Private Equity Makes a Move for Virgin Media

Virgin Media, the UK cable TV, telephony, broadband and mobile group, is currently the subject of a preliminary offer of $11.5 billion by the private equity group, Carlyle. Virgin Media was formed last year from cable operator NTL (which had just completed a merger with Telewest) and Virgin Mobile.

We have always had the view that bringing together three disparate entities into one would be a long and difficult task. The vision was to create one company that can offer TV, phone, broadband and mobile in an era where everything is coming together. Judging by the results so far, progress has been slow (revenues are down 5.5% to £1,022 million, and operating cashflow is down 2.3% to £305.7 million). Add in the ongoing argument Virgin Media has with Sky about content and the Board have a lot of issues to deal with concurrently.

The Carlyle group thinks it can do a better job.We believe there are three reasons why private equity firms are interested in the telecoms sector: they believe some firms in the sector are underperforming; the whole is worth less than the sum of the constituent parts; and consolidation / transformation creates opportunities that are not being fully exploited. Virgin Media seems to fit these criteria quite well. From Virgin's perspective, taking the company private would enable it to deal with the three-into-one challenge out of the media spotlight. This would ease the pressure a little. But the attitude of Sir Richard Branson (who has a 10% share in the business) is likely to be key. He has used this approach in the past with the Virgin Atlantic airline, so it cannot be taken for granted that Virgin Media will fight against this in principle.

Virgin Media has responded by asking Goldman Sachs to act on its behalf and conduct an auction for the business. So Carlyle may not have it all its own way - a bidding war amongst private equity firms may ensue.Within a broader industry context, 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 defence against private equity raiders which have the funds and the belief that they can do a better job.