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Cable's New Contender


On a sweltering summer day, contractors working for ONO, a Spanish cable startup, are using a huge circular saw to carve a gash along a public square in the small eastern town of Alaquas. The workers are putting in long hours and weekends to bring to life the vision of an American telecom pioneer, Richard J. Callahan. He and his partners are spending $2.5 billion to wire a huge region of Spain around Valencia, the third-largest city, not only for TV but also telephone service and high-speed Internet access.

ONO is but one piece of Callahan's fast-growing cable business. Since setting up his own company, Callahan Associates International, in 1996, this prolific dealmaker has strung together a web of European cable properties spanning three countries and 8.5 million subscribers. That is comparable to the third-largest U.S. cable company, Philadelphia-based Comcast Corp., which is now bidding $52 billion for AT&T's cable business. More impressive still, Callahan, 59, has built his empire with a tiny organization and very little of his own capital.

At a time when investors are dumping shares in some of Europe's biggest cable operators, Callahan boasts an enviable roster of backers. The list includes such heavyweights as New York-based Blackstone Group, Bank of America, and Spain's Banco Santander Central Hispano. Callahan, who has a 30-year track record in the telecom and cable industries, is racing to satisfy the demand for huge volumes of data and entertainment that he is betting will soon emerge. "I am a broadband man," he says. "I don't care if it is by land, or sea, or air."

HUGE DEBT. Still, Callahan concedes that "this is an awkward time to be in this business." Some of Europe's onetime cable darlings have seen their share prices plunge on worries that they won't be able to service their huge debt. On Aug. 14, time ran out for Mark Schneider, CEO of Amsterdam's United Pan-Europe Communications. With UPC's stock below $1, down from around $80 in March, 2000, he said he was resigning.

Callahan's ventures, too, are expected to have negative cash flow for several years. But he doesn't have to worry about stock prices. His outfit, which has offices in Denver and London, is a private equity player, one of Europe's biggest. Callahan puts together groups of investors and sprinkles his ventures with his own experienced managers. Last summer, he tapped Andrew Sukawaty, formerly CEO of Sprint PCS, for the post of president at Callahan Associates. For their services, Callahan and his lieutenants charge multimillion-dollar management fees. They also take small stakes in some ventures and cut potentially lucrative profit-sharing deals. "They are pretty clever guys running around with no money at risk," says a European investment manager.

Indeed, while his rivals are struggling, Callahan is still finding money to finance purchases. So far, his various businesses have raised $4.7 billion in equity and $8.4 billion in debt--of which about $4 billion remains in reserve. "They have a nose for finding deals, and they are good operators," says William Strittmatter, managing director of GE Capital Telecom, which invested $135 million in the Spanish venture.

RIVALS. Callahan's biggest deal to date is the roughly $2.5 billion he agreed to pay last year for a 55% stake in the cable system he rechristened Callahan Nordrhein-Westfalen (CNRW). The former owner, Deutsche Telekom, retains 45%. Now he is on the verge of adding DT's $1 billion Baden-Wurttemberg system to his network. But Callahan is not the only U.S. cable mogul shopping in Germany. John Malone's Liberty Media Corp. is in the process of acquiring a 10-million-subscriber system from DT for an estimated $4 billion. Still, Callahan thinks he got the pick of the litter. "We were the first into Germany, and we looked at all the properties," he says.

In fact, Callahan is no stranger to Europe. He spent the early 1990s as the London-based chief of international operations for U S West, a Baby Bell now owned by Qwest. While in that job, he also helped start TeleWest Communications, now Britain's second-largest cable company, and One2One, a mobile-phone operator now owned by DT. From that vantage point, Callahan spied a tempting business proposition. Cable systems in Europe could be bought or built for a fraction of what they would cost to buy in the mature U.S. market. What's more, deregulation, along with the emergence of jazzy new services such as video-on-demand and digital television, promised to juice up anemic revenues from pay TV. Says Callahan: "I saw exploding interactivity, and I knew that the opportunity was greater than the cost."

That line of reasoning pushed Callahan in April to shell out $918 million for a 54.2% stake in Belgium's largest cable system, Telenet, along with an option to buy an additional 19%. The deal valued subscribers at just under $1,000 apiece, a bargain compared with the $4,000 that Comcast is prepared to pay for each of AT&T's cable subscribers.

Yet in the European cable industry, revenues per subscriber are typically a fraction of what they are in the U.S. Callahan's German operation averages just $6 per month per subscriber, compared with an average of $50 stateside. So he is spending $1.5 billion to upgrade the network to make it phone- and Internet-friendly, in hopes of charging higher fees for those services. This strategy already is beginning to bear fruit in Spain. Revenues per user at ONO average a respectable $42, thanks to robust demand for its phone and broadband services. Still, German competitors think that Callahan will not be able to boost revenues fast enough to make his bets pay off. "I feel sorry for (his) investors," says Heinz-Peter Labonte, a Frankfurt-based cable entrepreneur.

Callahan is running into some turbulence. His companies may not have listed shares, but their $2 billion in high-yield bonds have taken a hit. CNRW's are now at 64 cents on the dollar, reflecting worries about high debt. And choppy markets forced ONO to scrap a $225 million initial public offering last fall. IPOs may be out of the picture for now, but Callahan wants to eventually sell his empire, either wholesale or piecemeal.

In the meantime, this persistent dealmaker is hoping that today's nasty climate will send some choice morsels his way. For instance, financial hard times may persuade Telecom Italia and utility Endesa, the owners of Spain's other key cable system, Auna, to either sell assets or join forces with ONO. "If you run a good show, you are going to get more opportunities," Callahan says. Stay tuned for the next act. By Stanley Reed in Valencia, Spain, with Jack Ewing in Frankfurt


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