* 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
"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
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
"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
"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
"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