John Malone’s $6.4 Billion UPC Sale Unravels

(Bloomberg) -- Billionaire cable mogul John Malone’s plan for a $6.4 billion sale of UPC Switzerland fell apart after would-be purchaser Sunrise Communications AG concluded its shareholders won’t support the move.

Sunrise Chief Executive Officer Olaf Swantee said Tuesday in an interview that the deal was “dead.” The company had earlier called off a shareholder vote scheduled for Wednesday on a rights offering to fund the purchase. UPC parent Liberty Global Plc has yet to say it has walked away.

Liberty Global Chairman Malone had agreed in February to sell the unit, raising the prospect that he would rake in a heftier cash pile to support a range of activities, including potential shareholder payouts and acquisitions in western Europe. But Freenet AG, Sunrise’s biggest investor, railed against the purchase price and an influential proxy advisor came out against the deal, wiping out the possibility of success.

This is the second setback this year for the man who sold cable provider Tele-Communications Inc. to AT&T Inc. for $48 billion in 1999 -- his attempted purchase of Millicom International Cellular SA fell apart in January on price concerns. Liberty Global shareholders may also need to recalibrate their expectations for the prices they can expect for future transactions.

“Malone’s not had many failures in his career and this is a reputational setback if nothing else,” said Mirabaud analyst Neil Campling. “Liberty Global may have to reset some of its ambitions around the values it can achieve for future M&A.”

The transaction, which would have created a bigger player to compete against Swisscom AG, valued UPC at 10 times adjusted earnings before interest, taxation, depreciation and amortization. Sunrise had agreed to finance the deal through a mix of debt and about 4.1 billion Swiss francs ($4.2 billion) raised from a rights issue. Freenet balked at this mix. Eventually the rights issue was cut to 2.8 billion Swiss francs, and last week Liberty Global pledged as much as 500 million francs to support the capital increase.

These changes weren’t enough to earn the approval of proxy advisor Institutional Shareholder Services, which said a fair value range for UPC was 4.6 billion Swiss francs to 5.2 billion Swiss francs.

Examining Options

Liberty Global is still examining its options within the current share purchase agreement, said a spokesman for the company. That agreement expires Feb. 27.

An attempt by Liberty Latin America to take over Millicom for $7.6 billion in cash and stock fell through after the target’s executives were said to have demanded changes to the terms of the transaction, including a higher premium and cash component. The unwinding of the Swiss effort -- Freenet CEO Christoph Vilanek said in a phone interview Tuesday that there’s no way to rescue it -- sends a signal to European companies considering participating in industry consolidation.

An end to the deal “probably tells telecom management in Europe that paying a 10 to 12 times Ebitda multiple on a transaction isn’t getting support from investors,” Stephane Beyazian, analyst at Mainfirst, said Monday.

Sunrise shares rose as much as 4.6%, the most since Jan. 3, while Liberty Global’s Class A shares sank as much as 5.5% in early New York trading, the biggest drop since May.

Standalone Strategy

Swantee said Sunrise has no immediate plans to consider alternative acquisitions, and the company will revert to its standalone strategy, “which fortunately has been working well.”

He said earlier this month that a management shake-up at the Swiss company was likely if the deal doesn’t go through. When asked Tuesday if he would quit, he said “our priority now is to stabilize the company.”

Swantee will have to do so in a competitive environment that has Swiss carriers locked in an aggressive discounting war. The UPC purchase would have eased pricing pressure by reducing the number of players.

“The cancellation is a consistent step given the shareholder resistance, but also a missed opportunity to consolidate the Swiss telecom market,” said Mark Diethelm, analyst at Vontobel Securities.

Liberty Global is not short of cash - it will still have about $9 billion in proceeds from sales of businesses to Vodafone Group Plc and Deutsche Telekom AG, said Pivotal Research analyst Jeff Wlodarczak.

Tuesday’s outcome may complicate other potential deals at London-based Liberty Global, such as acquisitions involving partially-owned Belgian unit Telenet or a Dutch joint venture with Vodafone.

Read More: Failure of Sunrise Deal Curbs Liberty Global’s Ambitions

Telefonica SA’s British mobile-only company O2 has long been speculated as a neat fit for the fixed-line-only network at Virgin Media, which now makes up the majority of Liberty Global’s sales. Meanwhile, Liberty executives are preparing to spend money extending their U.K. broadband reach in a land-grab against BT Group Plc.

UPC Switzerland has been Liberty Global’s worst-performing unit, and Malone could attempt to find another partner -- Salt, the mobile operator controlled by French billionaire Xavier Niel, is a potential candidate.

“It seems to us that an absence of compromise and trust sank this deal,” Berenberg analyst Usman Ghazi wrote in a note. “Liberty Global was unwilling to address the legitimate grievances of Sunrise shareholders. Those who intended to vote against it were merely saying that the merger need not be pursued at any price, and this was a judgment call that we sympathized with.”

--With assistance from Stefan Nicola.

To contact the reporters on this story: Albertina Torsoli in Geneva at atorsoli@bloomberg.net;Thomas Seal in London at tseal@bloomberg.net

To contact the editors responsible for this story: Rebecca Penty at rpenty@bloomberg.net, Anne Pollak

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