Virgin Media UK Tops 4.46M Broadband Users and Sells to LGi for GBP15bn

Cable provider Virgin Media UK has today released its latest results (Q4-2012), which saw subscribers to their broadband ISP climb to total 4,465,000 (up by +51,600). But the big news is that international cable operator Liberty Global (LGi) has officially agreed to buy VM (merger) for an enterprise value of approximately $23.3 billion (£14.88bn).

The implied purchase price, before taking into account any other transaction costs and related expenses, is also said to represent an equity value of approximately $16.0bn. As usual the equity purchase price will consist of a combination of shares and cash.

The newly combined group should create one the world’s biggest broadband communications companies, covering a total of 47 million homes and serving 25 million customers across 14 countries. Meanwhile Virgin Media will continue, at least for now, to operate under the Virgin Media brand in the UK.

Neil Berkett, CEO of VirginMedia, said:

“Over the past six years, Virgin Media has transformed the digital experience of millions of customers, catalyzed a deep-rooted change in the UK’s digital landscape and delivered impressive growth and returns for our shareholders. I’m confident that this deal will help us to build on this legacy. Virgin Media and Liberty Global have a shared ambition, focus on operational excellence and commitment to driving shareholder value.

The combined company will be able to grow faster and deliver enhanced returns by capitalizing on the exciting opportunities that the digital revolution presents, both in the UK and across Europe.”

Mike Fries, President and CEO of Liberty Global, said:

“Adding Virgin Media to our large and growing European operations is a natural extension of the value creation strategy we’ve been successfully using for over seven years. Virgin Media will add significant scale and a first-class management team in Europe’s largest and most dynamic media and communications market. After the deal, roughly 80% of Liberty Global’s revenue will come from just five attractive and strong countries – the UK, Germany, Belgium, Switzerland and the Netherlands.”

Like all of our strategic acquisitions we expect this combination to yield meaningful operating and capex synergies of approximately $180 million per year upon full integration. … For these and other reasons, Virgin Media will be complementary to our own organic revenue and OCF growth profile, while providing attractive free cash flow enhancement to our shareholders.”

Back to the latest financial results. As usual the bulk of Virgin Media’s internet access subscriber growth has continued to come from its superfast cable (DOCSIS/EuroDOCSIS) platform (total 4,272,200), while their slower non-cable Virgin National (Virgin.net/ADSL2+) based broadband products fell from 203,900 in Q3 to 192,800 now (-11,100).

Overall some 2.176 million of Virgin’s cable customers are now on one of their superfast broadband packages (30Mbps to 120Mbps), which is up from 1.8m in the previous quarter (Q3-2012) and accounts for 51% (up from 42% in Q3-2012) of the ISPs total broadband subscriber base (mostly due to their £110m double speeds upgrade).

In addition, some 41% (down from 44% in Q3-2012) of Virgin’s broadband customers were on the operators faster 60Mbps to 120Mbps connections and 76% of their network has now received the double speed upgrade (due to complete by the middle of 2013).

It’s too early to predict what today’s merger will mean for the future. Both firms have big debts to tackle but clearly LGi sees plenty of room to improve cash flow and generate more money. LGi also referenced the “significant potential to monetize [Virgin Media’s] customer base, with opportunity to deliver current customers enhanced bundled and premium services“, which may or may not be good news.

Some have suggested that it could result in the further expansion of Virgin Media’s cable network around the UK, although at the same time Virgin’s limited scale allows it to enjoy some safety away from Ofcom’s rules for operators holding Significant Market Power (SMP). The only real certainty right now is that a merger means a period of delay while the administrative process is carried through. In other words any hidden plans for faster broadband speeds or new services may slip.