S&P Assigns Positive View on LBTYA

Zacks

Rating agency Standard & Poor’s (S&P) is keeping a positive outlook on media conglomerate Liberty Global Inc. (LBTYA) following its agreement to acquire UK’s leading cable multi service operator (MSO) Virgin Media Inc. (VMED) for an enterprise value of $23.3 billion.

The rating agency affirmed Liberty Global’s ratings at B+, keeping the company’s debt four tiers below the investment grade. The company’s rating could improve by one notch as the S&P believes that the acquisition will improve its asset portfolio and strengthen its cash flow generation.

Liberty Global will acquire 100% stake in Virgin Media in a cash and equity deal. Per the deal, the former will pay $47.02 in cash, 0.2582 Liberty Global Series A shares (totaling 86 million) and 0.1928 Liberty Global Series C shares (totaling 65 million) to each Virgin Media shareholder.

At the end of the recently concluded quarter, Liberty Global has nearly $4.2 billion in cash and marketable securities in its balance sheet. However, the company requires $5.9 billion in order to make cash payments to Virgin Media shareholders. So the required amount will be financed through a combination of debt financing and available liquidity of both Liberty Global and Virgin Media.

The deal, which is expected to materialize by the end of the first half of 2013, will produce cost synergies of $180 million for Liberty Global apart from helping the company to establish a strong foothold in the BSkyB dominated UK market.

BSkyB, which is partially owned by News Corporation (NWSA), has 10.7 million subscribers, compared with Virgin Media's 4.9 million. Moreover, the roll out of Liberty Global’s Horizon TV and Virgin Media's popular TiVo Inc.’s (TIVO) next-generation TV platform will drive subscriber growth going forward. We believe that the successful integration of Virgin Media with Liberty Global will create a dominant force in the highly lucrative UK pay-TV market and improve the latter’s growth prospects.

At the end of the previous quarter, Liberty Global had nearly $26.5 billion of outstanding debt on its balance sheet. Following the deal, Liberty will have to takeover Virgin Media’s outstanding debt of $9 billion. This could act as a deterrent for the improvement in Liberty Global’s debt rating as its high leverage position could significantly impact the company’s future returns.

Currently, Liberty Global has a Zacks Rank #2 (Buy).

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