Liberty Global has agreed to buy Germany's Unity Media in a Euro3.5bn deal that will mark the pan-European cable giant's second stab at conquering the German cable market. Liberty is paying Euro2bn for 100 per cent of Unity's equity plus the assumption of Euro1.5bn debt in a largely debt-financed transaction. The deal values Unity at 7.4 times forecast 2010 EBITDA. Unity has around 6m RGUs (TV, Internet and telephony subscribers), valuing each at Euro583. Liberty said it expects the transaction to close in first half 2010.
Our take...Liberty has generally pursued a strategy of operating only in markets where it controls the majority of the country's cable homes. While Unity is a major player in Germany, it is dwarfed by KDG, the country's largest operator with 10.8m RGUs. KDG has been lobbying German regulators to allow a merger of the country's three Level Three cable players that control the trunk network but its efforts have met with little success. It's possible that Liberty believes it will be more successful in pushing for cable consolidation in Germany and that the ultimate plan is to also attempt an acquisition of KDG. Current market opinion suggest such ambitions are unlikely to be successful, however, and Liberty Global's parent company has direct experience of just such a knock-back when it tried to acquire several Level Three operators in Germany in the early part of this decade.
More likely is that Liberty was attracted to Unity's strategic approach to the market. While KDG's size may make it the more obvious choice, smaller Unity has been more successful at selling additional services to its customer base than KDG. KDG currently has around 1.16 RGUs per home while Unity has 1.3. The measure shows the success of up-selling Internet and telephony services to the existing subscriber base. At 30 per cent of TV customers, Unity's uptake of digital TV is also almost twice that of KDG. Unity has also invested heavily in network improvement with 80 per cent of its core network upgraded by this year, putting it in a strong position to continue triple-play growth.
The value per RGU paid by Liberty represents a 51 per cent premium on the price paid for each RGU by cable group Iesy when it bought and combined with Ish to create Unity Media back in 2005. However, the value per RGU is almost identical to that paid by EQT Partners for Germany's smallest Level Three cable operator Kabel BW in 2006. As such, Liberty seems to have got a good price for Unity with little evidence of recent inflation.
This will be Liberty's second go at the German cable market. Liberty was active in Germany during the early part of this decade when it briefly owned independent cable group EWT/tss, it sold out of the market at a time when international investors were exiting Germany in droves, frustrated at the pace of change in turning around Germany's utility-type cable customers into high-ARPU triple-play assets. Private equity groups then moved into the market buying up cable groups and beginning a long over-due investment programme that has taken the German market to the edge of turnaround. The timing of Liberty's return is a good balance of the lower risk brought by these market changes (with clear evidence that additional services can be sold) combined with a reasonable price for the asset. As such, this seems like an excellent deal at a time when the German market has shown itself to finally be on the point of turnaround in its migration to a commercial triple-play European business.
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