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Virgin Media in talks over US takeover

Virgin Media has confirmed it is in talks over a possible takeover by US cable giant Liberty Global.

It is thought that Liberty Global could make a bid within days for Virgin Media - Britain's second biggest pay TV company behind Rupert Murdoch's BSkyB, with almost five million customers.

Liberty Global has pay TV operations around the world and is the largest cable operator in most of its 11 European markets, including Ireland.

In a short statement, Virgin Media said: "Virgin Media confirms that it is in discussions with Liberty Global, a leading international cable company, concerning a possible transaction.

"Any such transaction would be subject to regulatory and other conditions."

It is the second time that Liberty Global, which is chaired by billionaire media mogul John Malone, has looked at buying Virgin Media, in which Sir Richard Branson still holds a minority stake.

If a bid was successful, it would see Malone, who is a former News Corporation shareholder, become a direct rival of the market leading BSkyB.

Malone had previously built up an 18 per cent stake in Murdoch's News Corporation, before Murdoch swapped it for News Corp's interest in US satellite business DirecTV.

Malone, who has said previously he would like to enter the UK market, surprised the City when he did not bid for a stake in BSkyB when the Murdochs were forced to drop their attempts to gain full control of the satellite giant in the wake of the phone hacking scandal.

It is thought that Liberty, whose European markets span from Austria to Switzerland, would make savings on set-top boxes and other technology across the group as a result of a deal with Virgin Media.

A deal could reach as much as $24 billion and would give Liberty entry to one of Europe's biggest and most competitive telecom markets, allowing it to apply lessons learned as a pay-TV and broadband provider in 11 other European countries.

It would also put Malone's Liberty in a strong place to challenge Murdoch as cable groups across the region start to assert their authority over traditional telecoms firms with the offer of super-fast broadband and pay-television.

Murdoch's BSkyB leads the British pay-TV market with 10.7 million customers compared with Virgin's 4.9 million.

Virgin emerged two years ago from years of heavy losses from a costly network expansion. 

But its cables still only cover half of the UK and analysts see potential for more growth.

The approach for Virgin Media follows a period of stabilisation engineered by its chief executive Neil Berkett after near-death experiences and a debt restructuring.

Virgin Media was formed through the merger of NTL, Telewest and Virgin Mobile in 2006 and is listed in New York.

Its first few years were marred by lengthy and costly legal fights with BSkyB over access to channels and content, which damaged Virgin's reputation.

Appointed in March 2008 to turn things around, Berkett shunned that approach, settled the dispute and slowly built up Virgin Media's customer base by focusing on a superior broadband and technology offering.

While that enabled Virgin Media to post its first annual profit in 2011, some argue it has not been aggressive enough in signing up new customers. Instead of building out its network, the group has returned cash to shareholders.

Partly as a result, its shares have soared almost 160 percent since March 2008. They closed at $38.69 this week having recovered from a low of $2.96 at the end of 2008 when the financial crisis hit.

The company, which has a market value of $10.6 billion and $9 billion of debt, sells cable TV, telephony and broadband and also competes with BT's television service BT Vision and online offerings such as Lovefilm.

Its biggest shareholders are Capital World Investors which own 14.6 per cent and Capital Research Global Investors which own 10.9 per cent, according to Reuters data. 

Virgin reports its 2012 results later this week.

Analysts at Espirito Santo said they believed a fair enterprise value for Virgin Media would be around $24 billion, although they questioned how Liberty would pay for it.

Espirito put Liberty's net debt at 5 times its core earnings.

Having dominated the U.S. cable industry, Malone's Liberty has built its presence across Europe by snapping up companies.

A deal would bring him an asset he initially tried to control when it was still NTL and Telewest.

An offer is unlikely to face any regulatory objections, analysts say, but it could prompt some interest from private equity groups who have traditionally favoured cable groups.

Liberty's latest big deal came in Belgium where it increased its stake in Belgian operator Telenet to 58 per cent.

Analysts at Citi noted the Telenet deal went through at a price of 8.2 times the expected 2013 core earnings. 

Citi said a valuation of Virgin at 7 times that ratio would equate to a share price of $41.75. The stock was bid at $45.85 in New York.

Bernstein analyst Robin Bienenstock said she thought Liberty would have to offer paper for 60 per cent of Virgin to remain at a leverage of 4.5 times.

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