VMED O2 – Recapitalisation before distribution
All,
Please find our updated analysis here.
Virgin Media O2 (VMED) is a structure now familiar to European investors. A JV that makes regular payments to the parents to maintain a leverage range. As long as EBITDA continues to increase, everyone is happy. Cable/Mobile revenues may not be perfectly utility-like, but they are resilient. The future may herald increased competition from mobile providers utilising their 5G networks. It is worth noting that the convergence of Cable/Mobile was a response to that still looming threat. The move to streaming may hurt topline, as TV revenues move to streaming, but wholesaling SKY’s product has always been a low-margin business for UK cable. Cable remains the fattest pipe into the home, and that is what content providers want.
Investment Considerations:
- The £2029 all trade around 9% with the 7/2030 €SUNs trading at 10% vs 7% for the € 1/2031. We do not see a catalyst for a tightening of the € SUNs vs the €SSNs, but if the SUNs widen further, we will revisit this trade. The GBP 2029 bonds are trading around 9%, which offers an attractive yield over cash for what is low-risk paper.
- The downside risk is limited given the resilience of the client base and the stable leverage policy of the parents.
- There is no specific event here, just a lot of debt in a changing business.
- VM02 generates a lot of operating cash. VMO2 also spends a prodigious amount on capex. The cash metrics are the same for all the cable companies.
- Margins will come under some pressure as the wholesaling of Pay TV subscriptions declines (slowly). However, with a fixed and mobile network, VM02 is well placed to continue to earn subscription revenue as customers need online access to Subscription Video on Demand (SVOD).
- As long as EBITDA rises, the parents will take more cash out via recapitalisation.
Minor model adjustments:
- We have tweaked our model; increasing Revenue and EBITDA over the next two years. Regarding recaps, Liberty Global usually provides an annual target for the amount of cash it intends to take from VMED.
- We will update after the November 1 Liberty call and do a full review when the 2023 Results are published in Q1 next year.
VMED is comfortable operating at 5x leverage:
- VMED guides for £1.8bn - £2bn in dividend payments this year. We expect EBITDA to rise to c£4bn, which suggests a cap of £1.9bn. On an L2QA basis, Q223 leverage (the metric used by the company) was 4.9x. The figure is 5.0x on our estimates.
- Virgin Media O2’s (VMED) ownership model is straightforward; a leverage target is 4x – 5x with dividend recaps as EBITDA rises. Liberty Global and Telefonica target the upper range of the range and pay themselves accordingly. The Leverage figure used is the last two quarters annualised (L2QA).
- There is also a policy of distributing any excess cash. However, the nature of cable companies means that there are rarely large amounts of free cash available for distribution unless there is a disposal.
CTIL could be sold soon:
- VMED’s stake in the Towers JV (with Vodafone) is worth up to €1.5bn. The impact on leverage would be negligible as any cash would be sent up to the parents (as long as the 4x – 5x leverage target is met).
- In Q123, there were rumours of a potential sale of the 50% stake in the CTIL (towers business) held by VM02. The price tag was €3bn based on EBITDA (ex-leases) of €147m => 20.5x multiple.
- There has been no news on a potential deal recently, but Towers businesses are popular assets now, and multiples in the mid-20s are being paid.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055