Is Virgin Media vulnerable to takeover?

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The face of Virgin Media's 2007 numbers, however much make-up is slapped on, isn't looking its best. In a year that's seen the company lurch from an expensive rebranding, to a public bust-up with the Murdochs and Sky, right through to an on-off potential sale, the stark truth is that Virgin Media's customer base is smaller than it was back in January, and profits have been severely hit.

In the first quarter of 2007, Virgin Media posted a loss of £15.3m. Things then got better on the balance sheet, with the Q2 numbers ending with a £3m operating profit, but even that was less than half last year's equivalent point (although it broke a period of seven continued quarters of loss). Worryingly, in that same quarter, the company shed over 70,000 customers, putting 40,000 of those down to its public spat with Sky which resulted in the removal of the likes of Sky One from the Virgin Media cable channel line-up.

A further liberal dose of salt has then been applied, as it seems the majority of customers who have migrated elsewhere were those who were taking three of the company's services, and that's brought the average amount that Virgin Media earns from each of its customers down from £42.75 to £42.16. Widely reported problems with customer service are believed to be one of the contributory factors.

Ready for sale?

Yet it's been little secret that Virgin Media is a goose being fattened up for sale. Itself effectively born out of a collection of merged companies, including NTL, Telewest and Virgin Mobile, Virgin Media was approached in June by the Carlyle Group, a Washington-based private equity business.

As was extensively reported at the time, the Carlyle Group was interested in a takeover bid valued around the $10-11bn range. Furthermore, that enquiry sparked other potential buyers into action, and a queue quietly formed of potential businesses that liked the idea of a communications giant on the asset register. Most agree that the likes of broadband and mobile phone communications will be a cash cow for many, many years to come, and the sale of Virgin Media offers a rare opportunity for latecomers to the bandwagon to jump firmly on board, with a company that's potentially far from its ceiling.

Thus, an auction was the likely next result, with Goldman Sachs and UBS brought in to evaluate the offers and options open to Virgin Media. It soon became a case of just how high could that price tag potentially go.

Problems

After the Q2 results came in, Virgin Media's stock price valued it at closer to $7.5bn. The likes of Moody's Investors Services then moved its view of Virgin Media's credit rating from stable to negative, arguing that since the Virgin Media group was put together, it had failed to live up to financial expectations. The company's biggest shareholder, Richard Branson, is believed to agree.

External forces then took a role of the dice, too. The significant rumbles in the stock market over the summer, having already hampered more than one potential major deal (Cadbury-Schweppes and the re-financing of Manchester United's takeover debt, for instance), look set to claim Virgin Media's sale as a casualty too. With uncertainty surrounding the future of the debt markets, it's proven not to be the right time to mount a multi-billion dollar sale. Certainly it's believed to have thrown private equity firms off the scent, with the volatility of the markets loosening their ability to raise the necessary monies needed to procure the Virgin Media business. The fact that Virgin Media has over £5bn of debt on its books is also a major contributory factor.

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