Virgin Media: Stealth play on Liberty Global
Here's a strategy to own a well-positioned global media stock by first buying shares of its acquisition target.
Virgin Media (VMED) operates both in consumer and business telephony. This company is not owned by Sir Richard Branson and in fact is a U.S. company offering Britons quadruple play: broadband pay TV, broadband internet, land, and cellular telephones.
VMED is due to be taken over for about $16 billion in cash plus a further $7.5 billion in debt by Liberty Global (LBTYA), which will become a U.K. company after the deal is completed. As such we are buying Virgin Media with the expectation that we will end up owning Liberty.
Liberty Global is liked by analysts as a play on the internationalization of northern European telephone systems.
Last month Liberty bought a 12.65% stake in Ziggo n.v., the largest cable operator in Holland, for euros 632.5 million ($809 million). It already owns UPC Broadband, the second largest Dutch triple-play operator.
Liberty operates in nine other European countries via a subsidiary, which will become the prime listed company once the Virgin merger has taken place. It also has an operation in Chile.
One reason I like Liberty is that its ultimate aim with VMED seems to be to challenge BSkyB, a Rupert Murdoch satellite TV operation in Britain, the ultimate money-spinner behind his press empire.
Virgin Media hit hardscrabble times lately, borrowing to its limits and beyond to build out the cable network and its earnings were zapped by debt payments until last year.
It is still heavily indebted, about the only negative I can find. Its backward price-to-earnings ratio is 31.6 based on 2011 results (we don't yet have 2012) but that is illusory. The Reuters consensus estimate is that its current P/E ratio is about 20.
Virgin Media clawed its way back into respectability quarter by quarter last year by getting higher sales and producing earnings surprises. As a result it got rated bullishly by brokers which raised their price target by nearly 20% since the end of Q3 2012.
While the stock is probably still on the cheap side, the share price has doubled since LBTYA expressed its interest. VMED stock is up by nearly a third in 2013 alone.
Pay about $49.39 per share for Virgin Media. The deal to be taken over by Liberty Global is expected to close by summer if the regulators approve. We note that this play was suggested by nvestment manager Murray Lansdowne, an outside contributor to Global Investing.
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