Malone has upper hand in Sunrise investor battle
Cable tycoon John Malone faces opposition in his latest deal to cut his European exposure.
A dominant shareholder in Sunrise Communications Group is furious about the terms of its all-cash 6.3bn Swiss franc (€5.8bn) bid for Mr Malone's business, UPC Switzerland.
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Mr Malone should think hard before giving ground. This is a much bigger deal for Sunrise than for Mr Malone, whose Irish investments include Virgin Media and a string of hotels. Sunrise has a market value of just 3.5bn francs so it is asking shareholders for some 4.1bn francs of equity to fund the purchase.
Lead investor Freenet AG, the German mobile group, with a 25pc holding, faces a request for 1bn francs of that.
That is patently unrealistic. Freenet is already stretched, with €2.2bn of net debt and high leverage.
In a normal rights offer, shareholders like Freenet who
cannot or will not buy the new stock sell their 'rights' to participate. That provides compensation for the dilution they
suffer. But things might not be so straightforward when an offer is this big. Supply could vastly exceed demand for Freenet's rights, driving down their price and, in turn, the value of its compensation.
Freenet's only hope is that there is a queue of new investors itching to invest in Sunrise. Small wonder that it called on Friday for the deal to be revised. Its demands include cutting the price, paying Mr Malone in shares as well as cash, or using more debt and less equity. Freenet has withheld support for the fundraising. This must be passed by a majority of votes cast at a shareholder meeting.
Assume a two-thirds turnout and Freenet would need only to be joined by holders of about another 9pc of the stock to kill the entire deal.
While Freenet's hand is strong, Mr Malone's is too. In reality, a price cut looks hard to justify. The acquisition does not look expensive, with returns in the high-single digits including synergies, exceeding UPC's cost of capital within three years.
Asking Mr Malone to take some of the payment in Sunrise shares looks risky. But Freenet is right that the size of the equity fundraising is probably bigger than necessary.
Sunrise says combined net debt after the deal would be about three times trailing ebitda. That is higher than Sunrise's multiple now but on the low side for a telecoms group with lots of cable assets.
Sunrise could probably fund the deal with more debt and less equity. It may be easier to find a debt market solution.