Finance

Virgin Deal Sets Up Clash of the Titans

Malone, Murdoch to Battle for U.K. Subs 2/10/2013 7:00 PM Eastern

John Malone’s Liberty Global made a big push into the U.K. TV market last week with its $16 billion deal to purchase Virgin Media, a move that could once again pit the media mogul against his former rival, Rupert Murdoch.

Liberty Global agreed to acquire Virgin Media, the largest cable operator in the U.K. with about 4.9 million customers, in a cash-and-stock deal valued at $16 billion. As part of the agreement Virgin Media shareholders will receive $17.50 in cash, 0.26 shares of Liberty Global Series A and 0.2 shares of its Series C stock for every share of Virgin they own. The deal values Virgin at about $47.87 per share, a 24% premium to their closing price on Feb. 4. Including debt, the total cost of the deal is about $23 billion.

Virgin shares rose 18% ($6.92 each) to $45.61 on Feb. 5. The stock continued to climb in subsequent trading, closing at $46.04 on Feb. 7. Liberty Global shares fell 2% ($1.58) to $67.88 on Feb. 5, but gained ground in later trading, closing at $68.07 on Feb. 7.

The deal will give Liberty Global, the largest cable operator in Europe with 19.6 million customers in 13 countries, a foothold in the U.K., a market it has avoided in the past. The transaction also could renew an old rivalry between Malone and News Corp. chairman Murdoch, who owns a 39% interest in the dominant pay TV provider in the U.K., satellite firm British Sky Broadcasting.

Malone and Murdoch have clashed in the past, most recently in 2004, when Malone’s Liberty Media began buying News Corp. voting stock, eventually amassing a 19% voting stake in the media giant, second only to the Murdoch family. The two called a truce in 2006, with Liberty agreeing to exchange its News Corp. interests for control of DirecTV. DirecTV, the No. 1 U.S. satellite-TV provider, was spun off to Liberty shareholders in 2009.

On News Corp.’s conference call with analysts to discuss its fiscal second-quarter results, deputy chief operating officer James Murdoch said Sky and Liberty have a long relationship as both competitors in Ireland (where Liberty Global has about 1 million customers) and as partners in Western Europe, where Liberty Global purchases programming from the company.

“I don’t think there’s really a big change to the landscape there,” Murdoch said.

Malone, on the call to discuss the Virgin deal, said the market is competitive, but has enough room for everyone to grow.

“There’s no question the U.K. is a competitive market, but the demand for the services and technologies continues [to be] strong,” Malone said. “Everyone who does a good job of execution will do well.”

Liberty Global CEO Mike Fries called the deal a “a natural extension of the value-creation strategy we’ve been successfully using for over seven years,” adding that once the transaction closes, 80% of LGI’s revenue will come from just five countries — the U.K., Germany, Belgium, Switzerland and the Netherlands.

Most analysts were pleased, adding that with Liberty’s scale, the deal is likely to be immediately accretive.

TAKEAWAY

The deal for Virgin Media adds more European heft to Liberty Global, which now counts more than 25 million subscribers on the continent.

March