Did Cable Cowboy John Malone Just Blink in a Deal?

(Bloomberg Opinion) -- Did John Malone just blink in an M&A deal? The cable tycoon’s Liberty Global Plc has just agreed to help finance Sunrise Communications Group AG’s 6.3 billion Swiss francs ($6.3 billion) purchase of Liberty’s business in Switzerland. It’s a neat way of lending a helping hand to a struggling buyer without being seen to soften the terms of the deal itself. It still may not be enough to get the transaction done.

Sunrise’s purchase of Malone’s UPC Switzerland has been on the ropes for months. The Swiss buyer’s biggest shareholder, German telecoms operator Freenet AG, and a couple of investment funds are opposed. Sunrise needs to do a 2.8 billion Swiss franc rights offer to pay for the deal, which in turn depends on majority shareholder support. Freenet’s opposition is unhelpful enough given its 25% stake. Last week, the shareholder advisory service ISS also recommended that investors withhold their support.

That has rattled Liberty. Malone’s group now says it will put as much as 500 million Swiss francs into the rights offer if Sunrise’s own investors (most likely Freenet) don't stump up. This could be seen as a vote of confidence in the enlarged Sunrise from the American billionaire, which might make shareholders feel more comfortable about voting in favor of the fundraising. 

But the move could be seen equally as the price Liberty is willing to pay to get a deal over the line without amending the headline terms, for example by cutting the price or taking stock instead of cash.

This deal isn’t cheap but it makes sense for Sunrise. The buyer reckons UPC is worth 5.1 billion Swiss francs on a standalone basis, and it values the cost savings and revenue gains of a deal at some 3.1 billion francs. That total value is worth nearly 2 billion francs more than the price being paid.

Sure, UPC is probably worth less than Sunrise reckons. The same goes for those savings. Say UPC is more plausibly worth about 4.6 billion euros, based on it maybe making 600 million francs of Ebitda this year and commanding a multiple just shy of where Sunrise trades. And say you cut those anticipated savings by 25% and they’re worth 2.3 billion francs. On this view, the total value to Sunrise shareholders would still exceed the price paid, plus they would keep all the upside if the financial benefits of a deal turned out better than hoped.

Sunrise shareholders could kill the deal in the hope of striking a better transaction with Liberty at a later date — maybe involving less cash, more stock and a cheaper price. After all, it’s now clear that Malone is fine with taking Sunrise shares. But Liberty is flush with cash at present from selling assets to Vodafone Group Plc. It can afford to spend some of that in defense of its interests. There's a big leap from that to believing Malone should, let alone will, swallow worse terms another day.

To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

©2019 Bloomberg L.P.