Virgin Media triumphs in struggle against debt

http://www.guardian.co.uk/media/2013/feb/05/virgin-media-takeover-bid-liberty

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Virgin Media, against many expectations, has triumphed in its struggle against debt. In 2011, its borrowings were deemed worthy of investment grade – a first in a UK cable industry that for a decade and a half, during its troubled incarnation as Telewest and NTL, was a byword for junk.

So, with financial sobriety achieved and borrowings now down to £5bn-ish, it must be time to reload with debt and crank up the leverage, right?

That does indeed seem to be thinking behind Liberty Global's bid approach.

There are few operational savings to be bagged by combining Virgin Media with Liberty's cable businesses in continental Europe. Instead, Liberty's John Malone seems to be making a pure assessment of Virgin's future cashflows and calculating the price at which he could refinance the business in this sudden new era of cheap and plentiful credit for leveraged buy-outs.

City analysts, second guessing Malone's appetite, reckon he might be willing to pay 7.5 times ebitda (earnings before interest, tax, depreciation and amortisation) with borrowings being used to pay two-thirds of the takeover bill.

That would imply a take-out price for Virgin Media's Nasdaq-listed shares of $47 (£30) apiece. Not bad for stock trading at $5 during the depths of the credit crunch in early 2009, when chief executive Neil Berkett's comment that he had inherited a financial basket-case was fresh in memories.

Berkett got over the refinancing humps and the rest of the story has been about improving customer service (not hard given cable's past reputation; still more to do, some customers may feel), investing in fast broadband and avoiding too many head-to-head confrontations with BSkyB and BT.

Sensible strategy. Berkett's personal windfall, via the usual share-based incentive schemes, could be close to $30m. That's the reward for success when the odds are long.

Another to look at events is that, thanks to wonders of central bank's ultra-loose monetary policy, we have suddenly returned to 2006 and debt-fuelled takeover games.

Virgin Media, under its own steam, would never again entertain aggressive levels of leverage. Berkett is too mindful of cable's history in Britain. Malone, on the other hand, senses an opportunity to make his long-awaited splash into the UK.

Malone versus Murdoch makes for an entertaining sub-plot. In reality, the folk at BSkyB (and BT for that matter) may be inclined to laugh.

They prospered when cable was swimming in debt. Now, just at the moment when Virgin Media's balance sheet is vaguely conservative, a bidder wants to make the financial stakes more exciting.