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We reiterate our long-term Neutral recommendation on Virgin Media Inc. based on the company’s mixed financial results for the fourth quarter of 2012. Although revenue surpassed the Zacks Consensus Estimate, earnings per share fell below the same.

Why Kept Neutral?

On Feb 5, in a significant strategic move, Virgin Media came out with a joint press statement with Liberty Global Inc. (LBTYA - Analyst Report). Through a cash and equity deal, Liberty Global will acquire a 100% stake in Virgin Media.  The deal implied a total consideration of around $15.8 billion or an enterprise value of nearly $23.3 billion.

Both the companies are expecting the deal to be completed by the second quarter of 2013, subject to customary regulatory approval. If this deal gets approved, then Virgin Media will become a formidable challenger to BSkyB, the largest pay-TV operator of U.K. BSkyB is partially owned by global media giant News Corp. (NWSA - Analyst Report). Virgin Media currently has a Zacks Rank #4 (Sell).

Balanced View on Virgin Media

In the fourth quarter of 2012, Virgin Media improved itsaverage monthly churn rate to 1.1% from 1.3% in the year-ago quarter. Subscribers opting for the company’s services have shown their preference for its high-margin bundled services with super-fast broadband offerings.

Another major growth area is the company’s next-generation video services using TiVo Inc. (TIVO - Analyst Report) developed Internet-connected TV platform. At the end of 2012, the company installed Internet-connected TV platform for approximately 1.33 million customers, which is 35% of the company’s total installed TV base.

In the fourth quarter, the company added a net total of 187,300 Internet TV customers. Pay-TV customer base grew by 59,900 in the last quarter.

Virgin Media is currently trading at the high end of its 52-week price range. The stock price has moved up by a whopping 116.6% in the last year compared with 22.2% in S&P 500 over the same period.

Moreover, the stock is currently trading at significantly high multiples compared with the S&P 500 with respect to several valuation metrics. We believe that Virgin Media has limited potential to offer above market gain in the near future.

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