DOES anyone have Sir Richard Branson’s e-mail address? There are a bunch of
angry cable-TV customers looking for it on digital-spy.co.uk, a website
dedicated to digital TV.
Readers who have a gripe, or a compliment, can “post” their message on
Digital-spy’s chat forums. Virgin Media’s page must make uncomfortable
reading for Branson, the cable TV and phone company’s largest shareholder.
One man who has posted a complaint on the website’s forum says he has been
waiting six weeks for an upgrade to his TV system, another says he wants to
talk to Branson because he can no longer face talking to the “monkeys” in
the call centre.
The postings about Virgin Media are almost uniformly negative. Yet this is a
company that last week went up for sale for $22 billion (£11 billion). If it
is sold, it will probably be the most expensive public-to-private takeover
in British history.
Someone somewhere has a very different view of Virgin Media’s worth.
Last week Virgin Media, whose shares are listed in New York, announced it had
been approached by private-equity buyers looking to take the company
private. It’s not the first time that the cable company has been a takeover
target, but this time bankers and media executives believe changes in the
thinking of Virgin Media’s shareholders mean a deal is more likely.
So far the frontrunner to make a bid is Carlyle, the well-connected US
venture-capital firm whose alumni include former prime minister John Major
and both the current and former presidents George Bush. Carlyle owns a
number of other cable firms and has 30% of its investments in media.
Virgin Media has been approached twice in the past two years by private-equity
buyers, and each time rebuffed the offer as inadequate. The third time may
prove a charm. Branson, whose Virgin Entertainment division is the largest
shareholder, is said to be more open to a sale than in the past and keen to
sort out customer-service problems that could damage the Virgin brand. The
other block on past sales, Bill Huff, a New Jersey-based investor, has been
selling down his stake.
“I think this is it,” said one media executive last week. “Look at the price
on offer – that’s some serious money. UK cable has been promising it’s going
to be the next big thing for so many years it’s not funny, but maybe this
time it really is going to happen.”
Virgin Media is just the latest attempt by Britain’s cable companies to take
on telecoms firms, including BT and media players such as the BBC and BSkyB,
39.1% owned by News Corporation, parent company of The Sunday Times.
The company’s former incarnation, NTL, teamed up with Branson a year ago to
offer Britain’s first “quadruple-play” of pay television, home telephone,
internet connection and mobile phone.
It’s an offer that has come to dominate the telecoms and media market in
America, where Comcast has 24.2m cable subscribers and Time Warner 13.4m.
Satellite rival DirecTV has about 16m subscribers.
Steve Burch, Virgin Media’s chief executive, spent 17 years with Comcast and,
along with many US media executives and, apparently, venture capitalists and
investors, believes we can also be converted to cable.
Virgin Media is not officially commenting on the talks beyond confirming they
are taking place. But one executive close to the company said many of its
problems were now being tackled and the group was turning a corner.
“Improvements to customer service [a bugbear that led to its predecessor
being dubbed NT Hell] were critical to Virgin before we did the rebranding,”
she said.
“We have had to sustain those levels of improvement. I think perception still
lags reality when it comes to the improvements that have been made. If there
is interest in the company, it’s not because this is a basket-case, it’s
because cable is in its strongest position in five years.”
Analysts said Carlyle’s potential bid would value Virgin Media’s customers at
£3,250 a head compared with Sky’s at £1,500. It’s a rule-of-thumb valuation
– both firms offer more than TV subscriptions – but it does show the premium
Virgin Media is attracting.
Despite the price, real problems remain. Virgin Media lost £120m in the three
months to March 31 and has debts of some $10.5 billion. Fixed-line and
mobile-phone customers are moving to cheaper rivals and a fight with BSkyB
has led to the loss of some of its more popular channels. The piecemeal way
in which the company has been consolidated (see panel) has left it
with a confused network of customer support and multiple billing systems.
“There is a good argument for private equity here,” said one City banker. “If
you look at the unpopular private-equity bids for Boots, Debenhams or
Sainsbury, those were companies that did not have strategic issues and were
doing well independently. Virgin Media has fundamental problems and would
probably be better off tackling them without having to meet the quarterly
expectations of its shareholders.”
But there are also some fundamental differences in the UK market. For a start,
cable is not the dominant player for multi-channel TV. More than 80% of UK
homes now have digital TV, according to Ofcom, the industry regulator. About
8m receive Freeview, which offers free digital channels, Sky has 8m
subscribers, Virgin Media has about 3.4m subscribers.
Public-access TV in America is poorly funded in contrast with the BBC and has
nothing to compare with the extensive online and digital services available
from Britain’s state-funded media giant.
Sky invested in content in order to secure its success against the free,
high-quality TV available from the BBC and the traditional commercial
channels. In its early years Sky concentrated on sports and movies but it
has since beefed up its original content, recently winning Baftas for dramas
and documentaries, and bought hit US shows, including Lost and 24. Britain
is a fiercely competitive market quite unlike the US, and to date Virgin
Media has not had the money to buy its way into content.
The company also faces increasingly tough competition in telephony and
broadband from competitors ranging from Sky and Carphone Warehouse’s Talk
Talk to Tesco. Almost one in five Virgin Media customers leaves each year –
the so-called “churn” rate. The company has lost 200,000 telephony customers
in the past year. But the levels of customer dissatisfaction are high among
Virgin’s rivals, too.
Sky’s churn rate is 13.7% and, according to a recent survey by Uswitch, a
price-comparison firm, a quarter of broadband customers are unhappy with the
service they receive.
This weekend Goldman Sachs, Virgin Media’s banker, is working on whipping up
interest for an auction of the firm. Other private-equity firms, including
Blackstone and Apax, which launched a failed bid for ITV last year, are
thought to be watching the situation closely.
There have been a number of failed bids in UK media in the past few years. JP
Morgan, Carlyle’s banker, advised Virgin Media in its former guise as NTL on
an aborted bid for ITV last year.
This time media executives are betting a deal is going to be done. Less than
six months after NT Hell’s high-profile relaunch under the Virgin Media
banner, the cable group may soon have a new owner.
Some UK media executives can’t believe the fuss. “How many times have we seen
this story? You can change the name, but the legacy of problems just comes
following behind. I guess the Americans think they can do things better.
Well, good luck,” said one.
But across the Atlantic it seems there are plenty of people still prepared to
bet that cable will be the next big thing.
THE CABLE GUYS
CABLE TV’s roots in Britain go back as far as 1938, when cities such as
Bristol used wires to carry television signals to homes that couldn’t
receive transmissions over the air.
Cable remained a niche service until 1991 when the then local companies were
granted the right to offer telephone services.
In 1996, CableTel, a company founded by the American telecoms entrepreneur
Barclay Knapp, bought National Transcommunications Limited (NTL), the
privatised Independent Broadcasting Authority transmission network, and kept
the name.
In 1999 NTL bought Cable & Wireless’s UK cable operations for $10 billion.
The company sought bankruptcy-protection in May 2002, dogged by a huge
spending spree on infrastructure and rivals, a poor customer-service record
and the bursting of the telecoms bubble. Its debts were $18 billion.
The company emerged from bankruptcy in 2004 and in October 2005, NTL and
Telewest announced a merger.
In April 2006 NTL Telewest bought Virgin Mobile, valuing the mobile operator
at £962.4m.
The company was rebranded Virgin Media in February 2007. Virgin referred to
the event as “V Day”.
