John Malone’s Liberty Global struck a deal on Tuesday to buy British cable group Virgin Media for about $15.75 billion in stock and cash, a move that would put the U.S. billionaire up against old rival Rupert Murdoch.
The companies announced the deal in a statement late on Tuesday, after Virgin Media, the second-biggest pay-TV provider in Britain behind Murdoch’s satellite group BSkyB, confirmed Liberty’s approach earlier in the day.
Including debt, the deal would be worth more than $23 billion and would give Liberty entry to one of Europe’s biggest and most competitive telecom markets, allowing it to apply lessons learned as a pay-TV and broadband provider in 11 other European countries.
It would also put Malone’s Liberty in a strong position to challenge Murdoch as cable groups across the region start to assert their authority over traditional telecoms firms with the offer of super-fast broadband and pay-television.
Liberty will pay about $47.02 for each Virgin Media share based on Tuesday’s closing prices, using cash and shares of its class A and C stock. Before news of the bid emerged in a Financial Times report on Monday, the bid represented a 24 per cent premium to where Virgin’s shares had been trading.
Malone, whose group has 19.6 million customers, came up against Murdoch a decade ago when Murdoch’s News Corp. and Liberty Media vied for control of DirecTV Group, the largest U.S. satellite TV broadcaster.
The stand-off ended when both sides backed down. News Corp. sold its one-third stake in DirecTV to Malone’s group and Malone sold 16 per cent of News Corp that Liberty had acquired, giving the Murdochs fuller control over their company.
Dubbed everything from the Cable Guy to Cable Cowboy and even Darth Vader by former U.S. Vice President Al Gore because of his perceived ruthless style, Malone made his fortune through a series of deals that transformed, and ultimately consolidated, the U.S. cable industry into one dominated by a few big players.
Murdoch’s BSkyB leads the British pay-TV market with 10.7 million customers compared with Virgin Media’s 4.9 million.
Virgin Media emerged two years ago from years of heavy losses from a costly network expansion. But its cables still only cover half of Britain and analysts see potential for more growth.
For Liberty, those benefits must be weighed against the debt a takeover with cash and stock may entail.
Under the terms of the deal, Virgin Media shareholders will receive $17.50 in cash, 0.2582 Liberty Global class A shares and 0.1928 Liberty Global class C shares for each Virgin Media share.
Virgin Media’s shares closed up 18 per cent in New York at $45.61. They rose 17 per cent in London to around 28.88 pounds. Liberty Global class A shares fell 2.3 per cent, while its class C shares dropped 3.6 per cent.
Virgin Media’s bond yields rose and the cost of insuring its debt also rose on expectations more debt would have to be raised to finance a deal. It is also rated higher than Liberty Global, which could impact its credit profile.
Period of stabilisation
The approach for Virgin Media follows a period of stabilisation engineered by chief executive Neil Berkett after a debt restructuring. Virgin Media was formed by the merger of cable groups Telewest and NTL and mobile operator Virgin Mobile in 2006 to huge fanfare led by major shareholder Richard Branson, who still owns around 3 per cent of the group.
Its first few years were marred by lengthy and costly legal fights with BSkyB over access to channels and content, which damaged Virgin Media’s reputation.
Appointed in March 2008 to turn things around, Berkett shunned that approach, settled the dispute and slowly built up Virgin Media’s customer base by focusing on a superior broadband and technology offering.
While that enabled Virgin Media to post its first annual profit in 2011, some argue it has not been aggressive enough in signing up new customers. A deal with Liberty could help Virgin Media push more aggressively into offering its content on smartphones and tablets – a strong area for BSkyB.
Instead of building out its network, the group has bought up 24 per cent of its stock. Partly as a result, its shares have risen almost 160 per cent since March 2008. They closed at $38.69 on Monday having recovered from a low of $2.96 at the end of 2008 when the financial crisis hit.
The group sells TV, telephony and broadband and also competes with BT and online firms such as Lovefilm.
Its biggest shareholders are Capital World Investors which own 14.6 per cent and Capital Research Global Investors which own 10.9 per cent. Virgin Media reports 2012 results on Wednesday.
Analysts at Espirito Santo said a fair enterprise value for Virgin Media would be around $24 billion, although they questioned how Liberty would pay for it. Espirito put Liberty’s net debt at 5 times core earnings.
Having dominated the U.S. cable industry, Malone’s Liberty has built its presence across Europe by snapping up companies. A deal would bring him an asset he initially tried to control when it was still NTL and Telewest.
An offer is unlikely to face any regulatory objections, analysts say, but it could prompt some interest from private equity groups who have traditionally favoured cable groups.
Liberty’s latest big deal came in Belgium where it increased its stake in Belgian operator Telenet to 58 per cent.
Citi’s Weeden noted the Telenet deal went through at a price of 8.2 times the expected 2013 core earnings. Citi said a valuation of Virgin Media at 7 times that ratio would equate to a share price of $41.75.
Liberty, which plans to redomicile to the United Kingdom as part of the deal, said it expects the deal to generate around $180 million of annual cost savings after it fully integrates Virgin Media.
It said it plans to fund the roughly $5.9 billion cash portion of the deal through debt financing and available liquidity at both companies, increasing Virgin Media’s debt by more than $3 billion.
Liberty also said it plans to launch a two-year, $3.5 billion share buyback program after the deal closes.
LionTree Advisors and Credit Suisse advised Liberty Global, while Goldman Sachs and JP Morgan were Virgin Media’s advisers.