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

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.

Complications and Legal Issues

Given the 24 percent premium that Liberty Global Inc. (NASDAQ:LBTYA) has offered for Virgin Media Inc. (NASDAQ:VMED)’s shares, it seems unlikely that the smaller company’s shareholders will object to the deal. Likewise, approval by the company’s board of directors appears all but assured. At this point, the regulatory approval process represents the transaction’s main sticking point. While the European media landscape remains fairly competitive, there is a chance that British regulators will feel uneasy about the consolidation of two of its major cable providers. At the very least, requests for more information or recommendations that the terms of the transaction be modified could impede the deal’s timely closing.

Long-Term Prospects and Industry Outlook

The European cable and satellite markets are highly regulated in a way that might seem foreign to North American customers. Due to the relatively small market size of most of Europe’s individual countries, there may only be one or two major cable providers in a given territory. With its new-found heft, the combined company may be able to grab a larger share of several key European markets that have hitherto proven resistant to increased competition.

The company’s principal competitors will include Kabel Deutschland and British Sky Broadcasting Group. The former is a relatively staid company that operates primarily in its German home market. Known as BSkyB, the latter is a more dynamic outfit that may give a newly-expanded Liberty Global some serious headaches in peripheral British Isles markets like Scotland, Wales and Ireland. British Sky is known for its innovative business model and ruthlessly competitive pricing.  One of the reasons BSkyB can get away with their pricing is their small interest payments relative to Liberty.

In sum, the complex nature of this deal will create momentary share-price discrepancies that may provide keen-eyed investors with countless opportunities to earn nearly instantaneous returns of between 2 and 3 percent. For longer-term investors who may be uninterested in these short-term trades, it appears that Liberty Global Inc. (NASDAQ:LBTYA) will be well-positioned to create value for its customers and shareholders in Europe and the U.K. Interested investors are advised to purchase either company on temporary dips.

The article The Massive European Cable Deal originally appeared on and is written by Mike Thiessen.

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