International cable company Liberty Global has struck a deal to acquire U.K. cable, broadband and mobile telephony company Virgin Media. Liberty’s approach was confirmed yesterday by Virgin Media but the pair have now put out a joint release (see below) confirming the acquisition and its terms.
The stock and cash merger puts an approximate value of $23.3 billion on the deal — and reflects a 24 per cent premium on Virgin Media’s closing share price on February 4. Reuters notes that the purchase price is around $15.75 billion but, adding in Virgin Media’s debt, the value rises to around $23 billion.
Here’s the shareholder breakdown:
Under the terms of the agreement, 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 Virgin Media share that they hold. 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 and Virgin Media said the merged entity will have 25 million customers across 14 countries, with the potential to reach 47 million homes. They talked up “complementary strengths” across video, voice and data products, and said mobility and B2B also offer “significant additional growth potential in key markets”.
The pair also said they see “significant potential” to further monetize their current customer base by offering “enhanced bundled and premium services”, adding that the scale of the merged entity will enable them to invest in new technologies to drive customer retention and acquisition.
The combined company “will be focused on the strongest and most strategic markets in Europe” — after the deal Liberty noted that roughly 80 per cent of its revenue will come from five markets: the UK, Germany, Belgium, Switzerland and the Netherlands.
The acquisition transaction is subject to majority approval from both companies’ shareholders, as well as regulatory approvals plus other customary closing conditions. The respective shareholder meetings, as well as the closing of the transaction, are expected to occur in Q2, the pair said.
Should it go through, Adrian Drury, principal analyst at Ovum couched the deal as the largest shake-up in the U.K. telecoms and media sector since the merger of the T-Mobile and Orange UK mobile network operators, back in 2010 — and said it will pit two global pay-TV heavyweights, Liberty’s John Malone and News Corp.’s Rupert Murdoch, against each other.
“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 a pan European triple-play business, 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 chose to leverage the Virgin Mobile asset, it may also spill over in consumer mobile services,” he said in a statement.
“Malone will bring the operational smarts from cable operations in 13 markets, multi-territory leverage with the major studios and sports federations, plus its recently launched Horizon next generation pay-TV and multi-screen platform, now rolling out across its European operations. But it will be facing off against a jewel in the Murdoch empire. BSkyB, by any measurement is one of the best-run pay-TV operations on the planet, with a strong technology platform strategy, some powerful content rights, including exclusive rights to the entire HBO catalogue, control of the Premiership coverage wholesale market, and exclusivity on the output of all of the majors in the First Subscription Pay-TV Window.”
Drury also described the U.K. as a “must win market” for on-demand internet players Amazon’s Lovefilm and Netflix, adding that: “If Malone closes the deal, this will be a very interesting competition to watch and real test for the Liberty vision of the future of cable TV and internet services.”
Liberty Global and Virgin Media’s release follows below — or can be viewed in full here (PDF).
Liberty Global to Acquire Virgin Media
Powerful combination creates the world’s leading broadband communications company
- 25 million customers in 14 countries
- Complementary strengths across video, voice & data products
- Significant potential to monetize customer base
- Substantial synergy opportunity
- Accretive to free cash flow
- Strengthened commitment to shareholder returnsEnglewood, Colorado – February 5, 2013:
Liberty Global, Inc. (“Liberty Global”) (NASDAQ: LBTYA, LBTYB and LBTYK) and Virgin Media Inc. (“Virgin Media”) (NASDAQ: VMED; LSE: VMED) today announced that they have entered into an agreement, subject to shareholder approvals, pursuant to which Liberty Global will acquire Virgin Media in a stock and cash merger valued at approximately $23.3 billion.
Under the terms of the agreement, 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 Virgin Media share that they hold. 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.
A Powerful Combination
Creation of the world’s leading broadband communications company, covering 47 million homes and serving 25 million customers across 14 countries. The combined company will be focused on the strongest and most strategic markets in Europe, with the scale to be at the forefront of technological change for customers.
Complementary strengths across product suite, with aligned triple-play products, roadmap and expertise across digital TV, broadband and telephony services. Mobility and B2B expertise offer significant additional growth potential in key markets.
Significant potential to monetize customer base, with opportunity to deliver current customers enhanced bundled and premium services.
Substantial synergy opportunity, driven by scale advantages across core functional areas. Accretive to free cash flow, with combined track record of exceptional free cash flow generation.
Increased commitment to shareholder returns, leveraging the financial strength of the combined company, which generated $16.8 billion of revenue and $7.5 billion of Operating Cash Flow (“OCF”)2 in 2012.
Mike Fries, President and CEO of Liberty Global, said: “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.”
“Like all of our strategic acquisitions we expect this combination to yield meaningful operating and capex synergies of approximately $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.”
“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 $3.5 billion over a two-year period upon closing.”
Virgin Media CEO Neil Berkett said: “Over the past six years, Virgin Media has transformed the digital experience of millions of customers, catalyzed a deep-rooted change in the UK’s digital landscape and delivered impressive growth and returns for our shareholders. I’m confident that this deal will help us to build on this legacy. Virgin Media and Liberty Global have a shared ambition, focus on operational excellence and commitment to driving shareholder value. The combined company will be able to grow faster and deliver enhanced returns by capitalizing on the exciting opportunities that the digital revolution presents, both in the UK and across Europe.”
Transaction Details
The implied purchase 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 represents a purchase price multiple of 8.8 times Virgin Media’s 2012 OCF, and 7.0 times Virgin Media’s 2013 estimated OCF, after taking into consideration the expected annual impact of approximately $110 million of operating synergies that may be realized following full integration and after adjusting the consideration to be paid for certain tax assets.3
The equity purchase price will consist of a combination of shares and cash. Based on Virgin Media’s fully-diluted shares of 335 million,4 Liberty Global would issue approximately 86 million Liberty Global Class A shares and 65 million Liberty Global Class C shares (in each case such shares will be shares of the plc with substantially similar rights as the existing Series A and Series C common stock of Liberty Global, as applicable). In addition, each issued and outstanding share of Liberty Global common stock will be exchanged for one share of a class of ordinary shares of a newly-formed UK public limited company (plc) carrying substantially similar rights as the existing series of Liberty Global common stock exchanged. Based on issued and outstanding shares of Liberty Global as of February 1, 2013 and adjusting for the transaction, it is expected that Virgin Media shareholders will own approximately 36% of the pro forma shares outstanding of Liberty Global and have approximately 26% of the voting rights.
The cash component of the equity purchase price, totaling approximately $5.9 billion,5 will be funded largely through a combination of debt financing and available liquidity of both Liberty Global and Virgin Media. We intend to increase Virgin Media’s debt by more than $3.0 billion, such that on a pro forma basis, Virgin Media’s debt will fall well within our normal leverage target of four to five times annualized OCF.6 Together with the net proceeds of Virgin Media’s debt financing, the transaction will be funded with cash and other sources of liquidity of Virgin Media and cash and borrowing availability under Liberty Global’s existing credit facilities. Adjusting for the transaction and completion of the intended financings, we estimate the leverage on the combined company would have been approximately 5 times at December 31, 2012, which would serve as a modest deleveraging event for current Liberty Global shareholders. We are targeting mid-4’s leverage by year-end 2014.
As part of its acquisition of Virgin Media, Liberty Global will redomicile from Delaware to the United Kingdom by becoming a subsidiary of a new holding company, a UK plc. Liberty Global’s current headquarters and other principal offices will remain in place. Liberty Global will be listed on NASDAQ and will continue to report earnings and other financial statements in accordance with Securities and Exchange Commission regulations, including dollar denominated financial statements. Liberty Global’s Board of Directors will continue to form the board of Liberty Global, with the addition of one Virgin Media director to be named prior to the closing. Liberty Global believes that the creation of a UK plc as a new holding company will have several business and financial benefits, including increased strategic and financial flexibility, as it pertains to value creation for its shareholders. After closing of the transaction, Liberty Global may look to implement a European listing. Virgin Media will continue to operate under the Virgin Media brand in the UK.
Based upon facts and circumstances as of the date of announcement, Liberty Global believes that the share exchange as structured may not be taxable to U.S. shareholders of Liberty Global. However, the ultimate tax treatment of the share exchange is not certain and is dependent upon the facts and circumstances at the closing date, which are difficult to predict and are outside of Liberty Global’s control. The transaction is not conditioned upon a determination as to the tax treatment for Liberty Global stockholders. Further details will be provided in the proxy statement which will be designed to enable Liberty Global shareholders to evaluate the tax treatment with their own tax advisors.
The transaction is subject to majority approval from both companies’ shareholders, regulatory approvals and other customary closing conditions. The respective shareholder meetings, as well as the closing of the transaction, are expected to occur in the second quarter of 2013. Through certain trust arrangements, Mr. John Malone controls in excess of 35% of the voting power of Liberty Global, and he has committed to support the transaction in his capacity as a shareholder.
In connection with the transaction, LionTree Advisors acted as lead financial advisor to Liberty Global. Credit Suisse also acted as financial advisor and sole global coordinator and consent solicitation agent for the debt financing. Shearman & Sterling and Ropes & Gray served as legal counsel to Liberty Global. On behalf of Virgin Media, Goldman Sachs & Co. and J.P. Morgan acted as financial advisors and Fried Frank and Milbank served as legal counsel. Goldman Sachs International acted as corporate broker to Virgin Media.
