Hypothetical Analysis of Potential Transactions: Could Ziggo Have Gone to BT?

Mining business relationships is a foundational part of the deal making process, as it allows firms to identify targets and find exit points for investments.  Finding the best suitor for portfolio companies is an art form and is often where business relationships make or break deals.

Using our transaction screening capabilities we examined sponsor-backed exit transactions that occurred over the course of 2014.  Although these transactions are now closed and completed, we used our Relationship Path tool to identify whether or not alternative transactions could have been made hypothetically. 

Could Ziggo have gone to BT Group?

We started our analysis by looking at closed exits in the Telecommunications sector, where there’s been strong consolidation activity. On 27 January 2014, a large cap divestiture occurred as 71.7% of Ziggo N.V. was divested to Liberty Global

Using the S&P Capital IQ platform’s Find Buyers targeting engine, we identified alternative potential buyers for Ziggo N.V., taking into consideration, amongst other things, firms which have previously shown interest in investing in similar companies.

From this subset of potential buyers, the link between Ziggo N.V. and BT Group stood out due to first-degree relationships between BT Group and Lexington Partners, one of Ziggo N.V.’s selling partners.

Although not verified explicitly, we posit that a potential sale of Ziggo N.V. to BT Group could have been contemplated since Nicholas C. Rose, a Senior Independent Director for BT Group, is also an advisor to CCMP Capital Advisors, a current investor in Lexington Partners Inc. 

In addition, BT Group’s announced acquisition of EE Limited points to a desire for the firm to acquire assets in the mobile telephony space.  Instead of EE, would BT have looked to acquire Ziggo? We examined what a hypothetical acquisition like this would have looked like using our Quick Merger Model template.

Hypothetical Analysis: Ziggo & BT

Liberty Global acquired Ziggo N.V. for € 37.17 in January, so we used this as a good starting point for our hypothetical transaction.

Looking at Figure 1 below, the resultant hypothetical pro-forma company could have rendered earnings per share (EPS) for the fiscal year 2015 ranging from £0.31 to £0.27 (from a 100% cash/debt-heavy acquisition to an all stock acquisition scenario respectively, excluding the impact of synergies), versus BT Group’s 2015 consensus estimate of £0.29 as of 6th January 2015.

Figure 1: S&P Capital IQ’s Quick Merger Model – Hypothetical Transaction

S&P Capital IQ’s Quick Merger Model Hypothetical Pro-Forma Accretion/Dilution Analysis Output,
Source: S&P Capital IQ, as at 13th January 2015.  For illustrative purposes only.

Compared to BT Group’s standalone EPS estimates of £0.29, this represents a accretion/dilution ranging from 8.9% to -7.1% from the 100% cash/debt-heavy consideration to an all stock acquisition, respectively. 

We can see from our merger modelling that any acquisition consisting of less than 48.6% cash would require synergies to breakeven.  In a 100% stock consideration £257.7mn of synergies would have been required to avoid a -7.1% dilutive outcome in the fiscal year ending 31st March  2015.

How Could BT Group’s Credit Strength Have Changed?

We also constructed a highly simplified pro-forma company and reviewed its credit strength compared to that of BT Group’s standalone credit profile using our proprietary credit scoring tool, CreditModel®.  

The simplified pro-forma company assumed 100% ownership and did not factor in tax impact or any synergies.  It also accounted for the additional debt that would have needed to be raised for BT Group to acquire Ziggo N.V. through a range of cash, debt and stock consideration scenarios.

According to CreditModel, BT Group’s standalone quantitative credit score on 27 January 2014 was ‘bbb’  and would have been impacted most on that date by asset turnover and cash flow from operations/interest coverage.  (Note: Lower-case nomenclature is used to distinguish CreditModel credit scores from credit ratings issued by Standard & Poor’s Ratings Services.)

The hypothetical pro-forma company resulted in a credit score uplift from ‘bbb’ to ‘bbb+’ in all scenarios, highlighting that BT Group’s credit profile would potentially have improved as a result of the transaction.

In Conclusion

From this analysis, we’ve concluded that the hypothetical transaction would have had both positive and negative outcomes relative to the actual EE announced acquisition.

Positively, the resulting hypothetical pro-forma company would have improved credit strength and breakeven synergies appear attainable.

On the other hand, a hypothetical acquisition of Ziggo N.V. would have meant net assumed liabilities of €3.026bn compared to €2.5bn for EE Limited. In addition, a highly dilutive impact of the deal results in any consideration consisting of less than 48.6% cash/debt without significant synergies

Read more details on this hypothetical analysis in the latest EMEA Private Equity Market Snapshot. In this issue, we also review the increase in strategic M&A activity by EMEA Private Equity firms, including the rise in credit-focused investments and activity in non-core sectors. Access the full report here.

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