Liberty Global Faces Hurdles in Swiss Sale

Liberty Global continued its great European cable selloff Wednesday, swinging a deal to unload its UPC Switzerland operations to Sunrise for $6.5 billion on Wednesday. But that deal now faces a big obstacle in the form of an unhappy major Sunrise shareholder.

The deal, combined with other recent activity, would cut Liberty Global's European cable portfolio in roughly one-half over the past couple of years, as the cable operator cut deals to sell its German and Eastern European cable assets to Vodafone, forming a joint venture with Vodafone in the Netherlands and making this latest deal with Sunrise. As a result, the MSO would be left with sole ownership of cable systems in just the UK, Ireland, Belgium, Poland and Slovakia, assuming European regulators approve all the pending transactions.

However, Freenet, which owns a nearly 25% stake in Sunrise, may throw a monkey wrench into the works. Earlier today Freenet said it would not participate in a planned $4.1 billion rights issue to fund the transaction, arguing that the issue would saddles existing Sunrise investors with all the risk, not Liberty Global.

Speaking on the company's fourth-quarter earnings call late Wednesday, Liberty Global officials downplayed the notion that any opposition from Freenet could torpedo the deal, which has been a year in the making. They stressed that the transaction just needs majority shareholder approval from Sunrise, not 75% as some analysts had thought.

"It's not a 75% approval, it's 51% approval," said Liberty Global CEO Mike Fries, who hailed the deal as "transformational" for Sunrise because it would give that company scale to compete against incumbent Swisscom in the Swiss market. "So, they do not have blocking position and you know their position is not so unknown to us."

If the deal does go through, it would give Sunrise control of another 1.1 million total customers, breaking down to 1.1 million video, 700,000 broadband and 520,000 voice subscribers. UPC Switzerland's HFC network passes about 2.3 million homes. The two companies aim to close the deal before the end of the year.

Despite its apparent retreat from the continent, Liberty Global executives insist that the company is not pulling a Brexit and will remain a major player in Europe. On the earnings call yesterday, Fries stressed that the company will remain "the largest cable operator in the UK, Ireland, Belgium, Poland and Slovakia" with operations that "serve 23 million RGUs and generate $11 billion of annual revenue." He noted that Liberty Global will also still "serve another 10 million RGUs and generate over $4 billion of annual revenue in the Netherlands" through its JV with Vodafone.

"Each of these businesses is entering a new period of reduced capital intensity and meaningful operating free cash flow growth," Fries said. Bolstering this view, he referred to the Sunrise deal as the "last step" of the company's "rebalancing" in press interviews and said the company is "happy" with its new, slimmed-down European portfolio.

Fries also boasted that Liberty Global will now have "a significant cash balance, a $2 billion strategic investment portfolio and over $2 billion in net tax assets" once all its pending deals go through. That immediately triggered speculation among analysts about what Liberty Global, which buys and sells assets nearly as often as people change their socks, might seek to acquire elsewhere in Europe. Hot prospects include O2 in the UK.

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— Alan Breznick, Cable/Video Practice Leader, Light Reading

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