Liberty Global’s $23 billion offer for Virgin Media is a turning point in post-crisis deal finance. This mega-merger in cable television has most of the hallmarks of the precrisis boom.
The target’s shareholders are being paid partly in their own cash, which will be extracted from Virgin Media through some ambitious financing operations. Leverage may not be pushed up to precrisis highs, but this is still a big moment.
By any standards, this is a high-priced deal. Liberty has agreed to give shareholders of Virgin Media, which is listed on the Nasdaq, $6 billion in cash and a 36 percent stake in the combined group. The exit enterprise value is $23.3 billion. At 8.5 times Virgin Media’s projected earnings before interest, taxes, depreciation and amortization for 2013, it is expensive but not out of line with Liberty’s own valuation.
<>The declared $180 million of annual synergies don’t come close to covering the 24 percent premium to Virgin Media’s predeal market value. Taxed, capitalized and adjusting for one-time charges, the synergies are worth only about $1.2 billion. Liberty’s investors will hope that further savings can be found from the additional buying power for both content and set-top boxes.Liberty will refinance Virgin’s current debt and gear up with £5 billion ($7.9 billion) of new debt. A little under half of this will be a high-yield bond, with the rest coming from new loan financing. It’s a massive slug of issuance for a non-investment grade firm and the overall the effect will be to take leverage from about 3 to 4 times Ebitda.
The new debt will finance about $3 billion, or roughly half, of the cash that will be paid to Virgin shareholders. After the deal is completed, Virgin will be held as a ring-fenced entity, with its own debt. Its leverage will increase, as it funnels dividends to its! parent. Those payments will help finance the planned $3.5 billion of share buybacks for Liberty shareholders, including former Virgin investors.
The precise cost of all this debt hasn’t yet been determined. But Liberty must be hoping that it will be cheap enough that, in combination with the synergies, its return on investment on what is effectively a Liberty-sponsored leveraged buyout will be acceptable.
It’s ambitious stuff, making it hard to see a rival bid surfacing. Vivendi, a possible interloper, is tied up with other deals. Private equity firms could conceivably raise the same financing, although the sizable share ticket would be hard to match, and they would lack synergies. But if Liberty’s financing gets done, private equity will be inspired to do similar.
Christopher Hughes is a columnist for Reuters Breakingview.. For more independent commentary and analysis, visit breakingviews.com.
