Liberty’s Acquisition of Virgin Media: Gold Still in the Mines?

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Liberty Global (NASDAQ: LBTYA) must be crossing its fingers hoping that it’s proposition to acquire Virgin Media (NASDAQ: VMED) goes through. Virgin Media confirmed on Tuesday, Feb. 5, that it was indeed in talks with Liberty Global for a possible deal following a spell of media speculation.  John Malone’s Liberty Global seeks to tap into the European market, currently dominated by Rupert Murdoch’s News Corp (NASDAQ: NWS).

News Corp is the owner of British Sky Broadcasting, the U.K’s largest media company. Virgin Media is based in the U.K, and the U.K is Europe’s biggest market for video streaming and services. The acquisition of Virgin Media will give John Malone the opportunity to compete against Murdoch in Europe.

The Deal

According to reports on Feb. 5, Liberty is expected to table a bid of $20 billion for the U.K.-based company, which operates under Richard Branson’s brand, Virgin. However, the British billionaire is believed to own less than 3 percent in Virgin Media. The $20 billion (£12.7 billion) valuation would mean a stock price of $42 per share. However, the latest reports indicate that the deal could be valued at about $47.87 per share, or a 24 percent premium on Feb. 4's closing price.

Virgin Media debt stood at £5.7 billion just before the announcement of a possible deal. Based on the initial speculation, this would mean that Virgin Media’s equity is valued at about £7 billion. However, if the price of $47.87 as indicated in the follow-up reports happens to be final, Virgin Media’s equity would be valued at just under £8 billion. Liberty Global and Virgin Media jointly issued a press release indicated a price of $47.87 per share.

Whether this happens to be cheap or expensive would depend on the post merger value. Analysts from Bank of America Merrill Lynch believe tha tLiberty’s chances of benefiting from the deal are attached to the consequential presence in Europe. The analysts believe that Liberty would not gain any tax benefits from the deal, despite the operating losses and capital allowances on Virgin Media’s books.

Virgin: gold still in the mines

Virgin Media’s operating losses of about £2.2 billion and capital allowances estimated at £12.9 billion would have provided immediate benefits to the acquirer if from the U.K.  However, Liberty’s domicile, (UPC) based in the Netherlands, rules out immediate benefits.  Liberty would have to register UPC as a “Societas Europea” (SE), in order to capitalize on Virgin’s tax assets and capital allowances.

Additionally, Rupert Murdoch’s News Corp remains the company to beat.  Murdoch is reportedly pursuing the acquisition of 7 companies, which he expects to spend about $1.3 billion on. This would give News Corp additional muscle and presence to thwart any challenge from rivals.

Virgin Media’s most recent adjusted earnings missed analyst estimates sending the shares down, despite the announcement of the impending acquisition by Liberty just a day before. Nonetheless, analysts are optimistic that the company will post impressive results for the March quarter.

Bottom Line

John Malone has proven to be a shrew investor as far as long-term potential is concerned. A good example is the case of Sirius XM, whereby his company Liberty Media now owns just less than 50 percent, but is soon expected to increase stake well beyond the half way mark. The satellite radio services company rally in 2013 seems unstoppable, with the exit of Karmazin as CEO. Virgin Media would give Liberty a wider accessible market in a continent where Liberty has been lacking a presence. The combined package also has a subscriber base estimated at 24 million across the globe.


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