A Closer Look at Liberty Global-Virgin Media Deal
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The cable TV operator Liberty Global (NASDAQ: LBTYA) has agreed to purchase Virgin Media (NASDAQ: VMED) at around $47.87 per share, with a total transaction value of $23.3 billion. The deal will create one of the world’s leading broadband companies, serving 25 million customers in 14 countries. With substantial synergy, the combined company will have significant potential to monetize its customer base. Let’s dig deeper to see whether or not Liberty Global is a buy after the deal.
Liberty Global and Virgin Media – A Good Match
Liberty Global is a provider of video, broadband Internet, and telephony services to 19.5 million customers in 13 countries, mainly in Europe and Chile. The majority of its revenue, $4.4 billion, or 46.3%, was generated from video subscriptions. Broadband Internet subscription ranked second, with $2.2 billion in revenue in 2011. For the past 5 years, Liberty Global has generated consistent operating cash flows. Trailing twelve months, the operating cash flow was $2.76 billion and the free cash flow was $802 million. Liberty Global had a quite strong balance sheet. As of September 2012, it had $2.85 billion in total stockholders’ equity, $3.3 billion in cash, and no debt.
Virgin Media is one of the largest providers of residential Broadband Internet, pay TV, and fixed line telephony services in the UK, with 4.9 million residential cable customers, 1.7 million contract mobile customers, and 1.3 million prepay mobile customers. The business is divided into two main reporting segments: Consumer and Business. In 2012, around 83.7% of the total revenue was generated from the consumer segment, while the remainder was from the Business segment. Like Liberty Global, Virgin Media has also been a consistent cash generator. The operating cash flow has grown from nearly $1.2 billion in 2008 to more than $1.64 billion in 2012. In the UK, News Corp’s (NASDAQ: NWS) BskyB is the biggest pay TV company, with a 80% market share, while Virgin Media ranked second with a 40% market share.
Liberty Global bought Virgin Media in a cash & stock merger. For each of Virgin Media’s share, shareholders would receive: (1) $17.50 in cash, (2) 0.2582 Liberty Global’s Class A shares, and (3) 0.1928 Liberty Global’s class C shares. Thus, in order to acquire Virgin Media, in addition to $5.9 billion in cash outlay, 86 million Liberty Global’s Class A shares and 65 million Liberty Global’s Class C shares would be issued. After the deal, Liberty Global generated around two thirds of its revenue from five main countries, including the UK, Germany, Switzerland, The Netherlands, and Belgium. In 2012, the combined company had around $7.5 billion in operating cash flow. The adjusted free cash flow was estimated to be $1.5 billion. Liberty Global estimated it would achieve around $180 million in annual synergies, including $110 million in operational cost synergies and $70 million in capital expenditure savings.
Reasonable Purchase Price
The deal valued Virgin Media at 8.8x 2012 operating cash flow multiple and 7x 2013E operating cash flow multiple, after adjusting for synergies and taxes. Liberty Global, with $17.19 billion in market, is valued a bit cheaper at 6.7x operating cash flow in the market. News Corp is trading at around $28.30 per share, with the total market cap of $66.3 billion. News Corp is valued the most expensive among the three, at 16.5x LTM operating cash flow. News Corp owns a 39.1% stake in the largest pay TV provider in the UK, BskyB. Several years ago, it offered $12 billion for the full control of BskyB. Gaining full control of BskyB would have given News Corp’s chairman, Ropert Murdoch, a significant footprint in the British media industry, where he had already owned the biggest market share in the newspaper market. However, in the middle of 2011, News Corp withdrew the bid in the wake of the company’s phone-hacking scandal.
Going forward, Liberty Global was expected to have a mid-single digit revenue and operating cash flow growth, and mid-teens free cash flow growth. With the reasonable purchase price, Liberty Global would be a good long-term position in investors’ portfolio.
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