Liberty sets $23 billion deal to buy U.K.’s Virgin Media

Deal expands Malone's Euro presence, heightens Murdoch competition

There’s a new media mogul on arriving on Britain’s shores.

Blighty, meet John Malone, the drawling Denver billionaire and the biggest landowner in the U.S. with a stable of showbiz assets who on Tuesday night unveiled a deal to acquire the U.K.’s second largest pay-TV company, Virgin Media, for $23.3 billion in cash and stock.

The pact sets the stage for Malone’s Liberty Global to compete head-to-head in the U.K. pay TV market with News Corp.’s BSkyB — a familiar position for Malone and Rupert Murdoch.

The combined entity will have 25 million customers in 13 countries across digital TV, broadband and telephony.

The businesses together generated $16.8 billion in revenue and $7.5 billion in operating cash flow last year.

Pact values Virgin at $47.87 a share. Takeover speculation buoyed Virgin shares on Tuesday by nearly 18%, or a hefty $6.92 in active trading all day, to close at $45.61. Liberty Global went the other direction but with less fanfare, easing 2.27% to end the session at $67.88. Malone’s company, one of several offshoots of his Liberty Media, has a market capitalization (meaning the stock price times the number of shares outstanding) of about to $18 billion. Virgin’s market cap had surged to $12.2 billion after today’s run-up from about $10.4 billion on Monday.

Liberty Global prexy Mike Fries emphasized that Virgin was a good fit with Liberty’s existing Euro TV holdings.

“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,” he said.

He expects operating and capex synergies of $180 million a year.

Said Virgin Media CEO Neil Berkett: “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.”

The deal calls for Virgin holders to get $17.50 in cash and fractions of two classes of Liberty stock – Class A and C — in exchange for handing over their shares in the company founded by British entrepreneur Richard Branson.

The acquisition deal is big bite for Malone. He’s said to have arranged for financing of close to $15 billion to help the deal along. He’s also a master student of tax codes and the Virgin deal has particular fiscal advantages in the U.K., Wall Streeters said.

Virgin has about 4.9 million subscribers compared with its larger rival BSkyB’s 11 million. BSkyB is 39% owned by Rupert Murdoch and News Corp.’s plans to buy in the rest of it were scuttled in 2011 by a wash of negative sentiment following the U.K. phone hacking scandal.

Liberty and News Corp. already compete in Germany, which is Liberty Global’s largest market where it’s up against News Corp.’s nearly 50%-owned Sky Deutschland.

News Corp, prodded by chief operating officer Chase Carey, has been looking to exit minority stakes — or buy in the rest — of assets it doesn’t fully control. That may even be the case for BSkyB sometime down the road if News Corp. doesn’t make another run at acquiring it all.

Malone and Murdoch have had a complex relationship, strained after Malone quietly snapped up a hefty chunk of voting stock back when News Corp. was switching its incorporation from Australia to the U.S., a complex operation. News Corp. put a poison pill in place to block a potential hostile takeover. The two eventually made peace and Liberty handed over the News Corp. stock — in exchange for DirecTV and a bundle of cash.

Looking ahead, analyst Vijay Jayant of ISI Group said the deal could make Liberty Global an attractive partner to larger wireline or wireless telco like Vodafone.

In some collateral market damage, Tivo shares dipped 2% Tuesday. Virgin Media has a successful partnership with the DVR company as its set-top box and user interface provider — basically it’s one of Tivo’s biggest customers. But Liberty has also unveiled a multi-vendor, multimedia gateway called Horizon in the Netherlands, Switzerland, Germany and Ireland.

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