Freenet playing with fire forcing Liberty Global’s Swiss arm

In what is likely the first of many in Liberty Global’s mass European exodus, the sale of UPC Switzerland to local operator Sunrise is to be placed under the microscope of regulators following the vehement veto by German telco Freenet, a quarter-shareholder in Sunrise, in early March. Liberty Global could be forced to extreme lengths in order to pass the deal and we fear for anyone getting in its way, considering regulatory approval is largely expected, no thanks to the Dutch mess which has set the bar for European cable consolidation.

As a repeated anti-Liberty Global advocate, Sunrise has taken proceedings up a notch with the recruitment of US investment bank Citi to investigate the $6.3 billion deal for the exchange of Swiss cable assets, according to sources speaking to Reuters, citing one as saying discussions were “not driven by harmony.”

Freenet has apparently taken issue with the structure of the deal and is leaning towards the idea of a merger between Sunrise and UPC rather than spending big on buying the cable cowboy out of Switzerland. We don’t feel Liberty Global will be inclined to pursue a merger as it doesn’t appear to fit with the company’s strategy, one which is closely monitoring the Latin American and Caribbean markets. However, Liberty may decide to merge then sell off its stake gradually, or more likely still, buy out some or all of Freenet’s 24.5% shareholding in Sunrise separately in order to clear the field for a full sale of UPC to Sunrise.

Freenet’s veto a couple of months back meant Sunrise was unable to get the votes required to secure capital to fund the purchase of UPC Switzerland, although the deal fundamentally remains on the table, with Freenet reportedly prepared to budge depending on if UPC’s upcoming performance justifies its hefty valuation. Sunrise will hold a shareholder meeting later this year and with Freenet being the largest shareholder, its involvement is pivotal. Sunrise remains keen for Freenet’s involvement despite its opposition, according to Reuters’ sources.

But that doesn’t look promising considering Switzerland was UPC’s worst performing region during the first quarter, with video subscribers losses reaching 22,800 in Q1, dropping treacherously close to the 1 million subs mark (632,600 enhanced plus 427,600 basic). Strangely, Switzerland was the only country where internet subscribers declined across the Liberty footprint, waving goodbye to 14,100 as it declined to 686,200.

Typically, UPC’s territories have been experiencing a subscriber shift from DTH and basic cable TV over to the enhanced video offering, which has so far managed to partially offset the steady flow of cord cutters. Clearly this has not gone to plan in Switzerland, with the enhanced video base eroding at a faster rate than the basic tier, recording a Q1 2019 loss of 13,200 compared to 9,600 basic cancellations.

Rumors over the size of the price tag have ballooned over the past few months, with increasing value seen in UPC Switzerland’s network which reaches approximately 60% of Swiss homes.

Sunrise meanwhile has 2.2 million mobile subscribers, 400,000 internet customers, and a pay TV footprint of roughly 200,000 users. If it can agree to buy out Freenet’s share somehow, then it plans to upgrade the UPC Switzerland network using DOCSIS 3.1 technology, claiming it will soon be able to offer 10 Gbps services outside of its fiber footprint.

Our view is that Freenet is simply trying to force Liberty Global into pursuing its Sunrise stake for an inflated price tag, most certainly in retaliation to Liberty’s sale of assets in Germany, Hungary and the Czech Republic to Vodafone.