Storm Clouds Gather Over Sunrise's $6.4B Liberty Deal

A scuffle has broken out between Sunrise and top shareholder Freenet over the Swiss operator's planned $6.4 billion takeover of UPC Switzerland, with Sunrise today slamming Freenet's opposition to a rights issue intended to fund the acquisition of the Swiss cable company.

Sunrise shares fell 3% after it said in a lengthy statement that Freenet was being "guided by its own short-term financial constraints and self-serving objectives." Accusing Freenet of making "inappropriate requests at the expense of minority shareholders," its board has now moved to exclude Freenet representatives from any discussions related to the UPC transaction.

The clash now threatens to derail a takeover that Sunrise CEO Olaf Swantee has touted as a strategically important move. Sunrise's share price was trading 4.5% lower at the time of publication and has fallen 17.5% since the start of the year.

Freenet, which holds a 24.5% stake in Sunrise, had previously voted against the UPC takeover, describing it as "unfavorable" for all Sunrise shareholders. It argued that UPC had been overvalued at 6.3 billion Swiss francs ($6.4 billion) and said the transaction posed too much risk for Sunrise shareholders. At more than 100% of Sunrise's market value, the proposed rights issue of CHF4.1 billion ($4.2 billion) would overburden Sunrise shareholders, it claimed.

The German company proposed an alternative arrangement under which UPC owner Liberty Global would take a stake in the combined entity.

However, Sunrise has defended the transaction fee, saying it compares favorably with other recent European deals and that Freenet representatives approved it when the proposal was first made in February. Freenet also backed the all-cash offer and associated rights issue when talks about a partially stock-funded transaction collapsed, it says.

Sunrise has now revised its estimates of the cost savings and additional revenues that would result from a deal to about CHF280 million ($285 million) annually, an increase of CHF45 million ($46 million) on its original forecast. This combined with UPC's better-than-expected operating performance since the deal was first announced means it could reduce the rights issue by CHF1 billion ($1 billion), but Freenet has already rejected that proposal, it says.

It also insists that Freenet is being motivated by major financial and strategic challenges, pointing out that Sunrise's dividend payments are one of Freenet's few sources of free cash flow and that Freenet remains highly leveraged, with a net debt that equals about 4.8 times annual earnings (before interest, tax, depreciation and amortization), much higher than its target ratio of 3.5.

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Freenet's opposition could ruin the takeover plans if other Sunrise shareholders take Freenet's side. CEO Olaf Swantee has argued that a merger is needed to help Sunrise compete more effectively against rival Swisscom in the market for combined fixed and mobile services. UPC's cable infrastructure could also provide important "backhaul" connections for Sunrise's 5G mobile network.

"I am excited about the deal, as we believe it will improve our scale advantage and strengthen our convergence positioning, so we can compete more successfully in the long term," said Swantee in a results statement accompanying today's update on the UPC matter.

Sunrise blamed a fall in mobile hardware sales for a 1.7% dip in revenues for the second quarter, to CHF455 million ($463 million), compared with the year-earlier period. A rise in more profitable service revenues fueled a 6.7% increase in net income, to CHF26 million ($26 million).

Sunrise has added another 157,000 contract mobile customers since June last year, giving it more than 1.8 million in total. Its base of prepaid customers shrank by 95,000 over the same period, to 592,000. Sunrise also hailed momentum at its small Internet business, which has grown by 41,000 customers to 483,000 in the last year.

UPC's revenues fell 5.2% in the second quarter, to $315 million, compared with the year-earlier period, according to a recent earnings update by Liberty Global. The company has more than 1 million cable subscribers but has been losing customers in recent quarters.

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— Iain Morris, International Editor, Light Reading

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