The Liberty Global story is all about gaining market share, and where it either cannot, because it has the wrong resources, or finds it costs too much, it bails out. That’s the sign of a strong “shareholder value” based business, and it’s tough to accuse Mike Fries and co, of being anything other than shareholder friendly. Which is why the sale of Liberty Global in Austria to rival Deutsche Telecom, through its mobile subsidiary there T-Mobile, makes perfect sense.
The price of €1.9 billion extracted just after our last issue, values UPC Austria at around 11 times Operating Cash Flow, about the correct price for such a transaction. The money, we are sure will be put to good use, although we suspect more to cut down debt than anything else.
At close of business at end of September UPC Austria’s had 654,000 customers with 512,500 on broadband, 450,200 on fixed voice and 467,800 buying video services.
Effectively it has grown its RGUs in Austria by 36,800 last year to end of Q3, and 28,500 to the last Q3 – hardly a crime, as the Swiss and Belgium operations have grown far more slowly.
But we think that Austria was about the right size for Liberty Global to divest and it throws up the right amount of cash. When it bought Virgin in the UK, it promised to keep its leverage ratio or debt to equity ratio at 5.0 times or under. Today, some years later, Liberty Global has a gross ratio of 5.2 times and a net ratio of 5.0 times. That would be fine if it was growing profits excessively, but that situation has stopped and given the currency fluctuations in Europe, its investors have shown themselves to be unhappy retaining such a high leverage ratio. Just over $2 billion in cash is just what the doctor ordered, and this should be applied mostly in debt reduction and we would not expect the company to go out and acquire someone else with the money.
Most of its debt has been recycled to be new with around 88% not due until 2021 or beyond, so it’s not urgent, but it is important.
There will be some swapping of who retains which debts, which may change the final payout, but it is around $2.2 billion,
Mike Fries, CEO said, “This transaction highlights the strategic and financial value of our fiber-rich networks in a rapidly converging world and the significant synergies inherent in fixed-mobile mergers. We have operated in Austria for over 20 years and are extremely proud of the market-leading position we’ve built in both digital video and super-fast broadband.” But the new reality is that cellular success better defines how well a quad play can work, and T-Mobile has 5.2 million cellular customers, while UPC has just 55,700 and it may be that this was the weakest of its European subsidiaries in terms of offering up a quad play upside.
The proceeds from the sale were said to be for general corporate purposes, which may include leverage reduction. You bet it will.
T-Mobile Austria can choose to use the UPC brand for up to three years as part of the transaction, but we think this is unlikely to last long as T-Mobile is a strong brand in Austria.