September 30, 2019 / 12:08 PM / 21 days ago

Sunrise's UPC takeover fight grinds on as Freenet spurns concession

ZURICH (Reuters) - Sunrise Communications (SRCG.S) slashed the size of a rights offer but this failed to secure the support of a major shareholder for its 6.3 billion Swiss franc ($6.35 billion) purchase of Liberty Global’s (LBTYA.O) Swiss UPC unit.

Germany’s Freenet (FNTGn.DE), which owns 25% of the Swiss telecoms group, pledged on Monday to keep up its fight against the transaction, despite Sunrise’s move to cut its planned rights issue to 2.8 billion francs from 4.1 billion previously.

Luxembourg-based Active Ownership Capital (AOC), with less than 3% of Sunrise stock, also said it remained opposed despite the company’s concessions.

This leaves the UPC transaction in doubt and sets up an Oct. 23 showdown at an extraordinary shareholders’ meeting, when Sunrise Chief Executive Olaf Swantee must win a simple majority of investors for his expansion plan.

While he contends most shareholders are on his side now that he plans to sell fewer new shares in exchange for taking on more debt, Swantee acknowledged proxy advisers could play a big role, since foreign institutional investors often heed their advice.

“Not all the shareholders immediately tell you they are going to vote in favor or they are going to vote against it, because they are still waiting for the proxy advice,” Swantee told reporters on a conference call.

“We still have the proxy advisers we need to, of course, work with in the next few days,” added Swantee, who sees the addition of UPC as helping Sunrise better compete with government-controlled Swisscom (SCMN.S).

Analysts from Bank Vontobel and Jefferies said the deal for UPC, while more attractive with the new terms, is anything but home and dry.

“All this does not address concerns over the price paid,” Jefferies analyst Ulrich Rathe said in a note. “The likelihood of the deal passing has clearly increased overall from the 60-40 odds we estimated in our report from Sept. 9, but approval at the EGM is by no means guaranteed.”

Sunrise shares were down 2.8% at 1400 GMT.

STRATEGIC LOGIC

Freenet, AOC and other investors oppose the deal on several fronts, including its price as well as concern that it is strategic folly to buy UPC cable assets just as the industry, including Sunrise, is introducing newer 5G mobile technology.

“If this is the only change, it will not affect our decision to vote against the deal,” Freenet said in a statement, after Sunrise announced it was trimming the rights issue. “For now it is clear that the deal as such has lost its strategic logic.”

Chief Financial Officer Andre Krause said the UPC-Sunrise combination will now see debt rising to 4.2 times earnings before interest, taxes, depreciation and amortisation (EBITDA) with the new deal terms, from 2.24 times EBITDA in June.

Krause projects that can be trimmed to below three times EBITDA within three years via increased synergies and a proposed new option for dividends to be paid in shares rather than cash.

“Thereafter, we will target to get below 2.5 times (EBITDA), to get back to a prudent capital structure and to allow for a continuation of our progressive dividend policy,” he told investors on a conference call.

Reporting by John Miller; editing by Jason Neely and Emelia Sithole-Matarise

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