US cableco Liberty Global is set to acquire its UK-based counterpart Virgin Media in a stock and cash merger valued at around US$23.3bn.
The deal implies a price of US$47.87 per Virgin Media share, reflecting a 24% premium to the closing price on the…
US cableco Liberty Global is set to acquire its UK-based counterpart Virgin Media in a stock and cash merger valued at around US$23.3bn.
The deal implies a price of US$47.87 per Virgin Media share, reflecting a 24% premium to the closing price on the day before acquisition plans were announced. It also represents a purchase price multiple of 8.8x the target’s 2012 operating cash flow, and 7x its estimated OCF for 2013.
Under the agreement, the target’s shareholders will be offered US$17.50 in cash, 0.2582 Liberty Global Series A shares and 0.1928 Series C shares for every Virgin Media share they own. If the deal goes through as planned, Virgin Media’s shareholders will own around 36% of Liberty’s outstanding shares, and will have approximately 26% of the voting rights.
The cash component of the deal totals roughly US$5.9bn, which will mostly be funded through debt financing and the available liquidity of both companies.
According to Liberty, this will mean extending Virgin Media’s debt by more than US$3bn, although that would still leave it within its normal leverage target of 4-5x annualised OCF.
Liberty expects the combined company, which generated US$16.8bn in revenue and US$7.5bn of OCF in 2012, will have a leverage multiple in the mid-4’s by the end of 2014.
Mike Fries, Liberty’s CEO, said: “After the deal, roughly 80% of Liberty Global’s revenue will come from just five attractive and strong countries – the UK, Germany, Belgium, Switzerland and the Netherlands.”
“Like all of our strategic acquisitions we expect this combination to yield meaningful operating and capex synergies of approximately US$180m per year upon full integration. But just as importantly, Virgin Media’s market leading innovation and product expertise, particularly in mobile and B2B, will accelerate our own development of these business segments.”
“For these and other reasons, Virgin Media will be complementary to our own organic revenue and OCF growth profile, while providing attractive free cash flow enhancement to our shareholders. As a result, we intend to increase our commitment to share buybacks going forward with an initial target of approximately US$3.5bn over a two-year period upon closing.”
Virgin Media CEO Neil Berkett said: “The combined company will be able to grow faster and deliver enhanced returns by capitalising on the exciting opportunities that the digital revolution presents, both in the UK and across Europe.”
The deal will also see Liberty redomicile from Delaware to the UK by becoming a subsidiary of a new UK plc holding company. The group said it will also consider a European listing – a move that Bernstein Research analysts said yesterday could create long-term value.
Liberty also said that the share exchange structure of the deal may not be taxable to its US shareholders.
Both companies expect the deal to close in Q2 2013 following regulatory and shareholder approvals. Cable veteran John Malone, who owns in excess of 35% of Liberty’s voting power, has pledged his support for the transaction.
LionTree Advisors is Liberty’s lead financial adviser, with Credit Suisse also providing financial advice while acting as sole global coordinator for the debt financing. Shearman & Sterling and Ropes & Gray are providing legal advice.
Goldman Sachs and JP Morgan are financially advising Virgin Media. Fried Frank and Milbank are serving as legal counsel. Goldman Sachs also acted as corporate broker to Virgin Media.
Virgin Media competes with the UK’s incumbent fixed line operator BT for fibre services. It also runs an MVNO on EE’s network and operates a pay-TV platform that faces heavy competition from local DTH operator BSkyB, which is partly controlled by Malone’s longstanding rival Rupert Murdoch.
Capital World Investors is Virgin Media’s largest shareholder with a 14.61% stake, followed by Capital Research Global Investors with 10.88% and Manning & Napier Advisors with 6.49%. Other shareholders include Coatue Capital, MFS Investment Management, Norges Bank Investment Management, Schroder Investment Management, The Vanguard Group, TimesSquare Capital Management and Fidelity Management & Research Company.
A note by analysts at Citi following the announced deal terms said that, while investors might have preferred further consolidation in Germany, “taken with the enhanced buy back we expect the financial merits of this transaction to be compelling”.
Bernstein Research analysts said fair value for Virgin Media would be US$45-US$50, and it expected shareholders to agree to the deal at these levels.
