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The Massive European Cable Deal: Virgin Media Inc. (VMED), Liberty Global Inc. (LBTYA)

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In early February, Virgin Media Inc. (NASDAQ:VMED) announced that it would be purchased by fellow multimedia rival Liberty Global Inc. (NASDAQ:LBTYA) in a cash-and-stock deal valued at well over $15 billion. The combined company would be one of the largest cable and multimedia content providers in the United Kingdom, and enjoy access to several other key European markets as well. In fact, it is estimated that the combined company would serve nearly 50 million households across the continent, and boast annual revenues of nearly $17 billion.

Liberty Global has offered an attractive premium for Virgin Media Inc. (NASDAQ:VMED). Accordingly, the company’s shareholders have reacted favorably to news of the deal and seem likely to vote in its favor. However, there are some regulatory hurdles that must be cleared before the deal can be set in stone. If nothing arises to delay or scuttle the deal, it could close by the end of the fourth quarter of 2013.

About Liberty Global and Virgin Media

Englewood, Colorado-based Liberty Global Inc. (NASDAQ:LBTYA) is one of the larger content and cable providers operating in the European market. The company also operates a smaller cable and media network in Chile. Like most other cable providers, it offers broadcast, digital, broadband Internet and VOIP telephone services to its customers in the markets that it serves. It also offers a range of auxiliary services, including digital recorders, HD channels, premium pay-per-view offerings and video-on-demand services. Although most of its customers use the company’s fiber-optic cable services, some Liberty Global households enjoy access to its satellite television programming options. Liberty Global lost $636.8 million on 2012 revenues of $10.3 billion.

New York-based Virgin Media Inc. (NASDAQ:VMED) operates in many of the same sub-industries as Liberty Global Inc. (NASDAQ:LBTYA). Its cable, Internet and phone subscribers primarily reside in the United Kingdom. The company also offers cell phone products and services to customers in certain key markets through a low-cost prepaid model that enjoys little direct competition. However, Virgin Media Inc. (NASDAQ:VMED)’s personal communications business comprises a relatively small portion of its overall revenue stream. Virgin Media also offers high-end and dedicated communications services to various business and institutional clients, including healthcare providers, emergency-response teams, police forces and other “public good” agencies. The company had an EBITDA of $2.7 billion on 2012 revenues of $6.6 billion.

How the Deal Is Structured

Under the terms of the deal, Virgin Media shareholders will receive three separate forms of compensation in exchange for their shares. First, each shareholder will receive 2.582 Class A shares for every 10 Virgin Media shares that they hold. Concurrently, each shareholder will receive 1.928 Class C shares for every 10 Virgin Media shares that they hold. Finally, Liberty Global Inc. (NASDAQ:LBTYA) will provide a cash payment of $17.50 for each outstanding Virgin Media share.

At Liberty Global’s current share price, this deal values each share of Virgin Media Inc. (NASDAQ:VMED) at approximately $48.83. Relative to the company’s recent closing price near $47.70, this offers a negligible premium. However, it should be noted that fluctuations in Liberty Global’s share price can create short-term price discrepancies that may provide keen-eyed investors with momentary opportunities to buy into Virgin Media at a discount. It should also be noted that the agreed-upon purchase price represents a 24 percent premium to Virgin Media’s pre-deal share price.

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