Callahan Leads German Cable Mega-Deal –

Callahan Associates International LLC last week led a group of investors including, The Blackstone Group and Capital Communications CDPQ, a subsidiary of the Caisse de depot et placement du Quebec in the acquisition of North Rhine-Westphalia, one of nine regional cable networks owned by Deutsche Telekom AG. The new local entity will be known as Callahan Germany.

The value of the deal is undisclosed, but has been reported to be between Z1.83 billion ($1.83 billion) and Z2.6 billion ($2.6 billion). The deal gives the U.S. investment group 55% of Callahan Germany. Founder and chief executive officer of Callahan Associates, Richard Callahan, reportedly said, “I have raised $1 billion in equity and $2 billion in debt to purchase this 55% and to fund the implementation of our strategy over four years.

It could be slightly more than this.” Salomon Smith Barney was lead adviser to Callahan Associates, an investment club that identifies and develops investment opportunities and finances projects by drawing on a small number of core sponsoring investors.

Callahan Germany plans to upgrade the existing cable network infrastructure to a broadband, two-way network capable of delivering high speed Internet access, data, direct telephony and digital television services. The broadband cables will begin operation in 2001.

David Colley, President of Callahan Associates’ European Broadband Cable Operations, spoke of the importance of recruiting additional staff in order to enact this strategy.

Callahan, based in Denver and London, has already proven itself in European telecommunications through its partnerships with Spain’s Cableuropa SA, which operates under the brand name ONO, and France’s NC Numericble. Of the Deutsche Telekom networks, North Rhine-Westphalia is the largest, most significant region and the most affluent providing the greatest potential for growth, said Catherine May, spokeswoman for Callahan Associates.

The region encompasses eight million franchise homes and 11 of Germany’s 20 largest cities. Callahan Associates may create a pan-European brand with its own Web portals or it may attempt to partner with an established brand like America Online Inc.

Callahan is not the first to take advantage of the growing opportunities in Europe. In 1999, a number of other American buyout firms invested in European telecom companies. Kohlberg Kravis Roberts & Co. invested in Wincor Nixdorf GmbH & Co, KG, which provides IT solutions to the retail and banking industries. And the Carlyle Group gained a minority stake in Bredbandsbolaget AB, a data communications company that will provide broadband Internet services in Sweden. Many of these opportunities are the result of U.S. investors helping bloated conglomerates in Europe focus their businesses.

According to Christopher MacKenzie of Clayton Dubilier & Rice, who gave a presentation on European deal opportunities at this year’s Buyouts Symposium, Germany is home to 70% of these conglomerates and is just beginning to open its doors to U.S. firms. He also said a large number of transactions will likely come through due to the Callahan Associates-Deutsche Telekom deal. In addition, pending German legislation will allow companies to sell stakes to other companies tax-free. This will be a big incentive for freeing capital and encouraging investments.

The Blackstone Group, which has launched a communications-focused fund with a target of nearly $2 billion, has already made investments in several telecommunications companies, including Sirius Satellite Radio and regional cable network Bresnan Communication Co. (BUYOUTS Jan. 10, p. 3) Mark Gallogly, president and chief executive at Blackstone Communications Partners, said in a statement, “We are delighted to back Callahan Germany and partner with Deutsche Telekom . . . Based on our experience in the cable industry, we strongly believe in the opportunities for broadband communication in Germany.”

Deutsche Telekom will be divesting eight other cable networks and is currently in talks regarding five of them. The company intends to have those deals completed by the end of March.

In December, Deutsche Telekom announced it was in talks with U.S. investor group Kletsch about Hesse cable network, and with Dutch cable operator United Pan-European Communications NV (UPC) about its Saarland network.

Kabel Deutschland GmbH, a Deutsche Telekom subsidiary, will retain 45% of North Rhine-Westphalia and will transfer business to Callahan Germany on July 1, 2000 pending approval by the anti-trust authorities.

Callahan is looking to invest in many other areas and projects, and now with three major properties in Western Europe they should hold some more clout. “It is very exciting,” May said. “This purchase gives Callahan a huge footprint in Europe-serving 15 million franchise homes.”

Other investors involved in the North Rhine-Westphalia deal are Bank of America, Banco Santander Centro Hispano, The Edward P. Bass Group, Angelo Gordon, CIBC Capital Partners, Investcorp International Inc., Merrill Lynch & Co. and Multitel Cable.