February 6, 2013 5:50 pm

Virgin Media: picture puzzle

Boost for executives but less clear investors should be jumping for joy

All things come to those who wait. An entrée into the UK market is finally within the grasp of US cable tycoon John Malone, thanks to an agreed a stock and cash offer by his Liberty Global group for Virgin Media. This is worth around $47 per VM share and puts an enterprise value on the group of about $23bn.

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But if adding a British asset to LG’s portfolio and overtaking US rival Comcast by customer numbers gives executives a warm glow, it is less clear that investors should be jumping with joy. Start on the Virgin Media side. The per-share offer price is over 20 per cent higher than VM’s undisturbed share price. Sounds respectable enough, even if part comes in non-voting shares. But that equates to an enterprise value which is just 7.5 times 2013 earnings before interest, tax, depreciation and amortisation (adjusting the EV for the net present value of VM’s deferred tax assets, estimated at $2.7bn). That is only in line with the European cable sector average – to which the relatively mature VM business has long traded at a significant discount.

For Liberty Global’s investors, meanwhile, they look to be overpaying. The bidder, while singing the benefits of scale, does not pretend that it will change VM’s strategy. Total synergies – usually overstated in such deals – are put at $180m a year. Taxed and capitalised on 10 times that is worth $1.3bn, less than half of the market capitalisation premium being offered.

The benefit of VM’s tax assets should already be in its share price, unless Mr Malone has an ingenious trick up his sleeve to extract more value from them. Likewise, the sop of an expanded share buyback programme at Liberty Global should be ignored. That said, with little chance of rival bids, and Mr Malone holding 35 per cent of LG’s votes, the deal should get done. Shareholders on both sides should ask why.

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