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Tuesday, July 03, 2007

Virgin Mobile Minorities right to take the Cash

When Virgin Mobile was bought by the company formally known as NTL and now known as Virgin Media back in July 2006, the options were as follows:
  • Cash Only - 372p
  • Shares Only - 0.23245 shares in NTL (valued roughly at 351p)
  • Cash & Shares - 67p Cash and 0.18596 Shares in NTL (valued roughly at 281p)
The Cash & Shares option was really the “Branson option” as it was pitched well below the Cash only or Shares only options which were aimed at the minority 28.8% shareholders. Richard Branson through Morstan Nominees owned 71.2% or 184,238,328 shares in Virgin Mobile.

In fact this was a great return for the minority shareholders: compared to the cash offer the share price had risen 86% in the two years since ipo in July 2004 and an increase of 48% from the average share price in the twelve months preceding the offer.

Press are speculating that the offer from Carlyle is pitched at around US$32.50 which equates to 377p/share in the equivalent Virgin Mobile share price. An increase of 5p is hardly a decent return taking into account the cost of money and presumed increased transaction costs with a NASDAQ stock denominated in US$. The Virgin Mobile Minorities with the benefit of hindsight appear to have better served by taking the cash.

In fact most of the minorities appeared to take the cash and run. NTL issued stock worth £518.8m in the transaction or approx. 34.4m shares of which the Richard Branson allotment was 34.2m shares. These shares were valued at £15.07 or US$26.59. The Cash Cost to NTL was £418.2m.

For Richard Branson himself, he took the cash and shares offer which resulted in £123.4m cash payment in July 2006 and 34,260,959 shares. Branson current position with the NTL/Virgin Media shares is complicated by the cap ‘n’ collar transaction he has recently taken out for 12,847,860 shares or 37.5% of his shareholding. The collar element is $31.98/share and resulted with a prepayment of US$224.9m. Assuming that any buy-out price would be greater than US$31.98, this would leave Branson with an additional payment being due of US$192.7m minus some cost-of-money adjustment.

Outside of this derivatives transaction, Branson has 21,413,099 shares remaining in NTL/Virgin Media with a value of around US$696m at a buyout price of US$32.50. I’m guessing that he will want to roll-over all or part of this shareholding into the new (and presumably even more highly leveraged) Virgin Media. Once the effect of the increase in debt is taken into account, he might even be able to maintain his approx. 10% shareholding in the new company and thus protect his brand, oops sorry annual royalty payment of 0.25% of Virgin Media consumer revenues.

The big question is what is Branson going to do with all this cash – it certainly gives him more flexibility with regard to Virgin Mobile USA and the proposed IPO.

IPOs of MVNOs in the USA will be tough at the moment after the failure of amp’d. Overnight it appears as Helio has secured another US$200m in financing from the deep pocketed parents, SK Telecom and Earthlink.

I’m wondering if there is an opportunity for Branson to do a Virgin Mobile UK on Virgin Mobile USA. The original terms of the Virgin Mobile UK network deal between one2one and Richard Branson in retrospect turned out to be heavily skewed in favour of Virgin Mobile. Once, one2one was sold to T-Mobile, the new management were not too happy about the situation and renegotiated the contract with Richard Branson taking 100% ownership of Virgin Mobile, a new wholesale deal between Virgin Mobile and T-Mobile and some return due to T-Mobile if Virgin Mobile was subsequently IPOed.

Now that Sprint is struggling and probably reluctant to put more equity into Virgin Mobile USA, I’m wondering if Branson can put some more cash in with the hope of a better wholesale agreement and increased shareholding. Thereby, Branson would avoid the need for an immediate need for an IPO of an unprofitable company at a difficult time.

Mind you, Branson could also just as easily have seen the bubble on the MVNO game is fast deflating and it is best not to put any more cash in. He also has embryonic and cash hungry MVNOs in France, South Africa and India to worry about.