International cable MSO Liberty Global, Inc. (NASDAQ: LBTYA, LBTYB and LBTYK) has reached an agreement to buy Virgin Media Inc. (NASDAQ: VMED; LSE: VMED) in a deal worth approximately $23.3 billion in stock and cash.
Upon approval of shareholders and the usual regulatory approvals, expected sometime in the second quarter of this year, Virgin Media shareholders will receive $17.50 in cash, 0.2582 Liberty Global Series A shares, and 0.1928 Liberty Global Series C shares for each of their Virgin Media shares. Based on Liberty Global’s Series A share price of $69.46 and Series C share price of $64.50 as of February 4, 2013, this implies a price of $47.87 per Virgin Media share, reflecting a 24% premium to Virgin Media’s closing price on February 4, 2013, Liberty Global says.
The price, before taking into account transaction costs and other expenses, represents an equity value of approximately $16.0 billion and an enterprise value of approximately $23.3 billion. This is 8.8X Virgin Media’s 2012 operating cash flow (OCF) and 7.0X Virgin Media’s 2013 estimated OCF, after taking into account the expected annual impact of approximately $110 million of operating synergies that Liberty Global expects to create as well as the consideration to be paid for certain tax assets.
The combination will create a cable operator whose networks cover 47 million homes and serves 25 million customers across 14 countries. The resultant company will focused on “the strongest and most strategic markets in Europe,” according to a press release announcing the deal.
“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,” asserted Mike Fries, president and CEO of Liberty Global. “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."
Not surprisingly, analysts saw pluses and minuses in the deal. In an email to the press, for example, Analysys Mason Senior Analyst Cesar Bachelet wrote he believes the deal, if approved, would be able to build on the competitive position in fixed mobile services that Virgin Media has created. However, he doesn’t believe Liberty Global will decide to expand Virgin Media’s present service footprint. “Virgin Media’s cable footprint covers just over half of UK homes, which limits its ability to be a truly national player,” he wrote.
Meanwhile, market research and consultancy Ovum foresees a battle for UK dominance ahead. “While Liberty’s play for Virgin is likely to be driven by its long-term vision for the value a foothold in the UK will have… and the competitive need to fight News Corp at this scale, in the near term it will make the UK the ring for a straight slug fest between two global pay-TV heavyweights, John Malone and Rupert Murdoch, as they battle for UK fixed broadband, fixed voice, and pay-TV subscribers. Depending on how Malone might choose to leverage the Virgin Mobile asset, it may also spill over in consumer mobile services,” wrote Adrian Drury, principal analyst at Ovum, in a note distributed to the press.