Dutch cable operator Ziggo has set up the company Ziggo 4, via its subsidiaries Zesko 2 and 3. The new company is run by four directors, of which two executives from Ziggo and two from UPC. The aim of the company is to run and operate services (including broadcast) on fixed and mobile networks, according to a filing with the Chamber of Commerce register. Both the cooperation between Ziggo and UPC and the mention of mobile infrastructrue are plenty to drive speculation.
First, the partnership. It’s common knowledge that Liberty Global, UPC’s parent company, would one day like to take over Ziggo and expand its footprint in the Netherlands. Ziggo was created in 2008 from the merger of Casema, Essent Kabelcom and Multikabel. The owners, who funded the deal via Ziggo, are Warburg Pincus and Cinven – private equity companies that in around five years would probably like to sell the asset.
Mike Fries, the CEO of Liberty Global, has made no secret in recent months of the fact that he expects consolidation on the European cable market. This is supported by the company’s recent acquisition of Unitymedia and its sale of shares in J:Com. It’s clear that Liberty can lead the consolidation (see our research brief ‘Liberty Global increases leverage for Unitymedia’), via its extensive footprint in Europe, which includes 11 countries in west, central and eastern Europe. Fries is also a good dealmaker. Looking at the company’s transactions in the past year, we see the company buys for less than EUR 1,000 per subscriber and often sells for more than that:
• May 2009: sale of UPC Telemach (Slovena) to Mid Europa Partners for an undisclosed price, reportedly at EUR 950 per customer.
• November 2009: acquisition of Unitymedia (Germany) from BC and Apollo for EUR 770 per customer.
• January 2010: rumoured bid for KBW (Germany) at EUR 640 per customer.
• January 2010: Cristalerias de Chili sells stake in VTR (in which Liberty holds the rest of the shares) to Saieh for EUR 1,120 per customer.
• January 2010: sale of stake in J:Com (Japan) to KDDI for EUR 2,370 per customer.
While the transaction in Chile did not involve Liberty Global, it suggests the price was too high for Liberty to buy out Cristalerias itself. Ziggo had 3.165 million customers at the end of 2009, meaning a value of EUR 1,000 would put a price tag of EUR 3.2 billion on the company. This is an over-simplified estimate; Liberty will of course want to conduct tough negotiations and use more advanced calculations to come up with the real value of Ziggo. The value of an asset depends strongly on what the owner plans to do with it, including the potential synergies with other assets. Liberty may well see room for improvement in Ziggo’s operations based on UPC’s performance in the Netherlands, and there will also be significant synergies in any merger of the two. Ziggo’s debt will present a problem, and the question is whether Liberty Global is willing to take on all of this. The EUR 5.5 billion in debt may even exceed the company’s worth. This may be a reason for Liberty Global to hold off on making a bid: the more the debt increases, the stronger it’s negotiating position will be.
The second aspect of the new company Ziggo 4 is the proposal to develop mobile infrastructure. This brings to mind the upcoming auction of 2.6GHz spectrum in the Netherlands. This is scheduled for 20 April (unless KPN and Vodafone manage to secure a court order delaying it), but not all of the nine qualified bidders are known. KPN, T-Mobile, Vodafone, Tele2, Ziggo, UPC, Worldmax and Callmax are canadidates, and also a financial bidder is a possibility. Whatever the case, cooperation between Ziggo and UPC is logical as the two together have (near) national coverage. A few blank spots would remain, notably CAIW’s footprint (Westland), Delta (Zeeland), Cogas (Twente) and Rekam (Groene Hart), but these shortfalls could be overcome. The spectrum cap of 40MHz per bidder is also a consideration. By working together Ziggo and UPC are voluntarily imposing a limit on the amount of radio frequencies they could acquire.
There is another reason for cooperating on mobile: Ziggo simply has no money (and as good as no borrowing capacity) to build its own network. For UPC, the move into mobile means a big shift in strategy – few of its units have treaded the mobile market. The Belgian unit Telent (51% Liberty Global) is an important exception, where the company has a strong focus on developing a quad-play.
Conclusion: cooperating in mobile is a logical move and could lead to the eventual takeover of Ziggo by Liberty Global.
