UK cable giant NTL has signaled its intention to enter the ‘quad-play’ market after offering to pay GBP817 million ($1.42 billion) for Virgin Mobile, the UK’s fifth largest mobile operator. The move is the latest in a series of deals that are sending shockwaves throughout the European communications landscape.
The offer values each Virgin Mobile share at 323 pence ($5.61) in cash, which represents a 3.9% premium to Virgin Mobile’s closing price on December 2, 2005.
The deal already has the backing of Virgin Mobile’s largest shareholder, British entrepreneur Sir Richard Branson. Mr Branson controls 72% of Virgin Mobile, and would become NTL’s largest shareholder, with a 14% stake, if the deal goes ahead. The Virgin Group is expected to receive 1% of the revenues of the new company, and Branson is also expected to be actively involved in management of the new company, with a possible seat on the board.
However, it is not clear whether Virgin Mobile’s board of directors will back the deal. In a short statement on the morning of December 5, 2005, the board confirmed it had received an approach from NTL and said in considering its response, the board of Virgin Mobile will be mindful of its duty to maximize value for all shareholders.
The sticking point seems to be the minority shareholders who control 28.5% of the operator. These include Fidelity, Morley Asset Management, Deutsche Asset Management, and boutique fund manager Aberforth Partners. These shareholders are unlikely to accept the small premium offered by NTL, and are likely to want hard cash rather than the less desirable NTL shares.
For NTL, Virgin Mobile is desirable because it has a strong brand and is also recognized as having excellent customer service. The virtual mobile operator recently posted healthy interim figures after its user base grew once again to reach nearly 4.15 million. For the six months ending September 30, the company posted net income of GBP27.5 million ($47.3 million), up from GBP19.6 million ($33.7 million).
However, there are some concerns that NTL is stretching itself financially due to its $6 billion acquisition of cable rival Telewest Global, which is expected to close sometime next year.
In the past, NTL went into Chapter 11 bankruptcy protection when Telewest underwent a restructuring that saw its bondholders receive 98.5% of the company’s shares, another reason for the minority shareholders to want hard cash.
Yet in reality, NTL has little alternative other than to acquire a mobile operation, as it faces intense competition from the likes of BT Group, which will begin to push television content down increasingly fast broadband connections sometime next year, as well as UK satellite broadcaster British Sky Broadcasting Group (BSkyB).
BSkyB poses a huge threat to NTL due to its pay TV capabilities, which were recently supplemented by the GBP211 million ($373 million) acquisition of broadband service provider Easynet. BSkyB’s move into the triple-play market allows it to directly challenge for the first time the triple-play offerings from cable operators such as NTL and Telewest. However, BSkyB does not yet have a mobile operation, and NTL would be likely to use the Virgin Mobile operation as the key difference between it and BSkyB.
That said, BSkyB did recently sign an exclusive deal with mobile goliath Vodafone Group to offer its content for Vodafone’s mobile TV offering, where Vodafone users with a 3G phone can watch a number of Sky TV channels on their mobile handsets.
Triple-play is often regarded as the ‘holy grail’ for carriers because it will allow them to offer consumers voice calls (fixed-line), high-speed internet, and television over the same connection. With the Virgin Mobile offer, we are now starting to see ‘quad-play’, which is fixed-line and mobile telephony, along with internet access and pay television.
In the US, companies are examining a possible ‘quad-play’ strategy, but it is still relatively rare in Europe. The largest US phone company, Verizon Communications, already offers this type of service, but its video product is only available in two cities. A number of US cable companies have also teamed up with US mobile operator Sprint Nextel to offer wireless services.
This is not the first time that Mr Branson will have sold one of his subsidiaries to NTL. In September 2004, NTL purchased the remaining 51% holding in the ISP Virgin Net that it did not already own from Virgin Media Group.
The acquisition of Virgin Mobile will create a new organization, presumably branded under the Virgin name, with approximately nine million customers and a market cap of roughly GBP4.5 billion ($7.83 billion). At the moment, BSkyB has a UK customer base of nearly eight million subscribers.
An acquisition by NTL would present Mr Branson and Virgin Mobile’s management with a suitable ‘exit strategy’, as the operator is battling some true heavyweights in the highly competitive UK mobile sector.