VMED02 - Divergence
All,
Please see our updated analysis here.
VM02 has seen stabilisation and a little growth return to its Mobile and Fixed segments. Both are mature in terms of market penetration, but there is still revenue and EBITDA growth from the increasing number of UK households, and demand for faster mobile (5G) and broadband services. A divergence in strategy between Telefonica and Liberty Global probably brings us closer to Liberty being bought out, but we do not see that as likely in the next few years.
Investment Considerations:
- We are not taking a position now; there is no near-term catalyst for the debt stack to reprice. As a yield play, the 2030 SUNs yield over 9% (trading at 85%), which represents a good cash return. We see three points of upside/downside (+/- 100 basis points in yield), which will be largely driven by the underlying interest rate moves rather than any fundamental change in VM02’s risk. Furthermore, VM02 is not going to redeem low-coupon bonds early.
- Even if the war in the Gulf drags on, we see the main friction as being in Pay TV, which is a low-margin product for VM02.
- We do not see a bid for the whole of VM02 as likely, but it would see the 2030 SUNs trade near par (<4%).
- The equity holders will not allow £1.8bn of SUNs to dictate the fate of the capital stack.
- There is no specific event here. VM02’s core businesses are mature, but increasingly stable.
- Consumers are changing the way they consume TV, moving from cable boxes to streaming apps, to using 5G compatible smartphones. The change to consumption of TV via streaming will impact the number of subscribers to Pay TV and therefore revenue, but the impact on EBITDA contribution will be much smaller. With a fixed and mobile network, VM02 is well placed to benefit from Subscription Video on Demand, as consumers will need capacity in their internet connection.
Key Conclusions:
- The maturity segment confirms that there are no near-term debt repayments, and the DCF calculation highlights the large equity cushion under the bonds.
- As the Company and Recent Trading segments demonstrate, VM02 has strong market positions in mobile and fixed communications. Its business sectors are mature, but as seen in the Model portion, operational cash flows are strong, and despite significant capex, so is free cash flow.
- Revenue continues to be pinched slightly as marketing support is needed to retain customers. However, as the industry segment shows, this is an industry challenge rather than a VM02 one.
- The Liberty Global strategy is diverging from that of Telefonica, as shown in the Network decision, the sale of the network was opposed by Telefonica and in the longer term, we see a potential bid for the Liberty Global stake in VM02.
Recent Trading:
Q324:
- Subscriber numbers were a little above our expectations, but the friction in Revenue and EBITDA continues. Excluding the impact of the Neomania transaction, there will be at worst a modest rise in leverage in 2026, with revenue down 3% - 5% and EBITDA down by a similar amount. Distributions to shareholders are forecast at GBP200m (vs GBP300m – GBP400m forecast in 2025) and will consume free cash flow. That said, VMED continues to generate strong operating cash flow and can cover its debt.
- The Consumer Fixed business is suffering as customers reduce spending on streaming services. In April 2025, VMED increased the headline package costs by RPI + 3.9% c7.5%. Actual revenue fell 3.3% on subscriber numbers <1%. There will be a mixture of customers down-tiering and promotional offers from Virgin to keep subscribers at the expense of Revenue.
The Mobile business saw subs up 2%, but Revenues down 4%. As with Consumer Fixed, competition is forcing promotional activity to chip away at revenue.
- The acquisition of Neomnia by Nexfibre will result in a cash inflow of GBP950m for VMED, leading to a reduction in leverage of 0.3x. It is a net positive for creditors. The £150m of net cash being injected into Nexfibre by Telefonica and Liberty Global is less than the GBP200m that VMED expects to pay them as a dividend this year (as revealed in the VMED 2025 results today). Infravia is contributing GBP850m in cash to Nexfibre as part of the acquisition. The purchase of The Substantial Group by Nexfibre will create the #2 fibre company after BT Openreach.
I look forward to discussing this with you all.
Aengus
T: +44 203 744 7055