Once a year someone comes along and tries to buy Virgin Media, except that this time last year it was called NTL, and it didn’t own a mobile phone company. Since then it has acquired the UK arm of Virgin Mobile for $1.7 billion, and so the price has naturally risen in the latest outcrop of potential deals being played out in secrecy this week.
Virgin Media confirmed from its own web site that it has received a proposal to acquire 100% of the common stock of the company and although it has not entered negotiations, it has already initiated a review with Goldman Sachs to look at its strategic alternatives.
That statement might just as well have been taken from the NTL web site just over a year ago, and the usual private equity suspects are being talked about in hushed whispers.
Last year the consortia were thought to include Providence Equity Partners, Bain Capital, the Blackstone Group, Kohlberg Kravis Roberts and Cinven and the deal was valued at $10 billion plus debt, making it around $22 billion.
This time the deal is being said to be around $11.2 billion, which is a drop in valuation as far as we can see given that it has added the $1.7 billion Virgin Mobile to its folder since then, and that debt remains at around $12,350, where previously it was a tad less at $12.1 billion. That drop runs against the trend in Europe and globally, where ISPs, cable operators and telcos exit prices have all risen on a per customer basis throughout the past two years.
We have to remember that the shares in this organization are all held by either Sir Richard Branson (14%) or the banks which for ten years were stuck with debt holdings in NTL and Telewest, while they limped through the last recession. Finally the debt holders swapped their debt for equity, squeezing down previous share holders to the point where debt holders took 98.5% of the equity. Many of these debt holders will have little time for the Branson, who has been suspicious of financial institutions since he bought his own Virgin group out from being public several years back. Instead they would perhaps prefer to deal with private equity groups who are known to play pass the parcel with assets of this size and usually end up getting out with their bank balances more than intact.
The Nasdaq based stock was languishing with a market capitalization of around $8.2 billion when the bid was announced, making it a 38.6% premium and driving the stock immediately up to $9.4 billion in value.
You would expect that kind of premium to win a company over but this is a company that has launched itself wholeheartedly into the first quadruple play in Europe, even ahead of France Telecom’s Orange. It has driven down churn, is picking up significant numbers of customers in quad, triple play, in TV, in mobile and in broadband.
Every quad play we have studied ends up with a monthly churn of around 1% a month as evidenced by PCCW in Hong Kong and France Telecom, and already Virgin Media churn is down to around 1.6% a month, and falling. A further fall in churn to anything approaching 1% over the next two to three quarters would take it from a growth of around 2.5% to over 7% per annum, and overnight take its $240 million a year loss to a $350 million profit, a feat which would create a much larger valuation. None of this takes into account that Virgin has just solved its problem of how to offer a national footprint, and has extended its quad play by partnering other UK ISPs and going the unbundled loop route, which should see it capture further inroads previous denied to it because its cable only reaches just over 50% of UK homes.
For all of last year the churn was 1.7%, and before that it was lower, around 1.5%. It went up when Virgin Mobile was acquired, which as a stand alone MVNO had a far higher churn than the fixed line TV, voice and broadband, business.
And Virgin’s £10 ($20) per month per service, making it a straight $80 quadruple play, makes it the most aggressively priced service in the world, just under the successful France Telecom and PCCW pricing and cheaper than comparable US triple plays, which do not offer mobile voice. Also given the popularity of the Virgin brand, not just in the UK, but overseas, it is likely that the past support issues that deviled NTL, will give way to a popular quad play brand that captures the young aspiring professional market. The company has only been trading as Virgin for under 6 months.
All of that adds up to this bid being one of two things. Either it is a quick snatch by the private equity groups led by the Carlyle Group (Forbes tells us), one of the few private equity groups that was not part of the bid last year. Or it is a bid to harness the Virgin brand for a trans-European cable operator.
Carlyle has long been playing in and around the European scene for cable operators, having a piece of the Netherlands Group Casema in 2003, and selling it to another private equity consortia last year for $2.65 billion. Last April the UPC Swedish cable business was sold to a consortium including the Carlyle Group and most European cable groups have been both bought and sold by private equity groups in the past three years, in the hope of welding multiple national footprints together to build a trans-European cable operator.
Put the name Virgin behind such a Euro wide brand and let Branson keep his shares and have some considerable say in the final company, and the use of his brand, and suddenly this deal would take on a different complexion. It should really need to be sweetened by at least another $500 million if it was to attract Branson, but if he was to stay involved in a bigger game, then the current deal might already be quite enough of a premium against the current share price.
The key thing would be to have sufficient vision to retain the Virgin brand, and to get in front of Branson to discuss the deal. If this just turns into another smash and grab by private equity, the deal will be seen off in a few weeks.