John Malone’s Liberty Global Inc. (LBTYA) agreed to buy U.K. cable-television provider Virgin Media Inc. (VMED) for $16 billion in cash and stock to challenge Rupert Murdoch in Europe’s biggest pay-TV market.
The deal values Britain’s second-biggest pay-TV company at $47.87 a share, the companies said in a statement. That represents a 24 percent premium to Virgin Media’s closing price on Feb. 4, before the company said it was considering a deal. Including debt, Virgin Media is valued at $23.3 billion.
The acquisition, the largest media transaction since 2007, puts Liberty Global (LBTYA) in a dead heat with Comcast Corp. (CMCSA) as the world’s biggest cable company, and opens a new battleground with billionaire Murdoch, whose News Corp. (NWSA) controls British Sky Broadcasting Group Plc (BSY). Malone is using Liberty Global to grow in markets outside the U.S. and already runs pay-TV providers in Germany, Belgium and Switzerland.
“It’s an attractive transaction for Liberty Global, Matthew Harrigan, an analyst with Wunderlich Securities in Denver, said in a phone interview. ‘‘The number of shares issued with the deal is a little higher than some people might have expected, but there are decent programming synergies. Virgin’s a good asset, and I think the deal makes it even better.”
The deal is the biggest purchase of a media company since the $17.4 billion merger that created Thomson Reuters Corp. (TRI), announced in May 2007, according to data compiled by Bloomberg.
For each Virgin Media share held, Liberty Global will pay $17.50 in cash, 0.2582 share of its Liberty Global Series A stock and 0.1928 share of its Series C.
Malone is paying about 8.8 times Virgin Media’s 2012 operating cash flow and 7 times its 2013 projected cash flow, according to the statement. Virgin Media shareholders will have about 36 percent of the combined company and 26 percent of the voting rights. Liberty Global will fund the $5.9 billion cash portion of the purchase with debt, adding more than $3 billion to Virgin Media’s borrowings.
After the deal, about 80 percent of Liberty Global’s revenue will come from five countries -- the U.K., Germany, Belgium, Switzerland and the Netherlands, Mike Fries, the company’s chief executive officer, said in the statement. Liberty Global said it may seek a European listing.
“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,” Fries said.
Liberty Global, based in Englewood, Colorado, is the second-largest cable company in the world, behind Comcast (CMCSA). It generates about 90 percent of its revenue in Europe. Of the 20 million customers using its TV, Internet and phone services, more than 18 million are in Europe, with Germany and Belgium the company’s biggest markets in the region.
Virgin Media, whose shareholders include Richard Branson’s Virgin Group Ltd., slipped 0.7 percent to 2,870 pence at 10:44 a.m. in London. The stock jumped 17 percent yesterday after the company confirmed it’s in talks with Liberty Global. Liberty Global fell 2.3 percent to $67.88 in New York trading yesterday.
The cost of insuring Virgin Media’s bonds using credit-default swaps rose by more than 135 basis points, or 54 percent, to 385 basis points yesterday, according to data compiled by Bloomberg, amid speculation over how Liberty Global would finance a deal. That insurance cost slipped today.
Credit-default swaps pay the buyer face value if a borrower fails to meet its obligations, less the value of the defaulted debt. A basis point equals $1,000 annually on a contract protecting $10 million of debt.
Liberty Global has been among the most active acquirers of television companies in the past 12 months, racking up eight deals for about $1.1 billion and paying an average premium of 14 percent, according to data compiled by Bloomberg.
Acquirers paid an average premium of 22 percent for deals in the industry in the last 12 months, according to the data.
Malone’s company acquired Germany’s Unitymedia in 2010 and Kabel Baden-Wuerttemberg the following year to create the country’s second-largest cable operator.
Liberty Global’s bid for full ownership of Belgium’s Telenet Group Holding NV (TNET) fell through last month after investors rejected a 2 billion-euro ($2.7 billion) offer, leaving Liberty Global with a 58 percent stake.
The acquisition of Virgin Media reignites a rivalry between Malone and Murdoch, who were competitors and business partners in the U.S. TV market. In Europe, the two men’s companies vie for the title of the No. 1 pay-TV provider.
Murdoch owns shares in the Sky businesses across Europe, including almost 40 percent of BSkyB and more than half of Germany’s Sky Deutschland AG (SKYD). His companies have more than 19 million pay-TV customers in Europe.
The U.K. is Europe’s biggest pay-TV market by revenue, ahead of France and Germany, according to IHS Screen Digest. U.K. pay-TV providers are also benefiting from growth in Web subscribers.
By acquiring Virgin Media, Liberty Global would also boost its growth and potentially save in equipment and programming costs, according to Erhan Gurses and Paul Sweeney, media analysts at Bloomberg Industries.
The British company has also been making its Internet offering, advertised by runners Usain Bolt and Mo Farah, more attractive by boosting speeds. Virgin Media today reported 2012 income of 261.4 million pounds ($409 million) from continuing operations before taxes.
BSkyB, with almost 11 million subscribers at the end of 2012, reported rising sales and earnings last week for the six months ended Dec. 31, after raising prices and adding high-speed Internet customers.
Liberty Global is rated Ba3, or three levels below investment grade, by Moody’s Investors Service. Standard & Poor’s rates its B+, or four levels below investment grade. The company reported $26.5 billion in total debt as of Sept. 30.
Liberty isn’t alone in making acquisitions. News Corp. (NWSA) has been following closely, with seven deals valued at $1.33 billion in the past 12 months, according to data compiled by Bloomberg.
News Corp.’s 7.8 billion-pound bid for the remaining stake in BSkyB was thwarted in 2011 when employees at News Corp.’s U.K. print business were caught hacking into subjects’ mobile phones for stories, making the acquisition politically impossible. Murdoch plans to split his company into publishing and entertainment groups by the middle of this year.
In 2008, Malone traded 16 percent of News Corp. for a 41 percent stake in pay-TV provider DirecTV (DTV), $625 million in cash and three regional sports networks. The swap ended a standoff that led Murdoch to install a takeover defense plan in 2004 to stop Malone from boosting his stake in News Corp.
LionTree Advisors represented Liberty in the Virgin Media deal. Credit Suisse arranged the debt financing. Shearman & Sterling and Ropes & Gray provided legal counsel.
For Virgin Media, Goldman Sachs & Co. and JPMorgan Chase & Co. served as financial advisers and Fried Frank and Milbank gave legal advice.