Liberty Global-Virgin Media: smart use of cheap debt… or not?
16 February 2013
Liberty Global mkt cap (as of 15/02/13) : $16.6 bn
Virgin Media mkt cap (as of 15/02/13) : $12.15 bn
On the 6th of February Liberty Global officially announced a $23.3 bn bid for the takeover of Virgin Media in a mixed cash and stock offer valuing the company at $47.87 per share, a 24% premium on the price before the announcement. More specifically, the offer is $17.50 cash, 0.26 class A voting and 0.17 class C non-voting LG shares for each Virgin Media share. The motivation for the deal is for LG to gain entrance into the United Kingdom telecommunications market, a market that as of now is quite firmly in the hands of three major players, Rupert Murdoch’s BskyB, British Telecom and Virgin itself with its 25 million customers. There are some operational and tax synergies quantified in approximately $180 mln per year that will also entail a change in LG’s domicile from the US to the more fiscally convenient UK. To help its own takeover, Richard Branson’s Virgin Media went as far as to issue $4.6 bn of high-yield debt, equally split between bonds and loans, tapping an increasingly cheap market in order to complete the transaction.
At first sight, this would strike as a reasonable deal where both companies stand to reap benefits, however this is not as enticing for shareholders in either of the two companies. Consider first the situation of Virgin Media’s shareholders: in spite of the premium, the $23.3 bn enterprise value is merely 7.5x Ebitda, completely in line with the rest of the sector and merely eliminating the relative discount at which VM has been trading compared to its peers. The situation worsens on the bidding side : in fact, capitalizing the forecasted synergies of the deal for 10 years puts the after-tax gain at $1.3 bn, while the price offered entails a premium of as much as $2.5 bn on its equity. From this quick and dirty comparison, the bidder is considerably overpaying while the target is not receiving much more than what its true value should be.
To sum up, unless LG’s John Malone has some more tricks up his sleeve (and for some unknown reason has decided not to share it with the rest of the world) there is a very poor rationale apart from managerial ego into a deal that would not have even happened if high-yield debt markets were in different conditions. Perhaps that would have been for the best.
Liberty Global has been advised by Liontree Advisors and Credit Suisse, while Virgin Media’s advisors were Goldman Sachs and J.P.Morgan.