Virgin: Take the money and run, Beardie

Analysis: Private equity group Carlyle is bidding to take over Virgin Media, the UK's cable monopoly formerly known as NTL. We reckon Branson should take the money. He could get shot of the debt-burdened albatross, and put the money to good use elsewhere in the Virgin telco empire.

(I analysed Virgin's debt troubles recently here.)

When Virgin Mobile bought the company formerly known as NTL and now known as Virgin Media back in July 2006, ownership was divided between Branson, which through Morstan Nominees owned 71.2 per cent or 184,238,328 shares in Virgin Mobile, and the minority shareholders, who owned 28.8 per cent of the new company.

The options were as follows:

• Cash Only: 372p
• Shares Only: 0.23245 shares in NTL (valued roughly at 351p)
• Cash-and-Shares: 67p Cash and 0.18596 Shares in NTL (valued roughly at 281p)

The Cash-and-Shares option was really the "Branson option", as it was pitched well below the Cash-only or Shares-only options which were aimed at the minority 28.8 per cent shareholders. In fact, this has been a great return for the minority shareholders: compared to the cash offer the share price had risen 86 per cent in the two years since the IPO in July 2004, and an increase of 48 per cent from the average share price in the 12 months preceding the offer.

The press is speculating that the offer from Carlyle is pitched at around US$32.50, which equates to 377p per share in the equivalent Virgin Mobile share price. An increase of 5p is hardly a decent return, taking into account the cost of money and presumed increased transaction costs with a NASDAQ stock denominated in US dollars. The Virgin Mobile Minorities - with the benefit of hindsight - appear to have been better served by taking the cash.

Cash infusion

In fact, most of the minorities appeared to have taken the cash and run. NTL issued stock worth £518.8m in the transaction, or approximately 34.4m shares of which the Richard Branson allotment was 34.2 million shares. These shares were valued at £15.07 or US$26.59. The Cash Cost to NTL was £418.2m.

Richard Branson himself took the Cash-and-Shares offer, which resulted in a £123.4m cash payment in July 2006 and 34,260,959 shares. Branson's current position with the NTL/Virgin Media shares is complicated by the "Cap 'n' collar" transaction he has recently taken out for 12,847,860 shares or 37.5 per cent of his shareholding. The collar element is $31.98 per share and resulted in a prepayment $224.9m. Assuming that any buy-out price would be greater than $31.98, this would leave Branson with an additional payment due of $192.7m, minus some cost-of-money adjustment.

Outside of this derivatives transaction, Branson has 21,413,099 shares remaining in NTL/Virgin Media with a value of around $696m at a buyout price of $32.50. I'm guessing that he will want to roll-over all or part of this shareholding into the new (and presumably even more highly leveraged) Virgin Media. Once the effect of the increase in debt is taken into account, he might even be able to maintain his 10 per cent shareholding in the new company, and thus protect his brand (oops, sorry)...annual royalty payment of 0.25 per cent of Virgin Media consumer revenues.

Mobile ambitions

The big question is what Branson is going to do with all this cash - it certainly gives him more flexibility with regard to Virgin Mobile USA and the proposed IPO.

IPOs of Mobile Virtual Network Operators (MVNOs) in the USA will be tough at the moment after the failure of amp'd. Overnight it appears that Helio has secured another $200m in financing from the deep pocketed parents, SK Telecom and Earthlink.

I'm wondering if there is an opportunity for Branson to do a Virgin Mobile UK on Virgin Mobile USA.

The original terms of the Virgin Mobile UK network deal between one2one and Richard Branson in retrospect turned out to be heavily skewed in favour of Virgin Mobile. Once one2one was sold to T-Mobile, the new management were not too happy about the situation and renegotiated the contract, with Richard Branson taking 100 per cent ownership of Virgin Mobile, a new wholesale deal between Virgin Mobile and T-Mobile and some return due to T-Mobile if Virgin Mobile was subsequently IPOed.

Now that Sprint is struggling and probably reluctant to put more equity into Virgin Mobile USA, I'm wondering if Branson can put some more cash in with the hope of a better wholesale agreement and increased shareholding. Thereby, Branson would avoid the immediate need for an IPO of an unprofitable company at a difficult time.

Mind you, Branson could also just as easily have seen that the bubble on the MVNO game is fast deflating - meaning it is best not to put any more cash in. He also has embryonic and cash hungry MVNOs in France, South Africa, and India to worry about. ®

This article appears today on the Telebusillis blog.