Cable Billionaire John Malone Attempts a Classic Swiss Heist
(Bloomberg Opinion) -- When negotiating with U.S. cable billionaire John Malone, your team can ill afford to have a weak link. Unfortunately for Sunrise Communications Group AG, its biggest shareholder is just that.
Malone’s Liberty Global Plc announced a 110 Swiss franc-per-share deal on Wednesday that values the Zurich-based mobile carrier at 6.8 billion Swiss francs ($7.4 billion), including debt. The price isn’t exactly a knockout, but it may well be enough to win the day. That should leave most Sunrise investors frustrated at the failings of Freenet AG, the German firm that owns 24% of the Swiss company’s stock.
In February last year, the inverse deal was announced: Sunrise agreed to acquire Liberty’s Swiss cable business. But it required a 4.1 billion-franc rights issue to fund the transaction, and Freenet didn’t have the money to buy enough new shares, so it blocked the deal.
The logic of the combination remains sound. Bringing together Sunrise’s mobile operations and Liberty’s cable operations will generate plenty of cost savings. But those synergies also mean Liberty could afford to pay a lot more and still cover the target’s cost of capital.
Does that mean Sunrise shareholders can ask for more money? Probably not. Malone’s offer is the only option on the table. The one other fixed-network operator in Switzerland is state-controlled Swisscom AG, which already has its own mobile network. No other bidder could find the savings from combining networks to justify even Liberty’s current offer price, which is a 28% premium to the stock’s close on Tuesday. And Liberty has an alternative target in Salt, a smaller Swiss carrier owned by French billionaire Xavier Niel.
That’s why the Swiss company’s investors must be kicking themselves. If it weren’t for Freenet’s inability last year to fund its 1 billion-franc slice of the proposed rights issue, then Sunrise — not Malone — would be the beneficiary of the value created by those synergies, which will add almost 50% to the company’s operating profit by the end of 2023. The price Sunrise agreed to pay last year was also potentially advantageous to the Swiss firm.
It’s been a busy year for Malone and his lieutenant Mike Fries, Liberty’s chief executive officer. In May the company agreed to combine its U.K. cable arm Virgin Media with Telefonica SA’s British mobile operator, O2. The proceeds from that deal mean Liberty will still have $7 billion in cash, even after the 3.5 billion francs that it’s using to pay for Sunrise (the rest of the offer is being funded by debt).
It looks like more dealmaking is afoot. Prospective targets will want to ensure they’re better positioned than Sunrise.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Alex Webb is a Bloomberg Opinion columnist covering Europe's technology, media and communications industries. He previously covered Apple and other technology companies for Bloomberg News in San Francisco.
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