By Alexander Bergmüller (IE Business School), and Jack Briody (Columbia University)
Overview of the deal
Acquirer: Liberty Global
Target: Sunrise Communications Group
Total Transaction Size: $7.4bn
Announced date: August 11tth, 2020
Acquirer advisor: Credit Suisse, J.P. Morgan and LionTree Advisors
Target advisor: Homburger AG and Shearman & Sterling LLP
Liberty Global to acquire 100% of Sunrise Communications Group by Tender. The Denver-based company will pay CHF110 a share in cash to acquire Sunrise, which will be funded from Liberty Global’s cash reserves and debt. The offer represents a 32% premium to the 60-day volume weighted average price per share of CHF83.17 through August 11, 2020 and puts Sunrise’s equity value at CHF5.0 billion with a total enterprise value of CHF6.8 billion. Sunrise's Board of Directors is unanimously recommending that its shareholders accept the offer, and Freenet AG -- Sunrise’s largest shareholder, which holds approximately 24% of Sunrise’s capital -- has signed a binding, unconditional commitment to tender its shares at the offer price. Sunrise is therefore expected to become a wholly owned subsidiary within the Liberty Global group of companies.
“It wasn’t a question of ‘is this a good deal?’ only a matter of how it would get done”- Liberty Global CEO Mike Fries
Company Details: Liberty Global
Liberty Global (NASDAQ: LBTYA, LBTYB and LBTYK) is one of the world’s leading converged video, broadband and communications companies, with operations in 6 European countries under the consumer brands Virgin Media, Telenet and UPC. The company invests in the infrastructure and digital platforms that empower the customers to make the most of the digital revolution. The substantial scale and commitment to innovation enables Liberty Global to develop market-leading products delivered through next-generation networks that connect 11 million customers subscribing to 25 million TV, broadband internet and telephony services.
Founded in 2005, headquartered in Denver, Colorado, U.S.
CEO: Mike Fries
Number of employees: 21,000
Market Cap: $ 12.9bn (as of August 15th, 2020)
LTM Revenue: $11.4bn
LTM EBITDA: $4.8bn
LTM EV/Revenue: 0.2x
LTM EV/EBITDA: 0.5x
Company Details: Sunrise Communications AG
Sunrise Communications AG (commonly known as Sunrise), is a Swiss telecommunications provider based in Zurich. The company has 2.99 million customers, making it the second-largest telecommunications company in Switzerland after Swisscom. It provides mobile, TV, and landline phone and internet services.
Founded in 2000, headquartered in Opfikon, Switzerland
CEO: André Krause
Number of employees: 1,800
Market Cap: $ 4.9B (as of August 15th, 2020)
LTM Revenue: $1.4bn
LTM EBITDA: $0.6bn
LTM EV/Revenue: 3.4x
LTM EV/EBITDA: 8.0x
The combined company will prove to be a true contender in the medium to large enterprise space, currently dominated by Swisscom. Mike Fries made Liberty Global’s intentions explicit in stating that “this merger would give us a much stronger platform from which to challenge Swisscom.” Large Swiss corporations seek integrated solutions combining IT, cloud, internet, TV, landline, IoT, security, and mobile, and Swisscom’s ability to tie their services into a “one-stop” shop has been critical to their success in the B2B segment. Sunrise has already taken some steps in the right direction on its own, pushing landline integration into Microsoft teams and emphasizing the importance of companies making the transitioning to their application offerings rather than sticking to antiquated business hardware. UPC Switzerland is expecting to continue making headway in the enterprise space, increasing share of wallet of Sunrise’s existing customer base. Given that the COVID-19 pandemic has forced many businesses to wrangle with virtual solutions, it is of the utmost importance that big players continue to provide their enterprise clients with easy-to-use product suites for remote work.
While it will take time for the combined company to complete its network roll-out of 5G, in the near future customers can expect to benefit from a company with enough scale to service more innovative systems with ease. Mike Fries notes, “The industrial logic of this merger is undeniable, but the real winners are Swiss consumers and businesses. This powerful combination of 5G wireless and gigabit broadband will accelerate digital investment at a time when connectivity has never been more essential."
The Liberty-Sunrise merger will create the leading national converged challenger in Switzerland. The combined business would have CHF3.17 billion in revenue, 2.1 million mobile post-paid subscribers, 1.2 million broadband subscribers and 1.3 million TV subscribers, reflecting approximately 30% market share in each segment. The deal will position a strong player to challenge the well-established incumbent Swisscom.
The industry and the market are growing: there is a greater scope for investment in next-generation network and product innovation. After Sunrise´s acquisition, the combined business will be securely positioned to continue its network roll-out. This includes 5G and future technologies, supporting a range of new and enhanced products and services. Roughly 90% of Swiss households will have access to 1 gigabit broadband speeds by 2021 once the integration of UPC’s gigabit network, covering around 75% of homes, with Sunrise’s existing fiber to the home (FTTH) partnerships covering over 30% of homes, is completed.
By offering differentiated, converged products and services for customers, the combined company will continue to eat up Swiss market share. On the one hand, Sunrise is acknowledged as having the best-in-class mobile infrastructure, while also building an essential customer base in broadband and TV. On the other hand, UPC Switzerland is the country’s leading provider of gigabit broadband, offering the best video platform with features such as voice control, 4K, full content offerings and best in-class TV apps. As a fully converged provider, the consolidated business will be strong to compete in the Swiss market, accelerating the sale of converged fixed-mobile services to existing customers and new services using the best of each company’s product portfolios, skills and networks.
Total synergies are expected to total CHF3.1 billion after integration costs, the bulk of which (CHF2.6 billion) coming from cost and capital expenditure synergies. For any telecommunications company, the cost of building out new infrastructure (e.g. 5G, FTTH) is colossal; the combined company will have the capacity to make use of shared physical infrastructure, whereas prior to the deal, both companies would have had to continue building out their own systems.
Risks and Uncertainties
Sunrise shares are up 26.51% to CHF109.30 (as of August 16th, 2020) following the announcement of the merger. The fact that Sunrise’s share price has nearly converged to the tender offer price of CHF110 represents intense investor confidence that the deal will be executed despite the fact that the deal is still subject to Swiss regulatory approvals. Confidence of this degree is typically a positive for a deal of this size with respect to any possibility for regulatory scrutiny, as it is an indication that investors do not see Swiss regulatory approvals as a major barrier to the deal’s success.
A much more real concern may stem from the doubt Liberty Global has previously cast on the potential for growth in European telecommunications markets. The company has been divesting many of their European assets over the last few years, for example, the sale of their cable networks in Germany and parts of central Europe to Vodafone for $22bn in 2019. The company also pulled out of Austria, sensing that their operations there did not have the scale to guarantee success going forward. While CEO Mike Fries claims that Switzerland is “a great market and a great opportunity to put capital to work,” it is possible that like Germany and Austria, the Swiss market is tighter than Liberty Global realizes and may not fit with the company’s strategy in the long-term.
Another risk that could present itself is the overestimation of cost synergies that result from the deal. At CHF3.1 billion, anticipated synergies play a large role in the expectation that Liberty Global will not be over-levered in the years to come. While roughly 83% of the CHF3.1 billion figure comes from low-risk cost and capital expenditure synergies, hidden costs such related to the logistical nightmare of merging the companies’ respective existent telecommunications infrastructure ought not be underestimated. Take the Charter-Time Warner Cable merger from 2015: following the deal, the combined company has needed to iteratively refine software used to communicate with its contractors and has experienced other hits to operational momentum resulting from the company’s massive size. In short, scaling quickly in the telecommunications industry is a balancing act that requires care and resources, which could eat away at synergies. Further, there is some potential for the situation to be exacerbated by 5.0x target leverage (pro forma for the transaction including vendor financing and leases), as Liberty Global is financing the deal with CHF3.2 billion in fresh debt.