Bloomberg News

Malone Emboldened to Buy Virgin After Years Circling Firm

February 07, 2013

After years circling each other, Liberty Global Inc (LBTYA:US). and Virgin Media Inc (VMED:US). began serious discussions about a deal last summer, motivated by climbing equity prices and cheap and plentiful debt financing, according to people familiar with the matter.

By around Christmas, the contours of the purchase were resolved, according to the people, leading to the Feb. 6 announcement that John Malone’s Liberty Global was paying $16 billion in cash and stock to buy Virgin Media. The transaction allows Liberty Global to vie with Comcast Corp. to be the world’s biggest cable company, and heightens its battle with Rupert Murdoch’s British Sky Broadcasting Group Plc for Europe’s biggest pay-TV market.

“We’re going to put our heads down and grow these assets the way we know how to grow them,” said Mike Fries, chief executive officer of Englewood, Colorado-based Liberty Global.

About a decade ago, Malone tried to buy the predecessor of Virgin Media. While that went nowhere, the two companies and their bankers continued over the years to entertain the idea of a deal, according to people familiar with the matter who asked not to be identified because the talks were private.

In 2008, the courtship picked up again when Neil Berkett was named CEO of Virgin Media.

“We’ve been watching Virgin since Neil took over,” Fries said.

Stock Tripled

There was plenty to watch. By focusing on high-speed Internet and avoiding bids for the most expensive content, such as sports rights, Virgin Media reported its first annual profit in 2011. Its stock has tripled since Berkett took over.

Virgin Media was a “seriously debt-distressed and structurally weak company” before Berkett turned it around, Sanford C. Bernstein analyst Robin Bienenstock said in an interview.

By last summer, and throughout the fall, Fries and Berkett engaged in more serious discussions about a deal, according to the people.

Aryeh Bourkoff, the CEO of New York boutique LionTree Advisors LLC, which has carved out a niche in U.S. cable deals since it was founded in July, represented Liberty Global, along with Managing Partner Ehren Stenzler. Goldman Sachs Group Inc.’s Peter Gross and Michael Smith, both managing directors, were key advisers to Virgin Media. The co-advisers was JPMorgan Chase & Co.’s David Lomer, co-head of technology, media and telecoms for Europe, and his colleagues.

While the purchase could have been done a year before, with favorable stock and bond markets, the stars were aligned, according to a person familiar with the matter.

Active Buyer

The overall stock market was climbing, with the Standard & Poor’s 500 Index finishing 2012 up 14 percent. Meanwhile, Liberty’s stock has increased 38 percent in the last 12 months, giving it greater purchasing power for acquisitions. During that period, the company has been among the most active buyer of television companies, racking up eight deals for about $1.1 billion, according to data compiled by Bloomberg.

Virgin Media’s stock was also on the rise, advancing about 60 percent in the 12 months to a near record high before the deal was first reported. That didn’t deter Liberty, because the company has plenty of strengths including programming synergies, Matthew Harrigan, an analyst with Wunderlich Securities said in an interview this week.

“Virgin’s a good asset, and I think the deal makes it even better,” Harrigan said.

At the same time, financing the $5.9 billion cash portion of the deal was made easier by booming bond markets, allowing companies to raise money cheaply. Credit Suisse Group AG is arranging the debt financing.

High-Yield

Investors seeking better returns sent sales of high-yield bonds soaring 45 percent last year to a record $354.2 billion, according to data compiled by Bloomberg. Junk bonds returned 15.583 percent last year -- up from 4.383 percent in 2011 -- according to the Bank of America Merrill Lynch U.S. High Yield Index.

After negotiating through the fall, Fries and Berkett had sketched the outline of a deal around Christmas, agreeing to a price of $47.87 a share in cash and stock, representing about a 24 percent premium to Virgin Media’s closing price on Feb. 4. Resolving the split between cash and stock got over a critical hurdle, said a person familiar with the matter.

Berkett said yesterday he will step down when the deal closes because he’s “not a very good number two.” Liberty Global said it hasn’t found a successor.

If either company causes the transaction to fail, it will pay the other a termination fee of as much as $470 million, according to a filing by Virgin Media.

Neither Malone nor Richard Branson, who owns 6.6 million shares of Virgin Media, attended the negotiations though Malone was likely consulted, said a person. Virgin Media was created in 2006 when Branson merged his Virgin Mobile U.K. into NTL: Telewest to offer pay-TV, broadband, fixed-line and mobile-phone services.

The timing of the deal was good for another reason -- it was announced on Fries’s 50th birthday. “I couldn’t think of a better present on this day,” he said.

To contact the reporters on this story: Aaron Kirchfeld in London at akirchfeld@bloomberg.net; Jacqueline Simmons in Paris at jackiem@bloomberg.net; Kristen Schweizer in London at kschweizer1@bloomberg.net

To contact the editor responsible for this story: Jacqueline Simmons at jackiem@bloomberg.net


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Companies Mentioned

  • LBTYA
    (Liberty Global PLC)
    • $46.87 USD
    • 0.79
    • 1.69%
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