Carlyle Group Play for Virgin Media May Spur Bidding War

Private equity firm Carlyle Group reportedly has offered about US$11 billion for UK-based Virgin Media, with a bidding war for the rights to acquire the quirky company possible.

Carlyle may have bid as much as $30 to $35 per share for the company, according to press reports. Virgin provides cable TV, high speed Internet access as well as both landline and mobile calling services to millions of people in Great Britain.

With the nearly $12 billion in debt that has accumulated on Virgin’s books as it built out a video-on-demand network and other infrastructure, the total value of the buyout would more than double to around $23 million.

Virgin, which broke new ground in the UK by becoming the first to offer the quadruple play of TV, Internet and landline and mobile calling services, confirmed it had received an offer Monday, but declined to offer any details.

Carlyle is not the first private equity player to make a run at Virgin. Last year, Providence Equity Partners was reportedly in talks with Virgin that broke down before a deal could be reached. If Virgin shareholders appear open to a deal, Providence could return attempt to counter Carlyle’s offer.

Virgin has hired Goldman Sachs to help advise it on any sale, according to reports out of the UK. That move may be a sign that the company hopes to entice others to bid. Investors seemed to relish the idea of a bidding war, driving up Virgin’s US-listed shares nearly 19 percent in morning trading Monday to $28.93.

More Bids Possible

Today’s Virgin Media was created last year when NTL — then a stand-alone cable provider that had just purchased another major cable provider, TeleWest — bought the company. It rebranded itself under the Virgin name, which it licenses directly from Richard Branson.

Branson also owns 10.5 percent of the company’s shares and is said to be willing to sell at least part of that stake to the right buyer.

Despite being seen as on the cutting edge of providing video-on-demand to the home and despite being one of relatively few companies able to offer a four-way bundle of services, Virgin has had its share of problems of late.

In May, it posted its seventh straight quarter of financial losses and it has been locked in a battle with rival BSkyB over licensing rights to allow Virgin subscribers to receive some BSkyB channels. That dispute is wending its way through British courts, but Virgin may be losing TV subscribers as a result.

The Carlyle Group may believe it can do better at working with other TV providers, said Ovum analyst Mike Cansfield.

“Carlyle may see an opportunity to move past the dispute and find growth,” he said.

In addition, Virgin may offer opportunities for divesting some of its specific operating units to raise cash and tighten the company’s focus on the consumer. For instance, the company operates a business telecom service that may be one of the first assets to be sold. Some analysts have also pushed for Virgin to divest its mobile holdings, which operate as a one of the few successful mobile virtual network operator (MNVO) models.

The result is that Virgin customers get their service from other carriers and Cansfield said a private equity owner may be able to attract some bidders for that property. “This may take a while to play out,” Cansfield added. “Now that Virgin has let it be known it’s taking offers, there may be other players who step up.”

Virgin has 3.39 million TV subscribers and close to 5 million total subscribers.

Rare Bird

Virgin Media’s predecessor, Virgin Mobile, has a unique distinction as one of a small handful of successful MVNOs in the world, with the Virgin brand able to pull off what many others — including ESPN — have failed to accomplish, noted telecom analyst Jeff Kagan.

“That approach has proven very difficult to pull off and they are one of the few companies that has sustained it over any period of time,” he told the E-Commerce Times.

That success helped Virgin be acquired by NTL, a cable company with designs on extending the triple-play bundle of services to include mobile, something that some U.S. carriers are just now starting to do. “The cell phone is increasingly being seen as part of the big bundle of telecom or cable services,” Kagan said. “There are only a few companies that are in a position to offer that fourth component.”

Private equity buyers may see opportunities in better marketing that bundle, in capturing more of the video delivery market or in positioning the company to be a leader in next-generation services, such as mobile video, he added.

Some reports say that Virgin may also be considered a takeover prize because the UK government has extended billions of dollars in tax credits to the company, which haven’t been used because Virgin is in the red. However, it’s possible that if the company were combined with a profitable operation, the value of those tax credits could be unlocked.

For its part, Carlyle has been one of the most active private equity firms during the recent buyout boom, which has seen billions of dollars invested to take public companies private.

Under the leadership of David Rubenstein, Carlyle itself has announced almost $22.3 billion of takeovers in recent weeks, from the $10.3 billion takeover of Home Depot’s supplies unit to a $5.6 billion deal to buy GM subsidiary Allison Transmissions. On Monday, Carlyle announced it would buy nursing home operator Manor Care for $6.3 billion.

Telecom and related companies have been the targets of private equity buyouts as well. Earlier this year, Alltell Wireless was bought for $27.5 billion and more recently, such investors offered $8.2 billion to buy telecom-gear maker Avaya.