Liberty Global confirms US$23 billion Virgin Media deal

Liberty Global and Virgin Media have agreed a deal whereby the international service provider will acquire the UK’s sole large-scale cable operator in a stock and cash merger valued at approximately US$23.3 billion in enterprise value terms, including debt. The deal gives Virgin Media an equity value of US$16 billion.

Mike Fries

Virgin Media shareholders will receive US$17.50 in cash, 0.2582 Liberty Global Series A shares and 0.1928 Liberty Global Series C shares for each Virgin Media share that they hold. Based on Liberty Global’s share price on February 4, this gives Virgin Media shares a value of US$47.87, implying a 24% premium on Virgin Media’s share price.

The merger of the two companies will create a service provider with 25 million customers across 14 countries.

“Adding Virgin Media to our large and growing European operations is a natural extension of the value creation strategy we’ve been successfully using for over seven years. Virgin Media will add significant scale and a first-class management team in Europe’s largest and most dynamic media and communications market. 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,” said Liberty Global CEO Mike Fries. “Like all of our strategic acquisitions we expect this combination to yield meaningful operating and capex synergies of approximately US$180 million 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.”

Fries said that the deal would provide “attractive free cashflow enhancement” and would enable it to increase its share buyback commitment. The company has set a buyback target of US$3.5 billion over a two-year period after the deal closes.

Liberty Global intends to increase Virgin Media’s debt by over US$3 billion to help finance the cash element of the deal, which amounts to US$5.9 billion. Liberty Global will also tap its existing credit facilities to finance the acquisition.

Liberty Global will also transfer its business address from Delaware to the UK as part of the deal and become a subsidiary of a UK plc holding company. Liberty Global said the creation of a new UK-based holding company would have a number of benefits, “including increased strategic and financial flexibility, as it pertains to value creation for shareholders”. The company will be listed on the NASDAQ exchange but may also look to implement a European listing.

John Malone, who controls about 35% of Liberty Global’s voting stock, has committed to support the acquisition, as has Richard Branson, whose Virgin Group holds a 3% stake in Virgin Media.

“This deal is good news for the company, its customers and our people. Together, Liberty Global and Virgin Media are in a great position to shake up the industry and bring the full power of digital technology to UK consumers,” said Branson.

Virgin Media had 1.33 million TiVo customers at the end of 2012 after adding 187,300 customers to the advanced TV service in the fourth quarter.

The figure represents 35% of Virgin Media’s customer base. Overall TV customers grew by 59,900 in the fourth quarter.

During 2012, the number of customers on superfast speeds (30Mb and above) increased by 1.5 million, including 419,400 during the last quarter, taking the total to 2.176 million or 51% of our broadband base. Total broadband net additions in the year were 169,300, with 62,700 in the quarter compared to 30,000 a year ago. Net cable customer additions for the quarterwere 42,700. Cable customer net additions of 88,700 in the full year represented a record for Virgin Media and a significant improvement on the 5,500 added in 2011.

The strong operational performance helped nudge up Virgin Media’s revenues by 2.7% to £4.1 billion for the year. Operating income rose by 29% to £699 million, but free cashflow fell by 4.9% to £473 million as a result of the company’s continuing investment in broadband.

Liberty Global added 465,000 new revenue-generating units, or products sold to customers, in the fourth quarter of 2012, taking its total RGUs to almost 33 million.

Liberty Global’s total base was boosted by the addition of 249,100 internet customers and 243,800 telephony customers in the quarter. TV subscribers fell by 27,800, with total TV losses for the year notw amounting to 286,500. The operator now has 18.3 million TV customers, just over 9.2 million internet customers and just over 7.2 million phone customers, with a total customer base of 19.8 million.

Liberty Global posted revenues of US$10.31 billion for the year. Full-year operating income was up 9% to US$1.98 billion.