Liberty Global and Vodafone have agreed a 50:50 joint venture of their Dutch operations, a move Vodafone CEO Vittorio Colao should not be interpreted as a “blueprint for deals in other markets.”
Liberty Global (NASDAQ:LBTYA) and Vodafone (LSE:VOD) have agreed a 50:50 joint venture of their Dutch operations.
Speaking on an analyst conference call this morning, Vodafone CEO Vittorio Colao said the transaction was “not a blueprint for deals in other markets”, in reference to the two groups’ previous talks on a broader asset swap. Saying this deal had been triggered by Deutsche Telekom’s (ETR:DT) sale of T-Mobile Netherlands, a process expected to draw two bids, Colao noted that the single country transaction did not face the larger transaction’s valuation issues. He also said that further fixed/mobile deals would be evaluated on a market by market basis.
The combination will comprise cableco Ziggo – which includes the Sport1 premium sports channel –and number two mobile operator Vodafone, maintaining both brands. It will yield post-integration synergies worth €3.5bn (US$3.9bn) after costs, the companies said. These include cost and capex synergies with run-rate savings of €280m (US$312m) on an annual basis by the fifth full year post closing, equivalent to a net present value of approximately €2.5bn (US$2.8bn) after integration costs.
Advising Liberty Global are Goldman Sachs and LionTree Advisors, while legal advisers are Freshfields Bruckhaus Deringer and Allen & Overy.
On the Vodafone side are Morgan Stanley, Robey Warshaw and UBS, as well as Slaughter and May and NautaDutilh as legal advisers.
Vodafone CEO Vittorio Colao said the combination would create “a strong and competitive integrated communications player, which will invest in digital infrastructure, entertainment services and productivity applications for Dutch consumer, business and public sector customers”, adding that the transaction marked “a continuation of Vodafone’s market-by-market convergence strategy”.
Liberty CEO Mike Fries said: “This powerful combination of the best fixed and mobile networks in the Netherlands will deliver huge benefits to Dutch consumers and businesses. Throughout Europe, Liberty is capitalising on the rising demand for lightning-fast broadband speeds, the coolest digital TV platforms and apps, and seamless 4G wireless connectivity.”
The joint company will serve over 15 million revenue generating units (RGUs), comprising 4.2 million in video, 3.2 million in high-speed broadband, 2.6 million in fixed-line telephony and 5.3 million in mobile.
Financing
Based upon the enterprise value of each business, and after deducting Ziggo’s €7.3bn (US$8.2bn) of net debt, Vodafone will make a cash payment to Liberty Global of €1bn (US$1.1bn) to equalise ownership in the JV, reflecting the €2bn (US$2.2bn) difference in the two companies’ equity value. Vodafone Netherlands will be contributed to the JV on a debt and cash free basis.
For the full year 2015, Ziggo reported revenue of €2.48bn (US$2.78bn) and an operating cash flow of €1.35bn (US$1.51bn), while Vodafone Netherlands achieved revenue of €1.93bn (US$2.16bn) and EBITDA of €643m (US$719m).
The JV will target a leverage ratio of 4.5-5.0x covenant EBITDA, the companies said. As such, it plans to raise new debt financing in the future to reach its target leverage ratio, with proceeds to be distributed equally between Liberty Global and Vodafone. The transaction will not trigger a change of control under Ziggo’s existing third-party debt.
The JV intends to distribute 100% of its available cash to the shareholders and is expected to undertake periodic recapitalisations to maintain its 4.5-5.0x target leverage ratio. Liberty Global will contribute an estimated €321m (US$359m) of Ziggo net operating losses to the JV at closing and retain ownership of the remaining €2.9bn (US$3.2bn) of its other Dutch net operating losses.
Following completion of the transaction, neither Vodafone nor Liberty Global will consolidate the JV. After closing, Liberty Global’s 50% interest in the JV will be attributed to the Liberty Global Group, which is primarily comprised of Liberty Global’s European operations.
The transaction is expected to be enhancing to Vodafone’s free cash flow per share from the second full year post completion.
Management, governance and exit
The supervisory board of the JV is expected to comprise three representatives each from Liberty Global and Vodafone and two members nominated by the Works Council, with certain matters requiring unanimous approval of both companies’ representatives. The chairman role will alternate between Liberty Global and Vodafone each 12 months. The companies said they would announce key management positions prior to completion.
Each shareholder will be able to initiate an IPO of the JV after the third anniversary of closing, with the other shareholder able to sell shares in the IPO on a pro-rata basis. After the fourth anniversary, each shareholder will be able to initiate a sale of the entire JV to a third party, with the other shareholder having the right of first refusal.
The transaction is expected to close around the end of 2016 and is subject to consultations with both subsidiaries’ works councils, but not shareholder approval. The companies said they have started preparatory work on the required competition filings and will formally request approval from the European Commission in due course.
