Banks get creative for Virgin Media/O2 tie-up

IFR 2332 - 09 May 2020 - 15 May 2020
4 min read
Americas, EMEA
Claire Ruckin

JP Morgan and Citigroup have underwritten a £4bn unfunded credit facility to back the US$38bn merger of the British businesses of Liberty Global and Telefonica, creating an innovative financing plan designed to overcome the challenges that come with bringing such a large deal to market during the Covid-19 pandemic.

The eagerly awaited deal will bring together the biggest cable TV provider in Liberty's Virgin Media with Telefonica's O2, the second-biggest mobile operator, the companies announced on Thursday.

The £4bn 2.5-year investment-grade term loan will sit on the O2 business and syndication to sell it down to a large number of other banks is set to be launched imminently.

"It is likely to be syndicated to a pretty broad bank group given the vast amount of relationships both entities already have," a syndicate head said.

The loan will be used to initially de-risk the transaction. It is then expected to be refinanced next year and increased to in excess of £6bn through a combination of multi-currency leveraged loans and high-yield bonds, sitting across both balance sheets. Leverage at that point will stand at between four and five times.

OUT OF THE BOX

It is an innovative financing structure, modified in order to navigate the hurdles created by the coronavirus pandemic. Typically, deals of this nature are backed with either long-term often sub-investment-grade bridge loans or are brought to market straight away.

As investors have been less willing to take on risk in the current climate, banks have sought increased protections via flex language on leveraged transactions to cover any syndication risk.

“Both parties didn’t want to go straight into the market and finance because of the negative carry costs. When this was all discussed in light of the volatility and the flex costs that could come in, it wasn’t an option that looked attractive enough for the parties when the deal structure was agreed. This innovative I-grade style financing de-risks the transaction. It gives a bit of certainty to finance the majority of payments coming due,” a senior banker said.

Virgin Media will go into the joint venture with its existing £11.3bn of net debt and debt-like items, as no change of control will be triggered. The Telefonica entity will be almost debt-free, which is why the £4bn facility will sit at the O2 level.

TAKE-OUT

The take-out next year is expected to draw significant attention from leveraged loan and high-yield bond investors, attracted by its size and the fact that the TMT sector has been strong and performed well despite Covid-19. Also, the refinancing will only happen once the two businesses combine to give certainty to investors.

The combined company will have the largest non-investment-grade balance sheet in Europe, bankers said.

“This is a segment likely to be stable and thrive in this current environment. It is a no-brainer for investors from a credit perspective, bringing together the mobile network of O2 and the fixed line infrastructure of Virgin Media, creating a very powerful competitor to BT,” the syndicate head said.

It marks the latest move by Liberty's veteran billionaire dealmaker John Malone, the US cable pioneer who has pulled off a string of transactions in Europe in recent years, including the sale of networks in Germany and Central Europe to Vodafone as part of the same trend of combining fixed lines with mobile.

It will also allow debt-laden Telefonica, which tried and failed to sell O2 in 2016, to extract some cash from the business while keeping a presence in Britain.

The parent companies, which expect to achieve £6.2bn of synergies on an annual basis by the fifth full year after closing, will have equal ownership of the combined entity.

Additional reporting by Eleanor Duncan