LONDON (Reuters Breakingviews) - European telecoms consolidation is rumbling along, and Liberty Global Chairman John Malone is once again taking his chips off the table. The “cable cowboy” and his Chief Executive Mike Fries are selling sub-scale cable businesses to mobile companies at rich valuations. They’re banking upfront the benefits that buyers hope to reap by bundling together the different services, and likely getting the better side of the bargain.
Liberty is selling its Swiss unit to the county’s number two mobile carrier Sunrise for a $6.3 billion enterprise value, or 10 times the adjusted EBITDA it generated last year. The Thomson Reuters Europe Integrated Telecommunications Services Index trades at just five times EBITDA. Liberty, whose chairman also controls a large stake in U.S. group Charter Communications, last year agreed to offload its German, Hungarian, Romanian and Czech business to Vodafone for about 11.5 times EBITDA, and in 2017 extracted a near-11 times multiple from Deutsche Telekom for its Austrian division.
Malone and his Liberty investors have made a good return from being a relatively small player in typically cutthroat markets. The London-based group poured about $1.6 billion of equity into the Swiss business in 2005, for example, and received $3.9 billion of cash over the next 13 years after netting off interest payments. Add the cash sale proceeds of $2.6 billion, and Liberty has quadrupled its money. Crucially, it is getting out of a business that struggles to compete with incumbent Swisscom. It’s a similar story in Germany, where Vodafone is hoping to use Liberty’s cable infrastructure to take on Deutsche Telekom.
Why are the buyers paying big premiums for Liberty’s assets? Selling mobile subscriptions in Europe is a low-margin, competitive business. The buyers hope that by bundling it together with TV and broadband, they can keep customers for longer. But consultancy Enders Analysis reckons the evidence is patchy. Customer “churn” tends not to change much because rival telcos respond by dropping their own prices, and carriers end up selling the combined services for less. In Germany, bundle discounts have exceeded 30 percent, Enders reckons.
Debt increases the riskiness of this strategy for the likes of Vodafone and Sunrise. Both groups’ shares fell after the deals were announced, as investors took fright. Liberty, meanwhile, has a $15 billion war chest. Malone could use that to buy back shares, or even scoop up companies on the cheap when the economy, and equity prices, next turn down.
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