The year 2016 ended with some good tidings for Dutch consumers and businesses. According to a recent report by The Business Journal, the long-awaited proposed joint venture (JV) between the units of Liberty Global Plc. LBTYA and Vodafone Group Plc. VOD to merge their Dutch operations finally materialized on Dec 31.
The two companies announced that Liberty Global Europe Holding B.V. and Vodafone International Holdings B.V. have formed a 50:50 JV. The JV is valued at €3.5 billion (US$ 3.68 billion) after deducting €7.3 billion in debt held by Ziggo, the brand name of Liberty Global's Dutch operation.
As agreed upon, Liberty Global will receive approximately €2.2 billion (US$2.32 billion) and Vodafone will receive €6 million (US$6.31 million) in cash payments post closure.
The total cash proceeds came in at over €2.7 billion (US$2.84 billion) for Liberty Global and approximately €0.9 billion for Vodafone, considering the cash generated by both company’s respective Dutch operations from Feb 2016 through Dec 31, 2016. The companies aim to deploy this capital to drive long-term growth and investor returns.
The deal was first announced in Feb 2016, wherein it was decided that Vodafone will pay €1 billion (approximately $1.12 billion) in cash to Liberty Global to bring the valuation of each of their local units on par.
The 50-50 JV
The joint venture – VodafoneZiggo Group Holding B.V. – will have 4.2 million video subscribers and 5.3 million wireless phone subscribers. The JV will operate under both the Vodafone and the Ziggo brands and will create a nationwide integrated communications provider with 7.1 million homes passed by the fiber-rich broadband network of Ziggo Group Holding B.V. and the nationwide 4G mobile coverage of Vodafone’s Dutch operation.
VodafoneZiggo is expected to be an integrated provider of converged communications services in the Netherlands with a full suite of market-leading TV, broadband, fixed-line and mobile products on day one of the JV.
Following all post-closing payments, VodafoneZiggo will have gross debt of €10 billion. Moreover, the JV will distribute 100% of its available cash to shareholders of both sides, subject to a minimum operational cash balance. The JV is also expected to undertake periodic recapitalisations subject to market and operating conditions, to maintain its target leverage ratio.
The deal will allow the joint-venture partners to offer bundles of cable television, broadband and mobile services. The combined Vodafone-Liberty Global entity should pose a formidable challenge to key players like Royal KPN NV and T-Mobile Netherlands of Deutsch Telekom.
To Conclude
We are rather impressed with the merger and acquisition plans of Liberty Global. Apart from the JV with Vodafone, the launch of DOCSIS 3.1 network services, the acquisition of UTV Ireland TV stations from ITV, the long-term agreement with Netfix Inc. NFLX and the takeover of Cable & Wireless are expected to drive growth at Liberty Global.
We believe the above tailwinds have resulted in Liberty Global’s current Zacks Rank #2 (Buy). In spite of such efforts, shares of Liberty Global have underperformed the Zacks categorized Cable TV on in the past one year, due to multiple headwinds that hurt the stock last year. The stock lost 26.73% lagging the industry’s growth of 18.35% over the same period.
Another Key Pick
Another well-placed stock in the telecommunication sector is Liberty Media Corp. LMCA sporting a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Liberty Media posted a positive earnings surprise in three of the four trailing quarters, the average beat being 72.13%.
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