Virgin Media Gets An Offer and Other Important Lessons

On February 5, 2013, Virgin Media (VMED) was given a buyout offer at $47.87 per share by Liberty Global (LBTYA).  Virgin Media is already a member of the Nasdaq 100 Index while Liberty Global was recently added  to the same index on December 14, 2012 (see Nasdaq 100 re-rank here).

Virgin Media was featured in our Nasdaq 100 Watch List Summary section on December 16, 2011 (found here).  Our worst case scenario for the stock was that it might trade as low as $13.28, it never came to be.  In fact, VMED never traded lower and has subsequently gained as much as +117%.

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There are a couple of important observations about fundamentals that need to be addressed.  First, there weren’t any offers for VMED at the December 2011 low. This suggests that many corporations either cannot identify values at the low or that they are willing to pay nearly twice the price in the name of a “good values.”

According to Liberty Global’s President and CEO, “adding Virgin Media to our large and growing European operations is a natural extension of the value creation strategy we've been successfully using for over seven years.”  As much as the CEO of LBTYA talks of the value that VMED will provide, the chart below suggests that this was an ill-timed purchase or could have taken place at a better point in time.

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The chart above shows a time range from December 16, 2010 to the present.  What the chart indicates is that the best time to buy out Virgin Media was on May 15, 2012. At that time, LBTYA shares were at their height compared to VMED, as LBTYA was trading at more than 2 times the price of VMED. Alternatively, LBTYA could have made a similar deal at multiple points before December 2011.

Today, Liberty Global is only buying VMED at 1 ½ times the February 5, 2013 closing price, which is no bargain.  Making an offer for VMED on May 15, 2012 could have saved current shareholders of LBTYA a significant amount of dilution in the stock, as Liberty is going to issue at least 151 million shares to acquire Virgin Media.

Another issue that is worth pointing out is the all too popular valuation metric known as price-to-earnings ratio (definition here). When Virgin Media was on our Nasdaq 100 Watch List on December 16, 2011, the stock was trading at $20.95 with a P/E ratio of 67.58.  Today, Virgin Media trades at a P/E ratio of 33, or exactly half of what the stock traded at when the stock was within 1% of the 1-year low.  This epitomizes the mixed signal that P/E ratios generate for fundamental investors seeking to identify quality companies as indicated in our article titled “P-E Ratios: Lesson From Conflicting Indications”.

In light of the offer made by Liberty, we’d like to remind you to get your scorecards out because there are going to be at least two new additions to the Nasdaq 100 with the possible departure of Dell (DELL) and Virgin Media (VMED). Look for Netflix (NFLX) to be one of the two stocks added to the Nasdaq 100 index as the stock is twice the price that it was when it was booted from the Nasdaq 100 Index in December 2012, less than two months ago.

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