Liberty Global Eyes Virgin Media

A leading cable operator in Europe, Latin America and Australia, Liberty Global Inc. (LBTYA - Analyst Report) plans to bid for UK's leading pay-TV service provider Virgin Media Inc. (VMED) in the upcoming days as reported by the Financial Times.

The UK telecom market is extremely competitive with low barriers to entry. Since its inception, Virgin Media incurred annual losses until till 2010. Precipitous losses may create severe problems for the company going forward. The UK government raised the value added tax (VAT) in January 2011. Virgin Media may not be able to pass the full amount of the increased VAT to its customers as it may affect the company’s ARPU in the near term.

Liberty Global initiated its business restructuring process back in 2010. The company is currently concentrating primarily in Europe and Latin America while divesting operations in other parts of the world. Germany is one of the major growth areas for Liberty Global, where it has completed two major acquisitions. The company acquired UnityMedia GmbH and Kabel Baden-Wuerttemberg GmbH & Co KG, the second and the third largest cable TV companies in Germany, respectively.

Few days back, Liberty Global also raised its stake in its integrated telecom Belgian subsidiary, Telenet to 58.4% from its existing 50.2% stake.

Western Europehas emerged as a lucrative market for the cable operators. These markets are witnessing growing demand for pay-TV services together with triple-play bundled services, which combine basic cable TV, Internet, and telephony. In the coming years, we believe Liberty Global’s revenue will continue to benefit from a ‘triple play’ of video, broadband, and telephone, as it signs up more “bundled” customers in Europe.

Moreover, deployment of high-speed DOCSIS 3.0 network has facilitated the company to narrow the gap between two hugely dominated UK’s pay-TV markets Virgin Media and BT Group plc. (BT - Snapshot Report).Furthermore, Liberty Global has recently launched a hybrid IP video gateway called “Horizon TV” in the Netherlands. This innovative IP gateway will combine the cable operator’s video services with web-based content through an integrated cable modem. Horizon runs on Intel Corporation’s (INTC - Analyst Report) Atom CE processor.

However, we remain concerned about the company’s highly leveraged balance sheet. With more than $26 billion debt appearing on its balance sheet at the end of the third quarter of 2012, may act as a bottle neck for its future acquisition purpose.

Currently, Liberty Global has a Zacks Rank #3 (Hold).