Liberty Global Inc. (NASDAQ:LBTYA) (NASDAQ:LBTYB), the holding company of Liberty Media Corp (NASDAQ:LMCAD) is in talks to buy U.K.’s Virgin Media Inc. (NASDAQ:VMED), in a deal that will give John Malone the muscle to compete with Europe’s elite. The England-based cable-television provider is valued at about $10 billion and will provide an avenue for Liberty Global to challenge stalwart Rupert Murdoch in Europe’s biggest pay TV market.
Liberty Global Inc. (NASDAQ:LBTYA) (NASDAQ:LBTYB) serves nearly 20 million customers globally and will surely increase these numbers if it acquires Virgin Media. The company recently raised its stake in another media company, Sirius XM Inc. (NASDAQ:SIRI) via Liberty Media, as billionaire John Malone looks to cement his leadership in investment in media companies.
The Deal
In a report published Tuesday, Bank of America Merrill Lynch analysts reviewed the details of the deal. According to the report, Liberty was preparing to launch a bid with an equivalent value of $20 billion, or £12.7 billion, whereby £5.7 billion is believed to be Virgin Media debt, which then, gives a net value of £7 billion, or $42 per share. this would represent a 9 percent premium from Monday’s closing price.
The purchase will also result in a leverage of about 5.6x Net Debt/EBITDA compared to Liberty’s target leverage of 4-5x. Nonetheless, the analysts believe that there could be other incentives associated with the deal including “structural threats overhanging the business (from BT’s fibre push, VMED’s dependence on legacy telephony revenues and YouView’s aggressive push into TV)”.
Patrick Yau, a media analyst at Peel Hunt in London believes that Liberty Global’s premium of 9 percent is bound to stand as he does not expect any other bidders. Yau said, “Unless another bidder comes out of the woodwork, it’s hard to see much more of a premium on the price.” British Billionaire Richard Branson, the owner of the brand Virgin, widely used across the U.K is said to own less than 3 percent in Virgin Media.
The deal is expected to generate various tax advantages including substantial tax assets (£2.2 billion of UK Operating Losses, £12.9 billion of gross capital allowances and £12.1 billion of capital losses). The analysts believe that the tax assets and capital allowances could be useful in mergers and acquisitions situations, which could imply a value of $2.1 per share from the operating losses, and $10 per share from capital allowances. However, this would only work if used by a profitable U.K. domiciled acquirer.
The analysts noted, “Liberty’s problem is that UPC (its main cable asset) has a Netherlands domicile. If a bid were to gain traction, one potential move could be re-register UPC as a “Societas Europea” or “SE”, although we think this could likely be contested by HMR&C”.
Murdoch is Not Sleeping
Rupert Murdoch is also said to be making various acquisitions as he seeks to maintain his dominance in Europe. Murdoch owns News Corp, which owns U.K.’s leading broadcaster, British Sky Broadcasting Group plc (LON:BSY) (PINK:BSYBY). Murdoch is believed to be closely following seven deals valued at about $1.33 billion. News Corp (NASDAQ:NWSA) (NASDAQ:NWS) also failed in a bid to acquire the remaining stake in British Sky Broadcasting Group in 2010.
John Malone is not New to the U.K.
Liberty’s chairman John Malone has a long history in the U.K. as a former owner of 25 percent of Telewest, which is now part of Virgin Media. He was famously quoted by in the Financial Times in July 2007 saying, “The bottom line issue is, can anything flourish under the Death Star? There’s a high level of radiation that’s coming down [British Sky Broadcasting Group plc (LON:BSY) (PINK:BSYBY)]. The concentration of market power that’s been created means you have to scratch your head and say can anything compete?”
Liberty Global Inc. (NASDAQ:LBTYA) (NASDAQ:LBTYB) was down 4.26 percent at 10.15 a.m to trade at $66.50 while 16.32 percent to trade at 45.01 per share, well above the theoretical offer price of $42.
