Liberty's closeness to bondholders could thwart Ziggo/UPC merger

Fri Oct 25, 2013 8:24am EDT

* Ziggo/UPC merger could strain high yield indices

* LGI at pains to let investors class exposures separately

* Ziggo bond refinancing could create poison pill

By Robert Smith

LONDON, Oct 25 (IFR) - Liberty Global (LGI) has fired the opening shot in its takeover battle for Dutch cable business Ziggo, but the close relationship the U.S. cable giant has forged with bondholders could complicate any attempt to merge the target firm with its UPC operation.

"Liberty has one of the best relationships with bond investors in the European high yield market," said one investor, explaining that it has kept investors happy by allowing them to class its myriad cable businesses as separate exposures.

LGI businesses such as Unitymedia, Virgin Media and UPC all have separate credit pools, and so carry separate bond tickers. This benefits portfolio managers as they break down exposures on a ticker basis, allowing them to list the businesses separately.

Several European cable businesses switched to a single "LBTYA" ticker at one point, according to three market sources, but the company reverted back to separate tickers after complaints from bondholders.

Maintaining these separate tickers could pose a problem for LGI's next target acquisition, however.

Ziggo confirmed last week that it had rejected an initial offer from John Malone's LGI, which already holds a 28.5% stake in the company. This was in response to a report in German weekly Manager Magazin that LGI intends to merge Ziggo with its UPC operations in the Netherlands and Belgian firm Telenet.

Combining the bond debt of these three companies, however, would create a behemoth issuer, one which would dominate the European high yield indices, and frustrate investors by curbing their ability to increase exposure to LGI-owned firms.

"Liberty would have to retain a separate Ziggo ticker so would have to keep it as separate borrower group, but this raises the question: is the way Liberty funds itself dictating how it runs its businesses?" said a second investor.

QUESTIONS ASKED

UPC has over EUR4bn-equivalent of bonds outstanding, while Telenet has EUR1.5bn. Ziggo has EUR2.7bn outstanding, and according to the first investor: "If Malone buys it, it gets levered up, no question."

Even if Telenet is taken out of the equation, combining the debt of UPC and a levered-up Ziggo alone would sour the hard won trust of European bond investors. This means that LGI may not merge the businesses, despite the obvious business benefits.

"Keeping separate tickers would not matter for operational synergies but it would for tax synergies, and Malone is very focused on tax," said the first investor.

The second investor also cautioned that further LGI acquisitions could strain its "separate ticker strategy."

"As long as the index continues to distinguish the businesses most investors will be fine, but I have been asked questions internally from risk officers before," he said.

"My response is that the businesses have different operations and security packages, and that there are no cross defaults, but the cash pooling arrangement may be the sticking point some risk officers cannot abide."

This arrangement refers to LGI's policy of sweeping excess cash from its businesses up to the parent level. It should be noted, however, that this ability is limited by bond covenants.

Liberty Global did not respond to a request for comment.

POISON PILL

With Malone's intentions to buy Ziggo now out in the open, analysts and investors have begun theorising as to how he could combine the two Dutch operations without alienating high yield bond buyers.

"The alternative to mitigate issuer concentration would be to create a new unified Dutch credit pool," said a credit analyst.

"Liberty could either carve out UPC's Dutch assets from UPC's combined Dutch, Swiss, Irish and CEE credit pool, or it could collapse the UPC bond structure with across-the-board redemptions to create two new bond pools from scratch."

The first option would incur massive consent fees to remove UPC's Dutch assets from its bond's restricted group, the analyst added, but the alternative would force LGI to buyback billions of debt in one shot, a costly move the firm is unlikely to favour, according to the first investor.

"I'm not so sure they have to pay consent fees," said a high yield syndicate banker, however.

"UPC Netherlands is around a third of the business, so it would probably just be classed as an asset sale."

While creating a new Netherlands credit pool could be a solution for Liberty, an added complication is that Ziggo's chief financial officer said last week that cable firm is aiming to refinance its 2017 and 2018 bonds "in the near future."

While this could make the bonds more expensive for Liberty to strip out, the two investors said this has long been expected and is unlikely to affect Liberty's approach.

The second investor said the refinancing could pose a conflict for Ziggo, however, as maximising returns for Ziggo shareholders could create a poison pill for Liberty.

"Do Ziggo look to secure the cheapest funding they can get by offering the best protection to bondholders, or do they look to facilitate a leveraged acquirer's bid by refinancing with bonds that are portable or cheap to call?"

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