Ziggo has opened the door to Liberty Global, the media company controlled by John Malone. A few weeks after rebuffing an approach, the Dutch cable group has confirmed takeover talks with its larger rival. Any deal would be both big and logical, since Ziggo and a unit of Liberty, UPC, dominate the local market. And Liberty already owns a dominant stake in Ziggo. Now that Ziggo has conceded a willingness to sell to Liberty, the task is to get full value from a weak position.
That won’t be easy. Liberty is prudent, patient and already in possession of a blocking stake. But it’s not all gloomy: without full ownership, synergies will suffer. And there is value in a quick deal, since blissful debt-markets won’t last forever.
The target’s shares have already priced a lot of this in. A 32.8 euro share price late on Dec. 12 gives a market value of 6.56 billion euros ($9.02 billion). Add 3.14 billion euros of debt and this equates to 10.7 times the 907 million euros of Ziggo’s likely earnings before interest, taxes and amortization next year.
For Liberty, cost savings would help somewhat. In the Netherlands, synergies may have a net present value of 1 billion euros or 5 euros a share, ABN Amro reckons. That reduces the effective Ebitda multiple to a less lofty 9.6 times.
The risk for Ziggo shareholders is that Liberty follows a playbook used in Belgium, where it was too tight-fisted to take full control of Telenet. Another possibility, which Banco Espirito Santo suggests, would be to inject Liberty’s UPC unit into Ziggo. Then, Ziggo could stay listed, with Liberty the majority owner. The merger structure would deprive Ziggo investors of a premium takeover offer, though they would share in the synergies created.
But the reality is that Liberty would get more from full ownership and is likely to be willing to pay for it. Without that, integrating businesses and driving down costs is much harder. And an agreed deal at a big premium is less likely to drag. Speed matters. Mr. Malone’s debt-heavy deals work best when capital markets are red hot. The longer talks drag, the bigger the risk that bond markets get jittery. Ziggo may feel defenseless but it can afford to play hardball.
Quentin Webb is a columnist for Reuters Breakingviews. For more independent commentary and analysis, visit breakingviews.com.
