Providence Equity Targets Virgin Media
Virgin Media, the recently renamed U.K. cable operator once known as NTL, could be a buyout candidate after British newspaper reports that private equity giant Providence Equity Group is readying a $15 billion bid for the company.
News that Virgin may be in play goosed the company’s stock by more than 7% this week.Virgin Media shares, down nearly 5% ($1.16 each) May 9 after it reported disappointing first-quarter results, shot up 7.2% ($1.80) between May 18-21 to $26.65 per share. The stock has since dipped slightly, closing at $26.45 per share May 23.
Reports in several U.K. newspapers in the past few weeks said that Providence, one of the more aggressive private-equity buyers of European cable -- it owns stakes in German cable operator Kabel Deutschland; Swedish cable operator com hem; Dutch cabler Casema; and Turkish cable operator Digiturk -- was talking with other private-equity giants Kohlberg Kravis Roberts, Blackstone Group and Cinven about launching a bid as high as $31 per share.
Virgin, which changed its name earlier this year after it purchased media baron Richard Branson’s Virgin Mobile wireless telephone company, has been embroiled in a battle with U.K. direct-broadcast satellite service provider British Sky Broadcasting for months over content rights. The dispute has centered on contract renewal terms for Sky basic channels, including Sky One (which airs such hit U.S. television shows as Lost and 24), Sky News and Sky Sports News. Virgin pulled the channels from its systems in late February.
BSkyB has since said it has tried to negotiate with Virgin Media on a new deal – CEO James Murdoch released a letter he sent to Virgin CEO Steve Burch on May 10 -- released publicly on May 18 -- proposing that the two companies split the nearly $20 million difference between their respective offers for the channels. Virgin has disputed that figure, claiming that the new offer would reduce what it considers to be an excessive and anti-competitive price by about 15%.
Virgin sued BSkyB in British High Court April over the contract renewal, claiming that BSkyB was abusing its dominant market position -- BSkyB has 8.3 million subscribers to its direct-to-home satellite service in Britain -- by doubling its prices.
The loss of those popular channels resulted in a loss of 47,000 on-net customers for Virgin Media in the first quarter. And the cable operator said that investors should expect those losses to continue as the BSkyB dispute carries on.
“This is the latest in a string of negative competitive developments over the past year,” Credit Suisse First Boston analyst Bryan Kraft wrote in a research note. “Management has once again postponed the outlook for improving subscriber trends and meaningful [cash flow] growth, this time out to [the third quarter]. Can they deliver? It is tough to tell as this is not the first time we’ve been on the cusp of a major turnaround, only to be disappointed.”
That disappointing first quarter also prompted one of Virgin Media’s biggest shareholders – Franklin Mutual Advisers, a Short Hills, N.J.-based mutual fund that owns about 30.3 million shares (9.4%) of Virgin Media stock – to reveal its displeasure with company performance in a recent filing with the Securities and Exchange Commission.
“In view of the results for the first quarter 2007 announced by the Issuer on May 9, 2007, FMA may initiate discussions with the Issuer regarding, among other things, the Issuer's strategic direction, corporate governance and management, and to communicate from time to time with the Issuer's executive management and board of directors and with other holders of the Common Stock regarding such matters,” Franklin stated in the May 10 filing.
Virgin Media’s relationship with BSkyB appeared to sour last year, about a month after Virgin launched an $8.9 billion bid to buy ITV, the largest broadcaster in the U.K. Shortly after Virgin made that offer, BSkyB bought a 17.9% stake in ITV, which effectively blocked Virgin’s bid. Although ITV later rejected Virgin Media’s offer as too little, a deal would have needed 75% approval from ITV’s board. That sent Branson into a tizzy – he publicly slammed Murdoch and BSkyB in the British press, calling the purchase a “blatant attempt to distort competition even further by blocking any attempt to create a strong and meaningful competitor.”
On May 24, the U.K. Department of Trade and Industry referred BSkyB’s purchase of the ITV stake to the U.K. Competition Commission, the government body that rules on antitrust activity in Britain.
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