Optical/IP Networks

Carlyle Eyes Virgin

Virgin Media Inc. (Nasdaq: VMED) is in takeover talks with private equity giant The Carlyle Group LLC , according to market speculation Monday morning.

Numerous reports suggest that Carlyle is in early-stage talks with Virgin media's management about a bid of anything up to $35 per share, which would value the operator at around $11.5 billion. Its share price ended Friday trading at $24.37, giving Virgin Media a market capitalization of $8 billion.

Virgin Media is also carrying net debt of £6.1 billion ($12.3 billion), so the value of a $35 per share bid would be more like $23.8 billion.

Neither party is commenting on the reports.

This isn't the first time Virgin Media, which provides a mix of TV, broadband, and fixed voice services to its 5 million cable customers, mobile services to 4.5 million subscribers, and enterprise services through its Virgin Media Business Ltd. unit, has attracted private equity attention: Last year NTL Group, which subsequently changed its name following the acquisition of Virgin Mobile, was believed to be in talks with a group of private equity companies. (See Reports: Equity Firms Approach NTL and NTL Relaunches as Virgin Media.)

Now it appears Carlyle is trying to move in on Virgin Media following months of strategic and financial disappointments. Earlier this year the cable operator failed in its bid to buy British broadcaster and TV producer ITV plc (London: ITV) after key rival Sky acquired a stake in ITV. (See ITV Rejects $8.9B NTL Bid and NTL Abandons ITV Bid.)

Then Virgin Media became involved in a programming spat with BSkyB that resulted in the cable firm losing the rights to broadcast Sky's entertainment channels, which include popular shows such as The Simpsons, 24, and Lost. The loss of those key channels, over which Virgin Media has now launched legal proceedings, led to the defection of 47,000 customers and a disappointing set of first-quarter results. (See Virgin Media Slams Sky, Virgin Media Files Against Sky, and Virgin Media Reports Q1.)

Since then, the cable company has issued a healthier forecast for its second quarter, but that hasn't helped the company's stock to recover much value since Sky pulled its channels at the beginning of March, when Virgin Media's share price stood at $26.61. Since then it has lost $2.24, or more than 8 percent of its value. (See Virgin Media Revises Guidance.)

The general view is that private equity firms believe they can make a better job of running Virgin Media than the current management team, and following this year's performance, investors might think the same.

Ovum Ltd. analyst Mike Cansfield also believes the cable operator is displaying the qualities that cash-rich private equity firms are looking for -- it's underperforming financially, valued at less than the sum of its parts, and failing to exploit the operating cost reduction opportunities provided by a major consolidation process.

The analyst also notes that growing through acquisitions doesn't put off the private equity bidders. "This shows that bulking-up through consolidation is one thing, but efficiency counts too. This bid is all about the latter, and indicates that size alone is no defense against private equity raiders who have the funds and belief that they can do a better job," writes Cansfield in a research briefing issued today.

This also means that Carlyle may encounter competitive bids. Virgin Media is believed to have hired Goldman Sachs & Co. to examine possible alternative offers, opening the door for the private equity grouping of Providence Equity Partners , The Blackstone Group , Kohlberg Kravis Roberts & Co. (KKR) , and Cinven Ltd. , which failed to strike a deal with NTL last year, to put together a new offer.

— Ray Le Maistre, International News Editor, Light Reading

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