ITV Liberty unlikely to connect just yet

Liberty Global for ITV?

Many of us are all too familiar with recurrent talk doing the rounds of markets for at least a year saying the US-focused owner of Virgin Media is interested in buying the UK’s largest commercial terrestrial television network.

Before today, the last time the speculation was fuelled was July, when acquisitive Liberty Global bought a 6.4% stake in ITV.

ITV’s chief executive Adam Crozier was moved to pointedly remark on the day of the broadcaster’s first half results: “Liberty’s intentions are very much a matter for them.”

He added, at the time, there had been no contact with Liberty’s chief executive Mike Fries, apart from a courtesy telephone call on the night before Liberty’s stake purchase was due to be announced to the stock market.  Speculation sent ITV Plc. stock to what were, at the time, fresh all-time highs

Liberty chairman said to be canvassing opinion

Well, today’s trading has followed a similar pattern, this time fuelled by weekend press reports suggesting the chairman of Liberty, the American billionaire entrepreneur John Malone, was assessing the potential level of support a bid by his group would have amongst ITV’s material shareholders.

Obviously, corporate bidders tend to need very good reason to make an offer that would be widely considered to be a significant premium.

But there are signs Liberty has reason to be more cautious than many such would-be suitors.

For one thing a major US credit rating agency has signalled it was interested in the outcome of a strategy on Liberty’s part that looked like a circumnavigation, to say the least.

It was a telling interest by Moody’s, which chided Liberty for a set of relationships (meaning stake acquisitions) with media companies for which the agency could see “no material upside”. The underlying reason for the agency’s attention might well have been a tacit warning to the cable giant after the £481m stake purchase in ITV.

More to the point, Liberty may face shareholder opposition if it were to overpay for any highly-rated asset, such as ITV, with Liberty’s ratios in their current state.

Liberty needs to strike a delicate balance, if it is indeed looking to find a way to purchase ITV, whose last reported annual net income was £326m.

I suspect Liberty can afford to pay 4 times ITV’s last annual income, or around £1.3bn, or perhaps a little more and remain within the discipline it has imposed on itself.

Additionally, Liberty’s debt structure does not appear to be onerous in terms of timing, with only 35 basis points of current borrowings due over the next couple of years compared with 13.13% in 2019.

Finally it should be also born in mind Liberty’s peer media conglomerates look to be even bigger risk-seekers when it comes to leverage.

To be sure, Liberty’s debt-to-equity rating based on the last twelve months of trading, at 372%, does not bear scrutiny under the ‘normal’ conventions of corporate discipline.

But a glance down the list of readings in the same metric for Liberty’s close peers puts the latter’s somewhat crazy-looking figure in perspective. BSkyB would be rated at 249% on the same metric, whilst Prosiebensat 1 Media AG would be on 552.3%. In short, current times have put some media conglomerates in an acquisitive, highly levered mood.

Will Liberty make a bid soon?

Whilst there is much circumstantial evidence in both directions on the likelihood of a bid in the near term and Liberty’s chairman well and truly set the kite he was attempting to fly aloft, a bid looks only somewhat likely to me in the medium term, largely because of the elevated rating ITV shares are trading at.

A bidder for ITV would do better to wait for the shares to drift lower from the fresh highs they reached today and just as importantly, to get CEO Crozier as prepared as possible for the eventuality of an offer, which judging by his recent comments, still has not happened.

Additionally, it would seem to ill behove a company seeking to make a major bid to have its chief executive officer sell a substantial chunk of his own firm’s shares on the open market soon before a potential bid became known.

Filings for 29th August show Liberty’s CEO Michael Fries sold two huge lots of Liberty stock on that day, one of 73,809 and the other of 221,425.

Of course, it is arguable Fries could simply have wanted to avoid the negative share price impact from publicity about a forthcoming bid. However, the proportion of the share price loss today (Liberty stock is just 1% lower on Nasdaq at the moment) would not seem worth the risk of potentially jeopardising a bid, especially at a time when as many supporters amongst the shareholder base as possible would be needed.

I conclude it is unlikely Liberty ever seriously intended to launch a bid for ITV in the very near future.

It’s much more difficult to avoid the logic of the story in the longer term.