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August 07, 2007

Virgin Media Delays Sale

Virgin Media announced that it was delaying the sale of the company. The brief press release indicated that financial and strategic buyers continue to express interest but unfavorable debt market conditions make delaying a sale in shareholders best interests.

On July 2nd, Virgin Media received a proposal to take the company private. The buyer was Carlyle and the rumored price was $31. The shares quickly jumped to over $29 and many investors felt that a deal in the mid-$30s was plausible as other private equity groups and a few strategic buyers indicated interest in participating in the auction. Over the past week, two major private equity firms announced they were backing out of the auction. Presumably, the problems in the credit markets led to their withdrawal. With the chances of a deal weakening, the shares have pulled back more than 205 from their high immediately following Carlyle's bid.

On a fundamental basis, I think significant downside remains....

The collapse in multiples of US cable stocks creates a stiff headwind for Virgin Media which is not growing and is in a poor competitive position in the UK. Furthermore, Virgin Media is already highly leveraged. I owned the stock for much of 2005 and 2006 but sold in the mid $20s because I saw fundamental deteriorating. At the time, I thought that without a deal the stock could head below $20. Depending on hat Virgin Media tells us when they report 2Q earnings tomorrow, the stock could still head that low. Deal speculation should still provide some support for the stock so a landing area in the $20-22 range is probable.

Quarterly results could be weaker than expected. Virgin continues to face a brutal competitive environment in the UK with Sky dominating in TV, BT and many players offering cheap high speed data and telephony services.

Posted by Steve Birenberg at August 7, 2007 07:51 AM in NTLI