Media studies - Market perceptions may change but not, apparently, the conventions of M&A
The $23.3bn (£14.7bn) agreed takeover of virgin media by us-based cable giant Liberty Global, which was announced on 6 February, neatly encapsulates not one but two regular Value Perspective themes.
The deal values Virgin Media at close to $48 a share – a premium of almost 25% on the $38 closing price the day before the news broke the companies were in talks. More interestingly in our view, it also happens to be a premium of some 1600% on the $3 price at which the shares were trading at the start of 2009, when the market was concerned about how overly leveraged the company was in the depths of the credit crunch.
Yet what – aside from Liberty Global’s bid, obviously – has really changed for Virgin Media in the last four years? Would any investor who was prepared to be opportunistic and go against the grain to buy into the company at $3 a share, or indeed any of the prices that its shares traded at in 2009 or 2010, have been taking a stake in a significantly different business? Or is it just that the market’s perceptions and risk appetite have been transformed since then?
Virgin Media has certainly done some good things operationally, such as raising prices, and it has repurchased a lot of its own shares, all of which its management team deserve credit for. The willingness of the bond markets to fund cable companies has obviously also become considerably more benign since 2009. Virgin Media’s operating and financial leverage has been such that these small benefits have been magnified into much larger increases in free cash flow. The business itself though has changed to a much smaller extent than its share price would suggest.
Second, while the market’s perceptions of individual businesses may change, the way company management teams tend to think about mergers and acquisitions apparently does not. We most recently focused on this here, when we noted how, at the top of the mining boom in 2008, Swiss mining giant Xstrata fell over itself to bid for Lonmin at £33 a share before settling for a 25% stake at £19 a share. Lonmin’s share price now sits below £4.
Returning to Virgin Media, it is apparently only now it has turned itself around that another business has decided to try and buy it. Nobody would seem to have countenanced a takeover at $3 a share – and maybe they were sensible to steer clear. Nevertheless, if Liberty Global is happy to make its current offer, one would think somebody – even it were liberty themselves - might have taken a look somewhere along the road from $3 to $48. Contrary to common sense, nothing seems to attract the interest of corporate acquirers like a rising share price.
Fund Manager, Equity Value
I joined Schroders as a graduate in 2005 and have spent most of my time in the business as part of the UK equities team. Between 2006 and 2010 I was a research analyst responsible for producing investment research on companies in the UK construction, business services and telecoms sectors. In mid 2010 I joined Kevin Murphy and Nick Kirrage on the UK value team.
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