Swiss deal collapse is a rare blow for John Malone

Sunrise CEO Olaf Swantee Ppr Media Relations Ag

Sipping a beer at London’s Savoy hotel earlier this month, Olaf Swantee was in good spirits. The telecom executive’s efforts to combine his Swiss mobile company Sunrise with a rival owned by US “Cable Cowboy” billionaire John Malone appeared on track.

Two weeks later Sunrise’s $6.3bn (CHF6.2bn) acquisition of UPC, one of the last vestiges of the European empire built by Malone’s Liberty Global, had unravelled.

Swantee, who interviewed for the chief executive role at BT last year, declared the deal dead, killed by a lack of investor support from Sunrise shareholders for a rights issue that would have helped fund it.

The deal’s collapse was a rare defeat for Liberty, which has completed 360 transactions since the turn of the century and raised billions selling cable assets in Germany, Austria, Hungary and the Czech Republic. Liberty’s Nasdaq-listed stock fell 5% on the news on Tuesday.

The demise of the transaction is the latest setback in the consolidation of Europe’s telecoms sector. Yet unlike previous flops, such as Three’s aborted attempt to buy O2 in the UK, it was shareholders, not regulators, that thwarted the deal.

Nevertheless, Mike Fries, Liberty chief executive, said he believes the potential value of the combination means the Swiss market will eventually consolidate one way or the other.

“This deal could come back to life,” he told the FT. “Nobody can argue with the industrial logic,” he said of the merging of cable and mobile networks across Europe. “UPC is the fulcrum asset.”

“It’s good news for Swisscom.” Olaf Swantee, chief executive of Sunrise

Liberty Global had sought a clean exit from Switzerland with the sale to Sunrise but with the deal looking rocky, it agreed at the last minute to participate in the rights issue by spending CHF500m ($506m) on shares.

Competition regulators in Switzerland had already cleared the deal as the combination of mobile and cable networks to challenge a strong incumbent — in this case Swisscom — was once again waived through.

Fries played down the wider implications of the agreement folding, arguing that there had been €100bn of fixed-mobile transactions in Europe in recent years. “There’s more to come,” he said.

Freenet trouble

Swantee faced a problem from the start in Sunrise’s largest shareholder, Freenet. The German mobile phone reseller, which bought almost a quarter of Sunrise in 2016, relied on the telecoms company’s cash flow to pay its dividends.

Christoph Vilanek, Freenet’s founder and chief executive, signed off on the UPC acquisition, according to Swantee, but quickly and publicly moved to oppose the huge rights issue needed to pay for it.

Vilanek was soon joined by a largely German-based block of investors that opposed the takeover and started to argue that the launch of 5G services in the UK obviated the need for the deal as Sunrise would be able to offer broadband-like speeds over a mobile service.

That argument was laughed off by Sunrise and the supporters of fixed-mobile convergence strategies. Vodafone’s move to acquire Liberty’s Unitymedia cable network in Germany was justified by the synergies reaped from combining the two types of network technology. Sunrise’s revised plan suggested it would generate CHF3.1bn worth of synergies from the UPC combination.

The deal’s failure perhaps says less about the strategic rationale of cable-to-mobile mergers and more about the price Sunrise was willing to pay for UPC. The takeover was pitched at roughly ten times operating cash flow, which would have generated $2.6bn in proceeds for Liberty Global excluding UPC’s debt.

ISS to blame

Swantee laid the blame at the door of ISS, the proxy adviser, which said a fair value for UPC was at most CHF5.3bn. He criticised ISS’s report, which had to be corrected after publication, for recommending shareholders reject the deal. “That was the trigger point,” he said, referring to the collapse of the deal.

Swantee, who previously sat on the board of T-Mobile in the US, argued that Sunrise had explored other ways to combine with UPC, including joint venture deals and minority stakes, but that it exhausted all other options.

Meanwhile, he expressed concern that while Swiss telecoms consolidation was likely given the regulatory clearance, Sunrise could be on the sidelines.

“It’s good news for Swisscom,” he said.

Copyright The Financial Times Limited 2019