Liberty Global plc; Market Cap: $35.46bn (as of 20/11/2015)
Cable Wireless Communications; Market Cap: £3.3bn ($5.5bn) (as of 20/11/2015)
Introduction
On November 16, Liberty Global plc agreed to buy Cable & Wireless Communications plc in a transaction worth $5.3bn, thus strengthening its strategic footholds in the emerging markets. The deal will imply the end of one of the oldest companies listed on the LSE, but at the same time, it will allow Liberty Global to expand its telecom business in Latin America and in the Caribbean. Liberty could create a company that would be able to face competitors such as Denis O’Brien’s Digicel, Telefònica and American Movìl, by combining the Cable Wireless Panama and Caribbean businesses with its operation in Puerto Rico and Chile.
Cable & Wireless Communication plc
Cable Wireless Communication plc is a UK-based telecommunications company with operations in the Caribbean and Central America. The company was born in 2010 from the split of Cable and Wireless plc in two companies, the other being called Cable & Wireless Worldwide plc. Depending on the region, the British firm offers triple-play and quad-play services (mobile, fixed voice, broadband and TV services). It operates through four segments: Panama, LIME, BTC and Seychelles.
- Panama: Cable and Wireless Panama (CWP) is a telecom operator that offers several services to Panama, that includes digital pay-TV and Internet data centers
- LIME: Brand used by 13 Caribbean businesses that provides landline, Internet, Mobile and entertainment services
- BTC: Bahamas Telecommunications Company that provides mobile and Long Term Evolution services
- Seychelles: The company offers fixed line, mobile and broadband services in the Seychelles area
In 2010, the company had a global portfolio of telecom operators in small and medium-sized markets. However, due to such a diversified portfolio, it was difficult to reach the economies of scale needed in the telecom industry, thus the Board decided to focus on the business in the Pan-America region. Namely, Cable & Wireless Communications started divesting several businesses including those in Bermuda, Channel Island, Maldives, South Atlantic and Macau.
Liberty Global plc
Liberty Global plc is an American telecommunications and television company based in the UK. The firm, formed in 2005 from the merger between Liberty Media and UGC (UnitedGlobalCom), with its operations in 14 countries is the largest international cable company. The American giant provides services through next-generation networks and innovative technology platforms that connect approximately 27 million customers subscribing to 56 million television, broadband internet and telephony services (as of 30/06/2015). The company also offers Wifi access through 6 million access points to c.5 million customers. Liberty Global’s portfolio includes brand as Virgin Media, Unitymedia, Telenet, UPC, VTR and Liberty Cablevision.
Deal Structure
Liberty Global agreed to acquire Cable and Wireless Communications in a stock and cash transaction worth $5.3bn, extending Malone’s European cable empire further into Latin America area. Including proportionate net debt of $2.7bn (as of 30/09/2015), the transaction corresponds to an attractive LTM EV/EBITDA of 12.3x.
According to the Recommended Offer, CWC’s free-float shareholders will receive an indicative value of 86.82p per share (assuming no LiLAC shares are elected) overall: the offer is made up of a combination of new Liberty Global stock plus a special dividend of 3p per share, representing a premium of c.47.9% on the company’s closing share price before talks were disclosed (October 21), and approximately 18% premium on CWC’s share price on Friday, November 13. It is reported that the non free-float shareholders (John Risley, John Malone and Brendan Paddick) have already accepted an alternative offer, resulting in blended offer price of 81.91p per share.
Shareholders will be able to choose among three different combinations of Liberty Global and LiLAC shares – the latter being a tracking stock, a sophisticated financial instrument that tracks the performance of Liberty’s Latin America and Caribbean’s holdings, distributed first in July 2015. All the alternatives will include the aforementioned fixed special dividend of 3p. In the Recommended Offer to free-float shareholders, CWC’s management suggested choosing the first alternative, without including tracking stock, and electing for only new Liberty Global Class A and Class C ordinary shares, because it is considered the least risky.
The other two alternatives available for shareholders include a combination of new Liberty Global and LiLAC Class A and C shares in different proportions in exchange for each share of CWC – on top of which the special dividend is to be added on the transaction close.
Cable & Wireless stock rose 6.6% after the announcement, to $1.24 (£0.79). Ordinary Class A and Non-voting Class C Liberty’s shares were down roughly 2.2% on the deal announcement day.
Upon completion, expected in the second quarter of 2016 and pending on regulatory approval, Liberty Global expects to attribute CWC to the LiLAC Group. On a pro forma basis, existing LiLAC Group shareholders will own 25.44% of the shares in the LiLAC Group, 7.21% will be owned by existing CWC Shareholders, and 67.35% will be represented by the inter-group interest in favor of the Liberty Global Group. In addition, existing CWC Shareholders will hold approximately 11% of the total Liberty Global Class A Ordinary Shares, and 11% of the total Liberty Global Class C Ordinary Shares.
Deal Rationale
In recent years, Liberty Global has managed to expand its European platform via several acquisitions across the area, spanning the broadband industry in Ireland, Belgium, the UK, and the Netherlands in particular, in an attempt to generate income from the regional demand for bundles of television, broadband, telephone, and mobile services. Until last year, their drive was mostly directed towards incorporating competitors in an attempt of horizontal consolidation, acquiring mostly fixed networks; in 2014, instead, Liberty CEO reported that the company’s inorganic growth appetite would switch to a vertical integration strategy. The most noteworthy deals Liberty completed include the investment in UK broadcaster ITV, the acquisition of production outfit All3Media, the purchase of Dutch cable operator Ziggo, and the acquisition of Virgin Media.
However, their latest consolidation move, the planned acquisition of BASE, the third-largest Belgian mobile-phone operator for $1.4bn, to be merged with Liberty’s Telenet mobile business, attracted an investigation on behalf of the European Union antitrust regulators on the grounds of the potential for higher prices and narrower choice for customers in the region.
In the meantime, Liberty Global has also gradually started to focus on developing its business in Latin America and the Caribbean: for instance, Liberty’s Chilean business, VTR, is now the largest cable operator in Chile, and the company also counts a 60% interest in the largest cable company in Puerto Rico, Liberty Cablevision. This year Liberty Global also completed its acquisition of Choice, a large cable and worldwide player in Puerto Rico. In July 2015, Liberty Global announced the completion of the announced distribution of the LiLAC tracking stock for its operations in the region, in order to best position itself to exploit the low broadband and pay TV penetrations of the area.
Following up on these ambitions, the acquisition of Cable & Wireless Communications will add scale to the regional operations, combining and enhancing B2C and B2B strong platforms. B2B will be particularly revamped taking advantage of CWC’s comprehensive product portfolio and extensive terrestrial and submarine network. According to Liberty CEO, the combined business will serve 10 million video, data, voice and mobile subscribers; over the medium term, the company plans to achieve a double-digit rebased operating cash flow growth and to create value with their high-quality networks, while leveraging on the group’s management expertise as well. LTM estimated operating cash flow for the combined entity would amount to $1.4bn, while combined revenue would top $3.5bn.
The combination easily positions itself as a powerful investment vehicle, as it shows the potential both for attractive organic growth and for further consolidation in the area. Indeed, Liberty Global first expects to exploit the target’s fixed and mobile networks and product leadership with the goal of tapping the unexplored demand for broadband, pay TV and mobile products and drive customer take-up in Latin America and in the Caribbean.
As far as cost synergies are concerned, Liberty Global will push for a successful integration of Columbus, a recent acquisition by CWC, in the business, while quantifying at least $125m of financial benefits from scaling-up. By the first quarter of 2018, CWC and Columbus are also expected to generate overall synergies in one-time capital expenditures amounting to $145m. Furthermore, savings opportunities are present in administrative areas for LiLAC and CWC. Namely, public company expenses will be eliminated, cutting other corporate and administrative expenses when overlapping, especially on procurement and product development.
Advisors
Goldman Sachs International and LionTree Advisors acted as financial advisors to Liberty Global. Shearman & Sterling LLP served as legal counsel to Liberty Global.Evercore Partners International LLP is acting as Lead Financial and Rule 3 Advisor, J.P. Morgan Cazenove is acting as Financial Advisor and Corporate Broker, and Deutsche Bank AG is acting as Corporate Broker to CWC.
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