With Virgin buy, Malone takes aim at Murdoch in UK

John Malone, the chairman of Liberty Global Inc, is rapidly becoming News Corp Chief Executive Officer Rupert Murdoch’s biggest headache in Europe as the two billionaires chase pay-television growth.

Malone, 71, agreed to buy Virgin Media Inc for $47.87 a share in cash and stock, or $16 billion, to vie with Comcast Corp as the world’s largest cable operator. He is taking on British Sky Broadcasting Group Plc in the UK, the pay-TV company that Murdoch built into the country’s No. 1 by spending $3.6 billion on exclusive film and sports content annually.

A combination with Liberty Global would give Virgin Media resources to more directly challenge BSkyB, said Adrian Drury, a London-based media analyst at consultant Ovum. Malone is already using Liberty Global to expand in Europe, where he has 18.4 million pay-TV subscribers to Murdoch’s 19 million. The two compete in Germany where Murdoch’s Sky Deutschland AG is rolling out faster Web services to challenge Malone’s Unitymedia KabelBW.

“Liberty is an £800-gorilla and Murdoch is another £800-gorilla,” Drury said. “The reality is this will be a straight bloodbath because the UK is an incredibly competitive pay-TV market.”

Lucrative market
It’s also a lucrative market. Average monthly pay-TV bills in the country is about $41, the highest of any European country, according to London-based researcher Informa Plc. Virgin Media has almost 5 million cable customers in the UK, versus about 11 million for BSkyB.

The rivalry between the two men is longstanding. In 2008, Malone traded a 16 per cent holding of News Corp’s shares for a 41 per cent stake in pay-TV provider DirecTV, cash and some regional sports networks. That deal ended a standoff that had led Murdoch to erect takeover defenses in 2004 to stop Malone from increasing his stake.

Murdoch, 81, attempted in 2010 to take control of the 61 per cent of BSkyB that News Corp. didn’t already own with a £7.8 billion offer, part of a plan to combine the British company with other European assets.

He had to drop the plan a year later when employees at News Corp’s print business were caught hacking into subjects’ phones for stories, making the acquisition politically impossible.

Murdoch weighs in as the 91st richest person in the world with estimated net wealth of $11.4 billion, according to the Bloomberg Billionaires Index.

Malone is ranked 199th by Forbes.

‘Game changer’

The takeover of Virgin Media “can be seen as a game changer for pay-TV in the UK because Malone has very deep pockets,” said Alex DeGroote, an analyst at Panmure Gordon in London. “He’s a player with stronger resources than Virgin, and he’d definitely change the competitive dynamics for Sky.”

Shares of Virgin Media have tripled in New York trading since Neil Berkett took over as CEO in 2008. By focusing on high-speed Internet and avoiding bidding for the most expensive content, such as sports rights, Virgin Media reported its first annual profit in 2011.

Berkett said today he will step down when the deal closes because he’s “not a very good number two.” Liberty Global, led by CEO Mike Fries, said it hasn’t found a successor.

Virgin Media today reported 2012 income of £261.4 million ($409 million) from continuing operations before taxes. The company had a 920 million-pound net loss in 2008.

Average premium
The shares rose 0.4 per cent to 2,900 pence at 8:12 am in London, adding to yesterday’s 17 per cent gain after Virgin Media confirmed it was in talks with Englewood, Colorado-based Liberty Global about a deal.

Acquirers have paid an average premium of 22 per cent for deals in cable satellite and TV industry in the past 12 months, according to data compiled by Bloomberg.

Most of Liberty Global’s operations are in Europe, including Germany, Belgium, Austria, Ireland and Switzerland. In addition to BSkyB and Sky Deutschland, News Corp. owns Sky Italia in Italy. Liberty Global said it may seek a European listing following the Virgin Media deal, expected to be completed in the second quarter.

Malone may ultimately sell his European cable empire to Vodafone Group Plc, giving the region’s largest mobile-phone company access to fixed-line Internet and pay-TV services to bundle with wireless packages, said Robin Bienenstock, a London-based analyst at Sanford C Bernstein.

Vodafone Next?
“The out for John Malone is, ‘I build this big business, and then I sell it to Vodafone, who’s desperate because they don’t have any wireline,” Bienenstock said.

Representatives at Newbury, England-based Vodafone and New York-based News Corp. declined to comment.

Malone has historically used his Liberty companies as a holding vehicle for media and telecommunications shares. Today, Liberty Media owns shares in Time Warner Inc., Viacom Inc. and Sirius XM Radio Inc., while Liberty Interactive holds interests in video and online shopping businesses such as QVC Inc. and HSN Inc.

Malone was originally CEO of Liberty’s parent, Tele- Communications Inc., taking the role in 1973 and building it into the second-biggest U.S. cable operator. He sold the business to AT&T Corp. in 1999 and the telecommunications company spun off Liberty Media, the programming arm, in 2001.

German Deals
Liberty Global bought Germany’s Unitymedia in 2010 and Kabel Baden-Wuerttemberg the following year to create the country’s second-largest cable operator. In Belgium, however, Malone’s bid for full ownership of Telenet Group Holding NV fell through last month after investors rejected a 2 billion-euro ($2.7 billion) offer, leaving Liberty Global with a 58 percent stake.

In 2002, Malone was blocked from buying cable systems from Deutsche Telekom AG for $4.8 billion, which would have made Liberty the largest cable operator in Europe.

Attempts to take control of U.K. operators NTL Inc. and Telewest Communications Plc were then resisted by the companies’ bondholders. By November of that year, Malone ended a $751 million agreement to buy Dutch cable operator Casema after regulators delayed the purchase. NTL and Telewest merged in 2006, later becoming Virgin Media.

“If Malone is successful and winning customers from Sky then absolutely we’d see a power shift,” Ovum’s Drury said. “But there’s a lot for them to do to win customers from Sky.”