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Liberty Global, the largest international broadband communications provider in Europe, Japan and Latin America, announced that it is acquiring a Swiss telecommunications provider, Sunrise Communications, for 6.8 billion Swiss francs.

Liberty Global offered all-cash tender offer for 100% of the publicly held shares of Sunrise Communications Group AG at a price of CHF 110 per share, funded through a combination of Liberty Global’s existing cash, expected to be approximately CHF 3.5 billion, and proceeds from new debt issuance.

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Sunrise’s Board of Directors unanimously recommended that its shareholders accept the offer; Germany’s Freenet AG, Sunrise’s largest shareholder, which holds approximately 24% of Sunrise’s capital, has signed a binding, unconditional commitment to tender its shares at the offer price.

Liberty Global said the transaction price is underpinned by significant expected total synergies of CHF 3.1 billion on a net present value basis after integration costs, with the annual run rate of cost, capex and revenue synergies estimated at CHF 275 million.

Liberty Global shares closed 0.59% lower at $22.05 on Tuesday. The stock is down about 3% so far this year.

Executive comment

“The industrial logic of this merger is undeniable…Fixed-mobile convergence is the future of the telecom sector in Europe, and now Switzerland will have a true national challenger to drive competition and innovation for years to come,” Mike Fries, chief executive of Liberty Global, said the statement.

“This transaction is another significant step on our path to create fixed-mobile champions in all of our core markets, crystallizing the value of our superior broadband networks and driving long-term, sustainable free cash flow growth. Even after this deal, and assuming completion of our recently announced UK transaction, we will continue to have approximately $7 billion of liquidity8 to drive value creation for shareholders.”


Liberty Global stock forecast

Nine analysts forecast the average price in 12 months at $29.11 with a high forecast of $38.00 and a low forecast of $18.00. The average price target represents a 32.02% increase from the last price of $22.05. From those nine, six analysts rated ‘Buy’, one analyst rated ‘Hold’ and two rated ‘Sell’, according to Tipranks.

Liberty Global had its price target boosted by analysts at Pivotal Research to $30 from $27. Barclays raised the target price to $18 from $17. Several other equity research analysts have also recently updated their stock outlook.

In June, Deutsche Bank boosted their price target to $38 from $30 and gave the company a “buy” rating. In May, HSBC upgraded Liberty Global from a “hold” rating to a “buy” rating and set a $28 price objective.

Analyst comment

“We don’t plan to materially change our $33 fair value estimate, though the ultimate value of the firm will likely depend heavily on the investment decisions that management makes over the coming year or so,” said Michael Hodel, Director at Morningstar.

Upside and Downside risks

1) Value-accretive M&A, tapping strategic value in particular in Switzerland (synergy potential from fixed-mobile consolidation) but potentially also Benelux. 2) Stronger operational momentum than anticipated, e.g., in the UK. 3) More cost-cutting and/or lower capex than expected. 4) Target multiple 13.6x 2020e EV/OpFCF; price target$33.6, Jefferies highlighted as major upside risks.

1) Lacking strategic response to emerging FTTH/B rollout of UK incumbent. 2) Operational momentum slows, e.g., from regulatory (wholesale requirements), macroeconomic, or competitive issues (e.g., incumbent fibre) – downside amplified by high financial leverage. 3) Target multiple 9.6x 2020e EV/OpFCF; price target$17.8, were major downside risks.

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