a dual strategy in terms of consolidation irrespective of whether public or private security. And that is that as well as making direct acquisitions which can be -- it is not expensive but time-consuming because the number of small shareholders in the smaller Japanese cable operators. We are also looking as we really begin to get aggressive into rolling out our digital strategy of using our background to offer the turnkey digital service to third party operators so that we can effectively control and manage and add scale to our digital rollout. And that may be a very effective alternative or indeed a precursor to direct equity acquisitions.

How will you decide going forward what acquisitions belong in J-COM and what belong in Liberty international holding company whatever that holding company might be in the future?

We created Mediatti for instance, as a vehicle to move more quickly than we could through J-COM with its bank covenants and so on. I think generally speaking the philosophy that we've always followed as a good partner would be anything that comes up as first offered to J-COM and to our partners Sumitomo and Microsoft. If they don't want to participate and they do not want to be diluted, than we have the vehicle with Mediatti or we can (technical difficulty) through LMI to continue the growth of our footprint in Japan. But so far we've found our partners to be fairly enthusiastic about expansion.

Just as an aside is that strategy hold true for Europe and UCOMA as well thinking about Telnet of course where first UCOMA looks at the available deals and second they go to the Liberty international level?

I would say in the case of UCOMA, keep in mind it is a controlled subsidiary. We control UCOMA so unless there is a conflict of some kind of conflict on a situation between what we want and what UCOMA wants, what we want is what UCOMA wants. We do a vote control of it, and so our preference would be to have all our expansion in Europe and all the management in Europe handled by UCOMA. And sort of that is our fundamental philosophy. It would take some really unusual circumstance for us to want to expand in Europe competitively with UCOMA, with UGC. Our preference would be to have UGC be the expansion and (technical difficulty) agent and the only exception of that are things that came along by timing, and it was impossible to have UGC with its depressed balance sheet last year do some of the things that we did. But going forward the goal would be to have all of our European development done through UGC.

My last question if you will allow me is value in J-COM I guess you are just looking at a Tokyo listing, and because there are no cable comps there either I guess you value it on where the market trades in Japan or you value it on something based on U.S. cable comps. It seems to me the only thing that makes sense for an IPO is to value it on either that you can get the market multiple in Japan because otherwise you would have sub values at J-COM that are less than what these properties trade for in the private market. So I'm just curious if that makes any sense and what your bakers are telling you in terms of how to value the EBITDA or cash flow.

I'm not going to confirm that we are even having discussions of that nature. But if we were going to have discussions of that nature, my guess is that we would only want to go public if we thought we would get superior liquidity and valuations to what we can otherwise get indirectly through the LMI stock.

Thank you for your answers.

Robert Routh with Jefferies.

I noticed you are focusing a lot of time obviously on Japan and the growth we have seen there which has been phenomenal and on UGC but very little time has been spent on the Latin American assets. I am just wondering longer-term are the Latin American assets really strategic to LMI at all, or are they more trade bait that can be used later or noncore monetary assets that at some point we're going to see sold or spun off or something.

And second I was wondering if you could comment a little bit on the public securities that you currently hold within the LMI vehicle the News Corp stock, the ABC family preferred and what your ultimately intentions are with respect to those.

I will start the other way around which is to say my vision for LMI and UGC is that they be leveraged cash flow growth companies without big investment portfolios. So the goal would be to move assets to where we are consolidating, growing cash flows on a leveraged basis to try and get maximum equity growth, long-term for our shareholders. That is the philosophy. With respect to Latin America, UGC's BTR is an excellent asset. Chile looks like a terrifically strong country. And if we can get the merger of our piece with BTR and Chile accomplished through the regulators which they are currently looking at I think that is definitely a keeper as an asset. It is a wonderful cable property, the best in Latin America.

With respect to Argentina, you know I look at that almost as a warrant on being in the cable business. And in Latin America if in fact the restructuring of that asset happens according to the proposals that our side has made, we think that cablevision can be very successful long-term asset for us. But at the moment we don't have a huge amount of financial commitment or exposure there. I would guard it as all upside from the way we are valuing things. With respect to Sky Latin America I think it is going to turn out to be a very valuable investment but it will always just be an investment and if we could exit it on favorable terms, we would do so at some point in the future.

With respect to all of our other non cash flow in consolidating assets I would give you the same answer, which is considering tax considerations, and timing and liquidity we would prefer to have all of those investment positions converted into programming or cable assets that we operate and consolidate.

So if I understand you correctly all of the portfolio that you currently have now you view as basically monetary assets?

Correct.

With Dundee Securities, Nino Marcosi (ph).

I was just wondering perhaps if you can give us a sense of how truly fragmented that European market is right now and how things are going with your French acquisition.

I will give you a quicky and let Mike talk about it. Our view is that the European market is very fragmented, and mostly owned -- many of the pieces are owned or controlled by U.S. private equity players who almost by definition are short-term in their focus. So as they seek liquidity, we think it will provide in the future an opportunity for UGC to expand favorably because it will have operating synergies and scale that no other exit scenario will provide.

I think what, we made the same remarks on our call Monday. We are clearly focused in looking at every possible opportunity in Western Europe and Central and Eastern Europe. Clearly Western Europe is a region that is at least a large assets are owned primarily by financial investors, and it has been difficult to pry any of those transactions loose, quite frankly. And we as I said on Monday, we will not overpay for any of these businesses. So there is a valuation gap that is persisting, and we will just be patient when it comes to Western Europe to see what sort of opportunities might arise.

Central and Eastern Europe is I think a little easier and quite frankly pretty interesting right now if you listened in to our call you would know that our Central Eastern European businesses are growing at midteens type revenue rates. And have all the same long-term benefits and opportunities that Western Europe presents so we are squarely focused on that part of the world as well. And we got a relatively large base of customers to build upon to realize the sort of synergies that John is referencing.

With respect to France that transaction closed on July first. We did pay a little over seven times '04 EBITDA for that business. The integration process is well under way. But in the early stages. I think we have publicly disclosed that we expect to realize as much as EUR20 million in annual synergies over time, and we think we will get there. As you can imagine, we've got a team focused on all the most important things upfront getting management squared away, getting the network process and rebuild and upgrade and those sorts of things in the Q, getting the labor and the human resource issue sorted out, getting brands evaluated all the things you would expect us to be doing, we are in the middle of doing and I think things are going very well. So we expect to be updating shareholders regularly on the progress there. But things look good so far.

Perhaps if I may follow up with respect to L and earlier callers that remarked about simplification or your comment about simplification or clarification. Is there a sense, is there a timeframe? What do you see out 18 months if I can ask?

Out 18 months? Well, I think hopefully by then most of our financial assets will have been monetized and converted into operating consolidating operating assets through either using the proceeds and acquisition or the shrinking of equities of one kind or another. Either UGC's, by UGC or by LMI, or LMI's by LMI or some other device whereby we get a decent level. UGC right now apart from the fact that it's got a cash (indiscernible) which it probably will figure out how to spend somehow is almost ideal, and as I see a cable company with leverage somewhere in the potentially drifting between 3.5 and 4.5 times EBITDA keeping interest costs relatively low but at least getting substantial leverage on equity.

And then making acquisitions that are synergistic add to future tax shelter and provide additional growth opportunities for cash flow. And that's true also in content. So I would think that we will see a couple of acquisitions of larger positions or increasing stakes in things between now and 18 months from now. A balance sheet that has less cash and less financial assets and more operating assets on it and possibly some consolidation of the relationship between LMI and UGC.

And how about for L itself?

For Liberty?

Yes.

That's a different call. I think that Liberty's Board is continuing to analyze possible structural solutions or changes that would (technical difficulty) shareholder value. But I can't -- this is not an appropriate call to go into that in any detail. I think we better have one more question and then call it.

Adam Schwartz (ph) with First Manhattan Co.

My question is regarding UGC, just looking at your quarter-over-quarter subscriber growth in total videos the growth has been sort of sub one percent and I'm curious to get your perspective on if when you're looking at that market if you view it as a more mature market, certainly at EUR14 a month per revenue generating unit. What do you think the potential could be? And my second question related to UGC is how do you evaluate the programming challenges certainly across countries with different languages, and how you look at that?

On the programming side, each of our markets look not much different than a typical U.S. or cable market you're used to seeing. Our basic service is 25 to 30 channels, in almost every case the package includes the broadcast networks locally as well as a local version of Discovery and a local version of MTV, so there's really no programming challenges per se in the basic video product. Clearly when you move to the digital side of the business you've got to secure rights for each of your markets and that can be a challenge in some instances, soccer rights and movie rights and things of that nature. But if that is the gist of your question, I'm not sure challenge is the right word in the basic video product.

What I meant was in terms of leveraging synergies I would imagine it would be more difficult having to sort of cater programming across different language barriers and cultural barriers.

For the most part that is in our case we only own interest in a handful of channels, the channels that we own interest in are pretty basic and broad in their scope and appeal. I think extreme SportsChannel for example, but people like Discovery have done it very, very well and it is a matter of just localizing to some extent the content, voiceover, it is really not that complicated and difficult. And you'll find that almost every major brand of the U.S. has to some extent a version of themselves abroad, and they've decided like Discovery that that is a useful and worthwhile investment and that helps us on the distribution side.

With respect to our growth, we reported over 100,000 net additions in the second quarter and over 400,000 in the last 12 months. The vast majority of our customer base as you may know our analog video customers, and that is what brings our ARPU per RGU down to the numbers that you cited. But if you look at the revenue we are generating off of our million Internet subs who are three-quarters of a million telephony subs, it looks a lot like the U.S. who are in the mid 40s in US dollars on both those products. In fact I think our Internet ARPU is one of the highest certainly at this point at $45 on average in Europe, is higher than Cox or Comcast or Telewest or NTL, so we generate very reasonable and very high margin services both all high margin services in voice and data across Europe, and that is pretty consistent.

Most of our growth if you look at our net additions is coming at Internet. It's about 50 percent of our growth, and our digital and DTH products and our telephony products. So the analog cable business which is about 7 million RGUs is a stable, highly penetrated, very mature business with churn well below one percent a month and very, very high gross margins in the mid-80s. So I wouldn't want to - cash cow is really not the right term, but that is a massive customer base that generates significant cash for us that we market into the voice and data product. So that is how we've driven our ARPU per customer up pretty meaningfully. If you look at markets like Austria we're now in the mid-40s on ARPU per customer, and we are looking to take everywhere we do business to those types of levels by offering higher revenue products like voice and data as well as digital.

Thank you, everybody. We enjoyed your questions, and wish us good luck.

That does conclude today's conference call. Thank you everyone for your participation.