The battle for cable

Consolidation in the European cable market is far from over and Liberty Global is not the only potential buyer on the lookout for acquisitions, reports Kate Bulkley.

John Malone may have lost out to Comcast in the race to lead the next phase of cable consolidation in the US, but Malone’s Liberty Global is very much still heading up cable consolidation in Europe, most recently with a €6.9 billion agreement in January to buy Dutch cable operator Ziggo.

Not only is European cable consolidation far from over, but lenders seem happy to find the money for buyers and the appetite among the latter, including Malone’s international cable TV holding company Liberty Global, may not yet be sated, pointing towards possible rising multiples and several more potential acquisitions ahead.

But Liberty Global is not the only possible consolidator on the European cable scene: prices may rise and it could lose out to other large players.

Deep-pocketed Vodafone paid €7.7 billion to take over Kabel Deutschland, Germany’s largest cable company with some 8.5 million subscribers and 15.3 million connected households, in a deal that was approved late last year by the European Commission.

That deal allows Vodafone to offer bundles of TV, broadband and mobile, a potential big differentiator for the operator in Europe’s largest economy and one that it is clearly looking to replicate in other markets.

The interest of Vodafone and France’s Orange puts Liberty on notice that it won’t be alone as it looks to add other assets in Europe, including Germany, where Liberty owns the country’s second-largest cable company Unitymedia/Kabel BW with 12.6 million subscribers and could be looking to get bigger.

Germany isn’t only attracting the strategic buyers. Financial investors are also circling, including Cinven Group and CVC Capital Partners, which are both seen as bidders for indebted Tele Columbus as part of a possible merger between it and PrimaCom. Other Germany cable companies that could become part of the consolidation wave include Pepcom and Deutsche TeleKabel.

In Spain, ONO is now looking at an IPO that could raise around e1 billion for the operator, after months of talks with potential strategic buyers, including Vodafone. Elsewhere in Europe, Portugal’s Zon and France’s Numericable also could be potential consolidation targets.

Vodafone has deep pockets – the sale of its 45% stake in Verizon Wireless in the US business reaped it US$130 billion (e95 billion) giving it an acquisition fund of a reported £25 billion (e30 billion) – and it is keen to make its business more competitive by upgrading the speed and quality of its mobile network and adding fixed-line assets to allow it to offer bundled services.

Meanwhile, Liberty is looking to add scale and efficiency gains and when negotiating a purchase is patient and smart about the financing.

Take the recent Ziggo purchase, which values the Netherlands’ largest cable operator at 11.3 times 2014 EBITDA. This is twice as much as telecom peers, offering comparable growth rates, typically command. The premium comes down when you add in the net present value of the e160 million in annual synergies that Liberty has promised until 2018, achieved by merging its operations with UPC Netherlands.

Adding the synergy savings lowers the Ziggo valuation to 9.6 times EBITDA, which is still a healthy multiple but is more in line with the median multiple paid by peer companies, according to Reuters data.

Liberty also put in a relatively low cash component of Ziggo, instead using as much of its own stock as possible. It did this to avoid crossing over a self-imposed net debt ceiling of five times EBITDA. In another savvy move, Liberty will cover the cash component of the deal by borrowing fresh debt against Ziggo.

But Liberty also has some issues, not least slow growth in some of its European markets, in particular the UK, and these could impact its attitude towards any new moves to acquire more cable properties.

Liberty’s fourth quarter revenues were “soft”, including missed top line revenue numbers at Virgin Media, which has seen BT Sports’ high-profile marketing campaign eat into its sales. Net TV losses at Virgin were 4,000 for the quarter against what the company called a “tough comparable”. In the fourth quarter a year earlier, the company had 17,000 net TV additions. Tough, indeed!

Liberty Global’s share price has recovered from a low in the last six months of US$74.90 but it is still short of its high for the period of US$89.98, potentially limiting its ability to use its shares as an acquisition currency.

Certainly the news in mid-February that Warren Buffett’s Berkshire Hathaway had purchased 2.95 million shares in the company helped cheer Liberty shareholders. Especially interesting was that Buffett sold a stake in Malone’s other holding company Liberty Media, with its US assets.

Clearly the European market is becoming increasingly interesting for some.

Kate Bulkley is a broadcaster and writer specialising in media and telecommunications. [email protected].