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February 6, 2013 12:52 am
John Malone’s Liberty Global has confirmed an agreed $23.3bn cash and stock bid for Virgin Media, the UK cable operator, offering $47.87 a share in a move that will upend competition in the UK pay television, broadband and telecoms market.
With a successful entry into the UK taking Liberty Global’s reach to 25m customers, Mr Malone would be the dominant player in the European television market, as Liberty Global also operates cable assets in Germany, Belgium, and other countries across the continent.
“Virgin Media will add significant scale and a first-class management team in Europe’s largest and most dynamic media and communications market,” Mike Fries, chief executive of Liberty Global, said in an interview.
Liberty Global has offered $17.50 in cash, 0.26 Liberty Global class A voting shares and 0.19 class C non-voting shares for each Virgin Media share. The $47.87 price amounts to a 24 per cent premium before the Financial Times broke news of the deal late on Monday.
Its terms imply a $16bn equity value, and an enterprise value of about $23.3bn. Virgin Media shares closed 18 per cent higher on Tuesday as Liberty Global slipped 2.3 per cent to $67.88.
The deal throws Mr Malone into direct competition with Rupert Murdoch, a longtime rival and sometimes ally, whose News Corp controls British Sky Broadcasting, the largest UK pay-TV operator. Analysts said the move could increase the competitive pressure on Sky but could be more threatening to smaller rivals such as BT and TalkTalk.
“The UK market has exhibited a much more rational competitive posture in the last 18 or 24 months than it did at any time prior to that,” said Mr Fries. Investment in infrastructure by Virgin, BSkyB and BT was creating “a more favourable pricing environment” and increasing average revenue per user.
People familiar with Mr Malone’s thinking say the deal is motivated as much by what he sees as an opportunity to take advantage of Virgin Media’s tax losses and low interest rates, as it is by strategic considerations. Its timing also features some of the opportunism for which Mr Malone is known, coming just as Virgin Media is looking for a new chief executive.
“Robust” debt markets “didn’t hurt” in sealing a deal which will add $4bn of new borrowings to Virgin Media’s debt, Mr Fries said, but Liberty Global saw the opportunity to save $180m from the two companies’ combined $12bn annual operational and capital expenditure budget.
I do not see us doing anything . . . meaningfully different from what Virgin’s been doing with respect to premium content
- Mike Fries, chief executive of Liberty Global
Liberty Global also hopes to bring Virgin’s expertise in serving business customers, which account for about 15 per cent of its revenues, to Liberty Global’s other markets, where business customers account for just 6 per cent of sales. Mr Fries said it had similar ambitions to export Virgin’s success in bundling mobile subscriptions with broadband, video and landline connections.
Mr Fries played down expectations of a bidding war against BSkyB for prized content such as live football rights, saying: “I do not see us doing anything in this market that’s meaningfully different from what Virgin’s been doing with respect to premium content.”
Liberty Global was more likely to accelerate investment in faster broadband networks, he indicated, saying it would “continue the trend” Virgin Media had been on.
Liberty Global will move its domicile from Delaware to the UK, while retaining its US headquarters and Nasdaq listing. Mr Fries said the UK domicile “has financial benefits to both companies in the long run” but would not comment on its tax implications. Liberty Global, which pledged to increase share buybacks to $3.5bn over two years, said it may seek a European listing in time.
Coming on the day of the announcement of Michael Dell’s $24.4bn bid to take his PC company private, Liberty Global’s bid is another indication that the market is willing to support billions of dollars in leverage for transformational deals.
LionTree Advisors and Credit Suisse advised Liberty Global, with Shearman & Sterling and Ropes & Gray providing legal advice. Goldman Sachs and JPMorgan advised Virgin Media, with Fried Frank and Milbank providing legal advice.
This article has been amended since first publication to correct the spelling of Ropes & Gray.
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