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Breakingviews - Cable Cowboy makes pricey Swiss return call

Chairman of Liberty Media John Malone attends the Allen & Co Media Conference in Sun Valley, Idaho July 12, 2012.

LONDON (Reuters Breakingviews) - Cable Cowboy John Malone has pulled an aggressive pirouette on a tricky Alpine pass. Liberty Global, the telecoms group founded by the U.S. billionaire, is paying $7.4 billion for Sunrise Communications less than a year after failing to persuade it to buy its own Swiss unit. It’s a riskier and more expensive deal than the original plan, but one Malone can probably live with.

The collapse last October of Liberty’s plan to sell its UPC unit to Sunrise left the UK-based group with a headache. A standalone UPC, which makes most of its money from broadband services, was in no position to take on Swisscom, the $28 billion state-backed operator that controls over half of Switzerland’s telecom market. Even a deal with smaller rival Salt would have added insufficient heft.

That suggests a deal had to happen sooner or later. The first attempt fell apart when Sunrise’s largest shareholder, German group Freenet, balked at the price. Now Liberty, cash rich after selling its German operations to Vodafone for 19 billion euros, has coughed up instead. The combined entity will hold nearly a third of Switzerland’s mobile, broadband and TV market.

The delay has a cost. Liberty’s 110 Swiss francs per share offer is a 30% premium to Sunrise’s six-month average price of 83 Swiss francs. Ten months ago, the undisturbed price was around 10% lower. And the 6.8 billion Swiss franc purchase price, including debt, works out at roughly 10 times this year’s EBITDA, according to Refinitiv data. Sunrise’s five-year average multiple is less than 8 times.

Still, synergies give plenty of justification for the 1.2 billion Swiss franc premium. Liberty hopes to generate an extra 275 million Swiss francs by cutting costs and boosting revenue, a plausible 10% of the combined company’s cost base. Those could have a present value of 2.5 billion Swiss francs, after tax and capitalised.

True, cross-selling opportunities are unpredictable. But the deal still works even with cost cuts alone, which Liberty estimates at 231 million Swiss francs annually. Those savings have a present value of 2.1 billion Swiss francs. And the annual uplift, combined with next year’s expected EBIT of 218 million Swiss francs, would deliver a net operating profit after tax of 410 million Swiss francs, a return of around 6% on the purchase price, in line with Sunrise’s cost of capital. The cowboy’s Swiss roll looks tasty enough.

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