Dutch cable operator Ziggo has completed its IPO and listed on the Amsterdam exchange. Initial strong demand led to the number of shares on offer being increased to 43.5 million, and the offer was "multiple times" oversubscribed, according to the company. The issue was priced at the top of the indicated range of EUR 16.50-18.50, raising a total EUR 804 million. This gives the company a market capitalisation of EUR 3.7 billion. With net debt of EUR 3.2 billion, the company's enterprise value is EUR 6.9 billion.
We recently estimated Ziggo's enterprise value at EUR 8 billion (see our Research Brief ‘Ziggo IPO preview update – valuation est. EUR 8 bln’). Ziggo and the underwriters clearly chose to sell the shares at a discount, in order to ensure they weren't left holding shares and the IPO was a success. Given the opening share price of EUR 21.20 on 21 March, they appear to have achieved their goal. If the over-allotment option is exercised, the free float will be 25 percent of Ziggo's shares, leaving room for a secondary offering at a later date if needed. If that does happen, it will most likely be at a higher price than in the IPO.
Based on the issue price of EUR 18.50 per share, we can calculate various multiples for Ziggo. We compare Ziggo, the same as in the earlier research brief, with four other listed peers: Telenet, Liberty Global, Kabel Deutschland and Zon Multimedia.
- EUR 1,649 per home passed. This is clearly lower than Telenet's current valuation (EUR 2,094), but double what's paid for Liberty Global and almost four times more than the multiples of Kabel Deutschland and Zon Multimedia.
- EUR 2,304 per customer. Still less than Telenet (EUR 2,709), but more than our estimates for Liberty (1,516), Kabel Deutschland (934) and Zon (936).
- 4.42 times revenues for 2011. This is higher than at all the peers: Telenet is at 4.33x, Liberty 2.66x, Kabel Deutschland 3.97x and Zon 1.70x.
- 7.82 times adjusted EBITDA for 2011. Kabel Deutschland has a higher valuation (8.49x), Telenet slightly less (8.23x). Liberty is at 5.86x and Zon 4.65x.
- 10.51 times free cash flow. This is roughly the same as Liberty (10.48x) and Zon (10.24x), but less than Telenet (14.40x) and Kabel Deutschland (1.90x).
This shows that Ziggo was priced at a discount compared to its more comparable peer, Telenet. Telenet resembles Ziggo the most in terms of growth and margins. Telenet does performs better in terms of revenue growth and ARPU, but its EBITDA margin and free cash flow are weaker. Liberty Global, as a conglomerate, is less comparable to Ziggo, while Kabel Deutschland is growing much more slowly and with lower ARPU, and Zon Multimedia suffers from much tougher competition.
Ziggo's IPO is not just about the comparison with other listed cable companies, but also about its growth outlook and risks. In the short term, there is little to fear, meaning a strong share price. Revenue growth is strong, market share is growing at the cost of DSL providers, and ARPU is increasing. In addition, churn is extremely low, thanks to the success of Ziggo's triple-play offers. It's up to investors to weigh up these healthy prospects with the risks. In addition to its debt, Ziggo also faces (in its own words): “Operation in a capital-intensive business with rapidly changing technology”. This points to the growing number of alternatives for traditional TV and cable broadband:
- Over-the-top (OTT) services, at which Silicon Valley is currently devoting all its efforts. Examples include Google TV (software) and Apple TV (set-top box, possibly also a TV set), as well as smart TVs from the likes of Samsung, Panasonic and LG. Revenues from VoD (digital pay TV at Ziggo) are mainly at risk. But even linear TV will become less interesting for a certain group of viewers, due to the large on-demand offering. It's still uncertain whether Google TV and Apple TV will establish a place in the living room, but Samsung et al are already there - and that has implications for ARPU.
- Fibre (FTTH), the speciality of Reggefiber and CIF.
OTT and FTTH are still emerging and have yet to go mainstream. But of all the TVs sold these days, over half can be considered 'smart' TVs, posing a threat to ARPU. FTTH currently covers barely 15 percent of households. Ziggo itself expects to remain market leader in terms of top speed, but admits the number of households for which this holds true will fall to 79 percent by the end of 2013 from 87 percent currently. And this is even with the extra efforts possible at Ziggo to increase speeds on its network. Still, the pressure from FTTH is growing: in every village or neighbourhood where Reggefiber rolls out FTTH, a minimum 30 percent of residents sign up for fibre services, which is mainly coming at the cost of cable.
Over the short term, within the horizon of the average investor, there is little to worry about. The good performance should continue for another year or two. What happens after that is unclear, as even Ziggo is not sitting still and can work the changes in technology to its own advantage. Or, as a well-know stock market saying goes: “In the long run, we’re all dead”.
