February 5, 2013 / 7:24 AM / 4 years ago

Malone eyes Virgin Media in challenge to Murdoch

6 Min Read

Chairman of Liberty Media John Malone attends the Allen & Co Media Conference in Sun Valley, Idaho July 12, 2012.Jim Urquhart

LONDON (Reuters) - John Malone's Liberty Global is in late-stage takeover talks with Britain's Virgin Media over a $20 billion cable deal that would put the billionaire up against his old rival Rupert Murdoch.

Virgin Media, the second-biggest pay-TV provider in Britain behind Murdoch's satellite group BSkyB, released a short statement on Tuesday saying it had received an approach.

Two sources familiar with the situation said the negotiations were at a late stage and one of them said confirmation and details of a deal may come as soon as Tuesday.

A deal could reach as much as $24 billion and would give Liberty entry to one of Europe's biggest and most competitive telecom markets, allowing it to apply lessons learned as a pay-TV and broadband provider in 11 other European countries.

It would also put Malone's Liberty in a strong place to challenge Murdoch as cable groups across the region start to assert their authority over traditional telecoms firms with the offer of super-fast broadband and pay-television.

Malone, whose group has 19.6 million customers, came up against Murdoch a decade ago when Murdoch's News Corp. and Liberty Media vied for control of DirecTV Group, the largest U.S. satellite TV broadcaster.

The stand-off ended when both sides backed down. News Corp. sold its one-third stake in DirecTV to Malone's group and Malone sold 16 percent of News Corp. that Liberty had acquired, giving the Murdochs fuller control over their company.

Dubbed everything from the Cable Guy to Cable Cowboy and even Darth Vader by former U.S. Vice President Al Gore due to his perceived ruthless style, Malone made his fortune through a series of deals that transformed, and ultimately consolidated, the U.S. cable industry into one dominated by a handful of huge players.

Murdoch's BSkyB leads the British pay-TV market with 10.7 million customers compared with Virgin's 4.9 million.

Virgin emerged two years ago from years of heavy losses from a costly network expansion. But its cables still only cover half of the UK and analysts see potential for more growth.

For Liberty, those benefits must be weighed against the heavy debts a takeover may entail.

Virgin Media's bonds widened and the cost of insuring its debt rose on expectations that more debt would have to be raised to finance a deal. It is also rated higher than Liberty Global, which could impact its credit profile.

Virgin Media's shares were up 16 percent in New York and 19 percent in London. Liberty Global fell 3.6 percent.

Shares in BSkyB, 39 percent owned by News Corp, were down 1 percent against a higher FTSE 100 index.

The approach for Virgin Media follows a period of stabilization engineered by its Chief Executive Neil Berkett after near-death experiences and a debt restructuring.

Virgin Media was formed by the merger of cable groups Telewest and NTL and mobile operator Virgin Mobile in 2006 to huge fanfare led by major shareholder Richard Branson, who still owns around 3 percent of the group.

But its first few years were marred by lengthy and costly legal fights with BSkyB over access to channels and content, which damaged Virgin's reputation.

Appointed in March 2008 to turn things around, Berkett shunned that approach, settled the dispute and slowly built up Virgin Media's customer base by focusing on a superior broadband and technology offering.

While that enabled Virgin Media to post its first annual profit in 2011, some argue it has not been aggressive enough in signing up new customers. Instead of building out its network, the group has returned cash to shareholders.

Partly as a result, its shares have soared almost 160 percent since March 2008. They closed at $38.69 on Monday having recovered from a low of $2.96 at the end of 2008 when the financial crisis hit.

The company, which has a market value of $10.6 billion and $9 billion of debt, sells cable TV, telephony and broadband and also competes with a television service from BT called BT Vision and online offerings such as Lovefilm.

Its biggest shareholders are Capital World Investors which own 14.6 percent and Capital Research Global Investors which own 10.9 percent, according to Reuters data. Virgin reports its 2012 results on Wednesday.

"Virgin Media confirms that it is in discussions with Liberty Global, a leading international cable company, concerning a possible transaction," it said.

Analysts at Espirito Santo said they believed a fair enterprise value for Virgin Media would be around $24 billion, although they questioned how Liberty would pay for it.

Espirito put Liberty's net debt at 5 times its core earnings.

Legal Battle

Having dominated the U.S. cable industry, Malone's Liberty has built its presence across Europe by snapping up companies. A deal would bring him an asset he initially tried to control when it was still NTL and Telewest.

An offer is unlikely to face any regulatory objections, analysts say, but it could prompt some interest from private equity groups who have traditionally favored cable groups.

Liberty's latest big deal came in Belgium where it increased its stake in Belgian operator Telenet to 58 percent.

Analysts at Citi noted the Telenet deal went through at a price of 8.2 times the expected 2013 core earnings. Citi said a valuation of Virgin at 7 times that ratio would equate to a share price of $41.75. The stock was bid at $45.85 in New York.

Bernstein analyst Robin Bienenstock said she thought Liberty would have to offer paper for 60 percent of Virgin to remain at a leverage of 4.5 times.

Reporting by Kate Holton; Additional reporting by Josie Cox and Anjuli Davies in London and Arno Schuetze in Frankfurt; Editing by James Davey and Tom Pfeiffer

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