Ziggo exchange keeps Liberty's options open for UPC merger
* Ziggo completes bond exchange for Liberty acquisition
* Bond's clauses allow for UPC and Ziggo merger
* Bondholders anticipate merger within a year
By Robert Smith
LONDON, Feb 28 (IFR) - Ziggo completed its senior bond exchange this week, not only curtailing acquisition financing risk for Liberty Global but also keeping the cable giant's options open for a future merger between Ziggo and UPC.
While Liberty stated publicly that it will keep the businesses separate at this time, two clauses buried in the new bond's 600-page offering memorandum anticipate a merger.
Liberty announced in January that it had struck a deal to acquire Dutch cable operator Ziggo. To fund the unsecured piece of the debt finance it devised an exchange offer for Ziggo's EUR1.2bn 8% 2018 senior noteholders, by which they could flip into up to EUR934m of new 2018 notes.
Agreeing to the exchange guarantees an allocation on a new 10-year non-call five (10NC5) bond, with a May 2024 maturity paying 7.125% annual interest. This 10NC5 deal only comes into being if and when Liberty's acquisition of Ziggo closes.
"The benefit to Liberty is that it reduces both negative carry and market risk attributable to running a bridge loan with caps," said Jonathan Pearson, Head of Corporate Finance at Liberty Global.
"We devised the structure to optimise the financing and it also benefits bondholders as they lock in duration to a credit they like, without having to double up their exposure as they would if a new bond was raised from day one."
Bondholders certainly saw the benefit, as Ziggo announced this week that holders of EUR743m of the notes agreed to exchange, nearly 80% of the EUR934m target.
While the structure bypasses the risk of raising an acquisition bond and placing it in escrow, just as crucially the terms of the new bond could pave the way for Liberty to reorganise its European cable businesses.
The acquisition of Ziggo will effectively create a national Dutch cable operator for Liberty, as in conjunction with UPC's Netherlands business it will reach over 90% of Dutch homes.
UPC is a sprawling pan-European business, with operations in Central and Eastern European countries such as Poland and Hungary as well as Western European markets such as Switzerland and Ireland. UPC Netherlands is a key constituent of the group, accounting for nearly a quarter of its operating cash flow last year.
Liberty said on bondholder calls, however, that it will keep Ziggo and UPC as two separate businesses and credit pools, according to multiple sources.
While the companies will have separate accounts, Liberty will still achieve massive synergies by centralising its Dutch operations at Ziggo's Utrecht headquarters. Liberty has also publicly stated that there are no discernible tax benefits to formally merging the two operations.
This may be the case, yet two of the new Ziggo bond's clauses specifically allow for a merger.
Firstly, the bond has a special optional redemption upon a "UPC Exchange Transaction," in the event that Ziggo's bond is rolled into the UPC credit pool. Two Ziggo bondholders point out that Liberty recently removed its Chilean business VTR from the UPC credit pool, which could suggest it is making room for a new business.
"Carving out VTR from UPC is completely unrelated," said Pearson at Liberty, however.
"VTR is one of Liberty's strongest assets, and having a separate credit pool gives it the focus it deserves from both a management and capital markets perspective."
A source involved in the deal also argued that Liberty is unlikely to roll Ziggo into UPC as the size of the new credit pool would pressure bondholders' issuer concentration limits.
A second clause, however, outlines a special optional redemption upon a "Majority Exchange Transaction," in the event that UPC Netherland's business is carved out of UPC and combined with Ziggo.
"This is the path that everyone expects Liberty to take, as it makes sense to have the Dutch national operator in a seamless credit pool," said the source involved in the deal.
"Although taking the Netherlands out of UPC could be easier said than done."
A credit analyst said that Liberty would incur massive consent fees to remove UPC's Dutch assets from its bonds' restricted group, although a high-yield banker disagreed arguing that it would just be classed as an asset sale.
The two Ziggo bondholders argue that whatever the obstacles, history suggests that Liberty will merge two businesses in the same jurisdiction.
"It didn't take them long to merge the KabelBW and Unitymedia capital structures in Germany, so why would they not do so here?" said one of the bondholders.
"I just don't believe that in a year's time these will be separate companies."