Liberty Global - Virgin Media Merger Analysis

Transcription

1 Liberty Global - Virgin Media Merger Analysis Krunal Intwala Samantha Hess Joe Cardoso Anisha Gandhi Michael Schneider

2 Table of Contents Liberty - Virgin 2 Liberty - Virgin 3 Executive Summary 1. Cover Page 1 2. Table of Contents Page 2 3. Executive Summary Page 3 4. Decision - Buy Page 4 5. Liberty Global Locations Page 5 6. Liberty Global Company Description Page 6 LG s Market Dominance Page 7 LG s Risk Factors Page 7 LG s Brands Page 7 7. Virgin Media Company Description Page 8 VM s Risk Factors Page 8 8. SWOT Analysis Page 9 Liberty Global Page 9 Virgin Media Page 9 9. Terms of Acquisition Page Deal Highlights Page Industry Analysis Page 12 Industry Characteristics & Outlook Page 12 Industry Risks Page 12 Industry Leaders Page Comparable Companies Page Quantitative Analysis Page Works Cited Page 16 Decision - BUY Virgin Media World s leading broadband communications company Significant potential to monetize customer base Complementary strengths across video, voice & broadband products Combined synergy Company Description Liberty Global Liberty Global is a leading international cable operator with operations across 13 countries Revenue: $10.3 billion dollars Customers: 19.8 million 34.2 million homes passed 34.8 million RGUs Virgin Media Virgin Media is a leading provider of entertainment and communication services in the United Kingdom Revenue: $6.5 billion dollars Customers: 5 million 13 million homes passed 12 million RGUs Terms of Acquisitions Deal Size = $23.3 billion dollars Deal Price = $47.87 per VM share Virgin will gain one board member seat Liberty relocated to United Kingdom Industry Outlook Potential growth in the United Kingdom and Europe markets Comparable Companies British Sky Broadcasting Group PLC BT Group PLC TalkTalk Telecom Group PLC

3 Decision Liberty Global Inc. is recommended to go through with the acquisition deal of Virgin Media Inc. This decision for the merger is based on qualitative and quantitative analysis of the industry, Virgin Media and Liberty Global and their financial data. They are complementary companies because they operate in same industry that offers video, voice and data to its customers. Liberty Global is a holding company that specializes in acquiring and managing Cable/Telecommunication companies. Cable industry benefits significantly on scale because it helps them reduce costs and gives them leverage to negotiate content. In European market it holds majority interest in leading 6 companies. By acquiring Virgin Media it would gain access to UK market segment as well as become world s largest cable provider. It would add approximately 5 million customers and have combined synergy of $180 million. In the UK cable/telecommunication industry s revenues are growing slower than the other European countries. However, UK has a rational market that isn t price competitive but content competitive. The gross profit margin for Virgin Media is approximately 60% which is higher than the industry s average of 40 % which puts it in better position in long term. The free cash flows are also growing at steady rate indicating that company is profitable. In the past Virgin Media had capital losses and Liberty would benefit fit from their tax shield. Also, Liberty Global has created a new UK public limited company that will add additional tax benefit, since 80% of its revenue after the merger will be from the European market. Liberty Global is paying a 24% premium to acquire Virgin Media which is relatively average in the industry. The combined competitive advantage will not only help Liberty Global but also help Virgin Media offer better bundles, pricing and contents to its existing and new customers. The offering value is within the range of the quantitative analysis meaning that it is valued accurately. In conclusion, under the terms of merger and the analysis provided, the acquisition of Virgin Media will make Liberty Global dominant company in Europe as well as the world. Liberty - Virgin 4 Liberty Global Liberty - Virgin 5 Locations

4 Liberty Global Company Description Liberty - Virgin 6 Liberty Global (LG) is a leading international cable operator with market-leading operations including cable, Internet, and telephony across 13 countries, including 11 in Europe, Chile, and Puerto Rico. Liberty operates in 13 countries, which include: Austria; Belgium; Chile; Czech Republic; Germany; Hungary; Ireland; Netherlands; Poland; Puerto Rico; Romania; Slovakia; Switzerland. Liberty s products and services include: Cable: Basic and premium programming, high definition, digital video recorder, high definition digital video recorder, video on demand and an electronic programming guide. Accounts for 45% of total revenue. Internet: Internet access ranging from 100 Mbps to 150 Mbps in select markets. Accounts for 24% of total revenue. Telephony: Telephone rental, unlimited network, national or international calling, unlimited offpeak calling and minute packages, including calls to fixed and mobile phones. Accounts for 15% of total revenue. Business Services: B2B services are designed with a wide variety of options to meet the specific demands of the business customer, including increased data transmission speeds and virtual private networks. Liberty Global also owns Chellomedia, which produces and markets a number of widely distributed multiterritory thematic channels in over 124 countries and in over 27 languages. Revenue: $514 million dollars in 2012, which accounted for 3% of Liberty s total revenue. Content: 67 channels, of which 48 are 100% owned and 19 are joint ventures. Distribution: 390 million TV households. Channel Genres: Sports, Movies, Children s, Entertainment, Documentary, and Lifestyle. Liberty is the dominant player and controls the largest percentage of market share in the following countries: Austria; Belgium; Chile; Czech Republic; Hungary; Ireland; Poland; Puerto Rico; Slovakia; Switzerland. They are ranked second in market share in the following countries: Germany; Netherlands; Romania. Liberty Global s business strategy emphasizes superior organic growth, opportunistic M&A activity and a commitment to superior equity returns through a combination of appropriate leverage and consistent equity repurchases. Since 2005, Liberty Global has acquired several international Internet and broadband companies, which include Odakyu Telecommunication Services, Telnet, Cablecom, Astral, IPS Multicanal, NTL Ireland, Austar and Inode. These acquisitions have helped Liberty Global to grow at a rapid pace and increase its customer base, which through the networks owned and operated by Liberty Global, are currently sitting at over 33 million homes. Other Liberty Global s Dominance Risk Factors Liberty generates two-thirds of its revenue from four major markets: Germany Belgium Switzerland The Netherlands These four countries alone account for $6.7 billion dollars. (FY 2012 Revenue was $10.3 billion.) Liberty Global operates in an increasingly competitive markets and there is a risk that they will not be able to effectively compete with other service providers. Changes in technology may limit the competitiveness of and demand for their services. If Liberty is unable to obtain attractive programming on satisfactory terms for their digital cable services, the demand for their services could be reduced, thereby lowering revenue and profitability. Since Liberty s business is conducted almost exclusively outside of the United States, they are subject to numerous operational risks. Some of which include: Fluctuations in foreign currency exchange risks; Potentially adverse tax consequences; Increased government regulations; Changes in foreign policies that govern operations of foreign-based companies; Austria Czech Republic Hungary Ireland The Netherlands Poland Romania Slovakia Switzerland Liberty Global Brands Germany Belgium Chile Puerto Rico Market Share Average = 21%* *Only accounts for markets LG participates in. Liberty - Virgin 7

5 Virgin Media Company Description Virgin Media (VM) is a leading provider of entertainment and communication services in the United Kingdom. Virgin s products and services include: Cable: Basic and premium programming, tivo, high definition, 3D TV, digital video recorder, virgin TV on demand, subscription video on demand, virgin movies, free TV, virgin TV anywhere. Internet: Download speeds of 30 Mbit/s up to 100 Mbit/s in select markets. Also offers unlimited downloads, advanced security software, including anti-virus and anti-spyware protection and online data backup for no additional charge. Telephony: Fixed Line: Telephone rental, national or international calling, call waiting, call blocking, three-way calling and free calls to virgin mobile phones. Mobile: Contract and pre-pay customers ranging from a minimum of 30 days up to 24 months. In 2006, Virgin became the first UK company to offer quadruple services. Virgin operates in two major segments. Consumer: Accounted for 83.7% of total revenue in 2012 Business: Accounted for 16.3% of total revenue in Virgin s consumer marketing strategy focuses primarily on bundled offerings of digital products and services across their quad-play portfolio to existing and prospective customers. Their bundling strategy provides their customers with discounts and additional value added services when they buy their services. They also provide the convenience of a single bill for triple-play (TV, broadband and fixed line telephony) packages and additional value to these customers when they take their mobile services. They believe that customers who subscribe to multiple services from them are less likely to churn. Risk Factors Virgin operates in highly competitive markets which may lead to a decrease in their revenue, increased costs, increased customer churn or a reduction in the rate of customer acquisition. The sectors that Virgin competes in are subject to rapid and significant changes in technology and it is difficult to predict them. The fixed line telephony market is declining and is unlikely to improve. Virgin is a highly leveraged company and may not be able to fund their debt service obligations in the future. In the year 2015, they have a large number of bonds that will mature. This may require a comprehensive refinancing of their senior credit facility. All revenues, operating costs and selling, general and administrative expenses are earned and paid in pounds sterling but Virgin Media pays interest and principal obligations on some of their indebtedness in U.S. dollars and Euros. As of December 31, 2012, 2,722.3 million, or 46.3%, of their indebtedness based upon contractual obligations, was denominated in U.S. dollars. Liberty - Virgin 8 Liberty - Virgin 9 Liberty Global - SWOT Analysis Strengths Strong market position. Broad service portfolio. Opportunities Strategic acquisitions. Positive outlook for cable market in Europe. Virgin Media - SWOT Analysis Strengths Comprehensive offerings. Operational Efficiency. Strong market position. Opportunities Increasing demand for mobile broadband services. Weaknesses Highly leveraged. Threats Fierce competition. Foreign currency risk. Regulation. Connect. Discover. Be Free. Weaknesses Reliance on third-party suppliers. Threats Rapid technological changes. Competitive pressure. Keep Up.

6 Deal Highlights (cont.) Liberty - Virgin 11 Deal Size: $23.3 billion dollars. Price: $47.87 per Virgin Media share 24% Premium Cash & Stocks Offer: $17.50 in Cash/share; of Liberty Global Series A Shares of Liberty Global Series C Shares Terms of Acquisition Deal Highlights Liberty - Virgin 10 Liberty Global will issue approximately $86 million Liberty Global Class A shares and $65 million Liberty Global Class C shares. All of Liberty Global common stocks will be exchanged for the newly-formed UK public limited company with the same amount of rights. 36% of Liberty s shares will be owned by Virgin shareholders with approximately 26% of the voting rights. As part of the transaction, Liberty will become domiciled in the United Kingdom by becoming a subsidiary of a new holding company, a UK PLC. Liberty is doing this because of potential tax consequences. Five Major Markets Adding Virgin to our large and growing European operations is a natural extension of the value creation strategy we ve been successfully using for over seven years. -Mike Fries, President & CEO, LG 2012 Combined Results The combined company will generate 80% of revenues from just 5 markets After the transaction, Liberty will be the world s leading broadband communications company covering 47 million homes and serving 25 million customers across 14 countries. # of customers in millions There will also be a significant opportunity to monetize the combined customer base. This will allow them to offer bundled and premium services. The combined company will have more leverage for licensing content. The combined company will be focused on generating shareholder returns. Revenue: $16.8 billion OCF: $7.5 billion

7 Industry Analysis Industry Characteristics & Outlook Liberty Global and Virgin Media both compete in several industries. Liberty and Virgin both compete in the cable & TV, broadband internet and telecommunication industries. Each of the industries have both different characteristics and growth projections. Broadcasting & Cable TV: The broadcasting & cable TV market consists of all terrestrial, cable and satellite broadcasters of digital and analog television programming. Europe: The market is expected to experience accelerating growth to the end of the forecast period in In 2016, the European broadcasting & cable TV market is forecast to have a value of $138.2 billion, an increase of 19.1% since The compound annual growth rate of the market in the period is predicted to be 3.6%. United Kingdom: The market is expected to grow moderately over the forecast period to In 2016, the United Kingdom broadcasting & cable TV market is forecast to have a value of $20.7 billion, an increase of 13.7% since The compound annual growth rate of the market in the period is predicted to be 2.6%. Broadband Internet: The Internet access sector consists of the total revenues generated by Internet Service Providers (ISPs) from the provision of narrowband and broadband Internet connections through both consumer and corporate channels. Europe: The European Internet access market has been growing at a strong rate in the last few years. In 2016, the European Internet access market is forecast to have a value of $105.3 billion, an increase of 41.2% since The compound annual growth rate of the market in the period is predicted to be 7.1%. United Kingdom: The UK Internet access market has been growing at a moderate rate. In 2016, the United Kingdom Internet access market is forecast to have a value of $10.7 billion, an increase of 25.9% since The compound annual growth rate of the market in the period is predicted to be 4.8%. Telecommunications: The telecommunication services market consists of the fixed line telecoms market and the wireless telecommunication services market. Europe: The telecommunication services market has fallen into decline in recent years as it has reached its saturation point. In 2016, the European telecommunication services market is forecast to have a value of $390 billion, a decrease of 6.5% since The compound annual rate of change of the market in the period is predicted to be -1.3%. United Kingdom: The UK telecommunication services market has reached its saturation point and has started to decline in recent years. In 2016, the United Kingdom telecommunication services market is forecast to have a value of $51.4 billion, a decrease of 12.7% since The compound annual rate of change of the market in the period is predicted to be -2.7%. Industry Risks Liberty - Virgin 12 Industry Leaders Liberty - Virgin 13 Since both Liberty and Virgin compete in 3 different industries and in different geographical locations, it is important to analyze major competitors according to such. Below is a list of major competitors according to country and industry. Europe: Broadcasting & Cable TV: British Broadcasting Corporation; Mediaset S.p.A.; RTL Group SA; Vivendi S.A; Broadband Internet: Deutsche Telekom AG; France Telecom; Telefonica, S.A.; Vodafone Group Public Limited Company; Telephony: Deutsche Telekom AG; France Telecom SA; Telefonica, S.A; United Kingdom: Broadcasting & Cable TV: British Broadcasting Corporation; British Sky Broadcasting Group plc; ITV plc; Virgin Media Inc; Broadband Internet: British Sky Broadcasting Group plc; BT Group plc; Telefonica, S.A.; Vodafone Group Public Limited Company; Telephony: BT Group plc; British Sky Broadcasting Group; TalkTalk Telecom Group PLC; Virgin Media Inc; The telecommunications industry has been declining in recent years due to advances in wireless technology. The fixed telephony market in Europe and the United Kingdom is expected to decline an average of 2%/year until the year The mobile telephony market in Europe and the United Kingdom is expected to grow an average of 6.3%/year until the year There is also always the assumption that new technology will come out and a rapid technological change can force companies to not be as efficient and profitable.

8 Comparable Companies Liberty - Virgin 14 British Sky Broadcasting Group PLC The company is a pay television provider in the United Kingdom and a growing provider of communication services. Some of its strengths are: strong customer base; a multiproduct strategy; an expanding operating margin. A high debt burden could have a major impact on the operational performance of the company as a major portion of the company s earnings would be diverted towards servicing its debt obligations. It faces competition from a broad range of companies engaged in communications and entertainment services like cable operators, DSL providers, digital and analogue terrestrial television providers, telecommunication providers and internet service providers. BT Group PLC The company is a communication services provider that is engaged in providing and managing data and voice networks and providing a ranger of services over these networks. It operates in approximately 170 countries worldwide. It is considered the largest communication services provider to the residential and business markets in the UK. Some of its strengths are: diverse customer portfolio; wide products and services range; robust R&D. TalkTalk Telecom Group PLC The company offers fixed line voice and broadband telecommunication services to consumers and businesses. Some of its strengths are: operational efficiency; integrated offerings; strong network infrastructure. Increasing debt could have a major impact on the operational performance of the company, as a major portion of the company s earnings would be diverted to service its debt obligations. A high number of complaints and the company s involvement in proceedings affect its brand image and it may also affect its profits by increasing costs and deteriorating image. Quantitative Analysis Liberty - Virgin 15 In determining the implied valuation of Virgin Media s acquisition by Liberty Global, various techniques were utilized. Such methods include: discounted cash flows; comparable companies; precedent transaction valuation. These matrices, put together, are an implied value range of the company s worth. For the inputs: bloomberg; 10-k and the rutgers-database were used to compile financial information. The financial inputs were comprised from the terms of merger, balance sheet, income & cash flow statement. Shares outstanding have been adjusted to incorporate any dilutive effect. In accordance to historical data, the company is in good health. In determining the WACC, VMED s debt structure and equity structure were used. The cost of equity was higher than the cost of debt, implying that it can leverage more in the future. The comparable company analysis uses a list of relevant companies provided by the Rutgers-Database. Data was then gathered from Bloomberg to compute the average EBITDA, EBIT, and Net Income as well as their multiple ranges, derived from EV/EBITDA, EV/EBIT, and P/E respectively. These values were used to produce a distinct range of enterprise values in which Virgin Media was near the median in regard to its competitors. The discounted cash flow analysis for Virgin Media consists the EBITDA multiple method, which projects the implied perpetuity growth rate. Bloomberg and Rutgers-Databases were used to forecast future income statements for the next five years. The sensitivity analysis of Virgin Media is evaluated by the ranges of EBITDA multiples and Weighted Average Cost of Capital. From this, a range of the implied enterprise values are produced. The DCF valuation indicates a 7.7% premium over the intrinsic value. Assumptions were comprised from historical averages. Precedent inputs were derived from the Bloomberg, which showed list of past acquisitions in same industry. The precedent gives purchase multiples by using Enterprise value over LTM EBIDA value. The range then is used to determine implied Enterprise Values range. After evaluating discount cash flow, comparable companies, and precedents the Enterprise ranges were inputted into the football analysis chart. The football field analysis shows that the current value of Virgin Media is accurately aligned within the expected enterprise value range.

9 Works Cited Liberty - Virgin Liberty Global 10K 2. Virgin Media 10K 3. Bloomberg Terminal 4. Rutgers Database