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Is US cable co Liberty Global targeting Virgin Media?

The FT newspaper last night reported that US cable company Liberty Global is close to making a bid for the UK’s Virgin Media. If true, then we’re all set for the next round in the battle of the media moguls – in the blue corner, Rupert Murdoch, and in the red corner, John Malone.

If Malone’s Liberty does indeed succeed in acquiring Virgin Media, then he would resume his long-standing rivalry with Murdoch, whose company owns the dominant BSkyB satellite service. Whilst Virgin is doing a decent job in competing with Sky, after it bought cable co NTL six years ago, it still lags behind Sky in subscriber numbers – partly due to inadequate cable coverage, and also due to Sky’s policy of spending vast sums on premium content. However, Virgin does have the edge over Sky when it comes to broadband, being cable based.

Virgin Media has confirmed it is in takeover talks, issuing a brief press release this morning stating that:

“Virgin Media confirms that it is in discussions with Liberty Global, a leading international cable company, concerning a possible transaction. Any such transaction would be subject to regulatory and other conditions.”

Those regulatory conditions shouldn’t be too much of a problem, given the mess that Murdoch’s News Corp got itself into recently (feel free to read the Leveson Report, if you have a spare few months…). UK politicians and Ofcom will no doubt be privately delighted that Murdoch’s media empire would be subject to stronger commercial competition.

Liberty would no doubt make some serious changes to the Virgin Media operation. Liberty’s CEO Mike Fries has been critical of the TiVo service in which Virgin has invested to build its subscriber base to compete with Sky. Liberty its own Horizon product in use on its US-based UPC network, and would likely look to extend that to the UK. According to the FT, Liberty would have to bid upwards of $20bn for Virgin Media, if it were to meet its enterprise value. Virgin’s market capitalisation is currently £7.6bn with net debt of £5.7bn.

Liberty has been looking to expand its European operations. However, its bid for outright control of Belgium’s Telenet Group fell through last month after investors rejected the €2bn offer. It already has operations in 13 countries and as of September last year Liberty was reporting 19.6m customers globally.

The “difficult” history between the two moguls started back in 1997, when Murdoch tried to create a US national satellite service by merging his new ASkyB service with EchoStar, with the intention of killing off US cable. Malone at the time was CEO of cable giant TeleCommunications (TCI) and was a big customer of content from News Corp – needless to say he wasn’t best pleased, and Murdoch’s deal fell foul of the regulators.

In 1999, Murdoch bought Liberty’s 50 per cent stake in their joint Fox/Liberty Sports Network for $1.4bn worth of News Corp’s non-voting shares. It proved to be a masterstroke by Murdoch, who has been leveraging the power of original premium content ever since. One can only guess how much this must have rankled with Malone over the years.

It wasn’t all success for Murdoch though. In 2000 he was reportedly persuaded by Malone to buy him out of EPG specialists Gemstar, take the company public, and then use the funds to buy out DirecTV from GM. The IPO was abandoned and Gemstar became embroiled in SEC investigations. News Corp eventually made a $6bn write-down on the deal.

In 2004, Malone then starting to swap his nonvoting shares for voting shares so that he could have more influence at News Corp. He built up a 20 per cent holding, forcing Murdoch to buy him out. Murdoch eventually sold him his stake in DirecTV at a bargain basement price to resolve the situation.

Malone considered entering the UK market back in 2011, after News Corp was forced by regulators to drop its bid for full control of the TV operator. However, Malone declined to submit a rival bid of his own. He had previously considered a bid for Virgin back in 2008. He once said:

“Don't ever bid against Rupert Murdoch for anything Rupert wants, because if you win, you lose. You will have paid way too much.”

The prospect of these two multi-billionaire media moguls going head to head one more time is tantalising. How will Murdoch react? How far will Malone push him? And what will this battle of the giants mean for us mere mortal subscribers?

Incidentally, Virgin Media’s financial results are due tomorrow.

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