John Malone is shrinking his empire and giving himself some options. Shareholders in the cable tycoon’s Liberty Global Plc need to be alert to the risk that this is preparation for another splurge of buying.
The latest part of the portfolio to be pruned is in Switzerland. On Wednesday, cable operator Sunrise Communications Group AG said it was in talks to buy Malone’s UPC Switzerland in a deal valuing the company at about 6.3 billion Swiss francs ($6.3 billion) on a debt-free basis.
This comes as Liberty awaits clearance to sell a collection of European assets to Vodafone Group Plc, a transaction from which it expects to reap $12.7 billion in cash. An exit from Switzerland would reinforce Liberty’s balance sheet.
It’s not clear whether Sunrise, whose enterprise value is 4.9 billion francs, can afford an outright purchase. With net leverage of just twice Ebitda, the group has plenty of borrowing capacity. Still, it looks like it needs to raise at least 1 billion francs of equity to buy 100 percent of the company, as Bloomberg Intelligence points out. Or it will have to settle on keeping Liberty as a partner for a while.
Either way, Malone and Liberty Global CEO Mike Fries seem to be in active management mode. The question is whether the moves are simply opportunistic, or part of a grander vision.
There is some logic to the reshuffle. The assets being sold to Vodafone are arguably worth more to the U.K. buyer, which is building out a pan-European platform of converged mobile, fixed line and TV assets. In Switzerland, UPC has struggled amid increasing competition. Unless it splurges on M&A, its path to becoming the dominant converged player there isn’t clear. So it makes sense for Liberty to sell up if Sunrise is offering the chance to do so at a good price.
The mooted valuation equates to 9.4 times UPC’s Ebitda for 2019 as estimated by analysts at UBS – a modest premium to Sunrise’s own 8 times valuation. Bloomberg Intelligence estimates the synergies from a deal could be worth as much as 2.3 billion francs, so Sunrise can well afford the premium.
So it has the potential to be a slightly better deal for Sunrise than Malone. Even without the synergies, UPC could probably make an acceptable return if the price tag doesn’t rise.
Malone isn’t in wholesale shrinkage mode, though. He tried and failed last month to buy emerging-market focused Millicom International Cellular SA, which has a valuation of about $5.8 billion. The talks collapsed when Malone walked away over the price. Liberty shareholders will have to hope that his discipline as a buyer is maintained even as his financial capacity continues to improve.
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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.
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