Stubborn Freenet tests patience with $500m Liberty carrot snub

The extent of Freenet’s fervent opposition to allowing Sunrise, in which it owns a majority stake, to purchase Liberty Global’s Swiss UPC cable unit reached new heights this week – rejecting a sizable sweetener from John Malone’s company to the tune of half a billion dollars.

German telco Freenet has donned a ballsy attitude in this stalemate to say the least, standing firm against the US cable cowboy throughout 2019. But could this approach come back to bite Freenet where it hurts, or will Freenet eventually force Liberty into a remarkable deal? Snubbing a $500 million check towards financing the $6.3 billion deal will certainly instigate some investor unrest; like there wasn’t plenty of that already.

So, with Freenet reiterating its opinion that the price tag is too high, despite Liberty’s olive branch which amounts to paying about 8% of the full fee (meaning Liberty would own an 8% share in Sunrise), Liberty can either increase its offer to buy newly formed shares in Sunrise to help finance the deal, or back out completely. But there are a couple of wildcards Liberty could play.

With the Liberty game plan already clear, deserting Europe to focus instead on Latin America, we can’t see Liberty Global staying in Switzerland. This leaves us with an outlier scenario we initially proposed back in June, whereby Liberty would merge UPC and Sunrise then sell off its UPC stake gradually. Or, more controversially, it could 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. It sounds implausible, yet Liberty Global is fast running out of options.

It’s likely Liberty will front an extra $500 million towards the deal – representing the purchase of 16% of new Sunrise shares; surely too much to turn down.

Freenet, meanwhile, will be waiting for UPC’s next set of financial results – scheduled for November 7 – before deciding on its next course of action. The German company is unconvinced that the UPC cable business in Switzerland is sustainable at the current price tag.

On good measure too. The UPC picture at the end of the second quarter didn’t look great. The Swiss cable business lost 28,000 subscribers in the quarter, of which 19,500 were cable TV cord cutters. UPC Switzerland is now hanging perilously above 1 million subscribers and is likely to tank into a six-figure video subscriber footprint before the year is out. Strangely, basic subscribers increased by 13,700 subs, while the enhanced package tipped the scales with 33,200 customer cancellations. Naturally of course Liberty claimed improved performance in all products in Switzerland driven by enhanced value proposition.

Despite the drop off, there is increasing value seen in UPC Switzerland’s network assets which reaches approximately 60% of all Swiss homes. Sunrise 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.

Even internet subs were down, losing 9,500 to total 676,700. On mobile, UPC Switzerland gained 14,000 mobile subscribers during Q2, including 54,000 net postpaid additions. This knocked UPC revenue down 5.2% to $315 million.

While Freenet has done much of the talking, Sunrise said recently that Freenet is being “guided by its own short-term financial constraints and self-serving objectives” by blocking any move for Liberty Global’s Swiss assets.

The deal was approved by competition authority Weko in early October, saying the deal did not create dominance in any of the markets analyzed.

“The participation of Liberty Global changes nothing in our opinion or that of the majority of shareholders about the deal. We still think that it is not a good deal. Liberty Global has merely said it will participate at rock bottom prices with the money it will receive from a too expensive sale,” said Freenet in a statement.