Sunrise challenges Swisscom with $6.3 bln deal for Liberty Global's assets

By John Revill and John Miller

(Reuters) - Switzerland's Sunrise Communications is buying U.S. cable giant Liberty Global's local assets in a $6.3 billion deal to bolster its position against Swisscom, the country's dominant mobile and internet provider.

Liberty Global is the vehicle of U.S. cable pioneer John Malone, who is cashing out of some of his European investments.

Sunrise shares fell as much as 13 percent after the company said on Thursday it had agreed to purchase Liberty's UPC Switzerland as it said it would be accompanied by a 4.1 billion Swiss franc ($4.1 billion) rights issue.

The shares were down 10.3 percent by 1030 GMT.

Sunrise said it will pay Liberty Global around 2.7 billion francs in cash and assume 3.6 billion Swiss francs of UPC's debt.

"We believe the deal valuation is rational considering a significant and credible synergy potential and very strong industrial logic," Jefferies analyst Ulrich Rathe said in a note.

"Still, EGM approval for the required equity issue is not a foregone conclusion, given major shareholder Freenet may not be supportive of a cash call," said Rathe, who rates Sunrise "hold".

UPC's fixed and mobile services will help Sunrise go head-to-head with Swisscom.

The UPC business has 1.1 million TV customers, albeit with falling subscriptions, and 138,000 mobile phone clients in Switzerland.

Sunrise said the deal gives it a big chance to leverage its brand name and distribution network "to improve the current negative trajectory of UPC Switzerland by cross-selling fixed broadband and TV offers to existing Sunrise customers."

"We have all the ingredients to win," Sunrise Chief Executive Olaf Swantee said on a call, adding that the deal will lead to job cuts as he seeks to wring out savings.

The company said the deal would create total synergies of 2.8 billion francs, which analysts at Bank Vontobel called "considerably ahead of our estimate and provide the bulk of

value creation potential".

MALONE CASHES OUT

For Malone, chairman and a shareholder of Liberty Global, it marks a further trimming of his European assets. He is already planning to sell Liberty Global's assets in Germany and eastern Europe to Vodafone for $21.8 billion, subject to regulatory approval, and is selling its UPC Austria business to T-Mobile Austria, owned by Deutsche Telekom.

Proceeds from Sunrise's rights issue, which must be approved at the April 10 shareholders meeting, will fund the cash payment to Liberty Global, redeem debt and cover 200 million francs in transaction costs.

Jefferies analysts, however, said Freenet with a 25 percent stake in Sunrise "appears to have limited appetite to answer a cash call on the one hand or accept dilution on the other".

The deal requires a simply majority of votes present at an extraordinary shareholder meeting, so potential opposition by Freenet may not be insurmountable, they added in a note.

Freenet had no immediate comment. Sunrise said Freenet had not yet decided whether to take part in the cash call.

Swantee said integration of Liberty's UPC Switzerland could cost up to 150 million francs and the deal would likely lead to a one-level credit rating cut.

The deal is expected to close in the second half of 2019 and add to Sunrise's equity free cash flow per share from the first year after that.

Credit Suisse, JPMorgan and LionTree served as financial advisers to Liberty Global, while Deutsche Bank, UBS and Morgan Stanley advised Sunrise.

(Additional reporting by Ismail Shakil in Bengaluru, Angelika Gruber in Zurich and Georgina Prodhan in London; editing by Grant McCool/ Shri Navaratnam/Susan Fenton)