Industry Trend Analysis - UPC Buy A Risk For Salt - FEB 2018

BMI View : UPC ' s cable broadband assets would help mobile-only Salt become a more credible player in a Swiss communications market increasingly drawn to converged services. However, it would take more than increased scale to transform Salt ' s faltering business and a take-over of both Salt and UPC by a more experienced player - possibly Vodafone - would unlock the full value of both assets. Realistically, however, the likeliest outcome is that one or both will be picked up by private investors.

Liberty Global Inc (LGI) is said to be considering the sale of its UPC-branded Austrian and Swiss broadband cable businesses, either separately or as a unit. While there is no obvious reason why LGI should be contemplating a sale, a putative merger of LGI and mobile-centric Vodafone is still on the cards and LGI may be looking to focus more on markets where it can act as a disruptor through convergence. Although it could buy struggling mobile operator Salt to achieve that goal in Switzerland, Salt's weak financial performance and unattractive spectrum holdings make that scenario unappealing. Rather, we believe Salt itself may be interested in buying the unit in an effort to turn its fortunes around.

No Salt On The Table
Multi-Play (P) Subscribers By Operator (000)
Source: BMI Operators Database, Operators

Salt's competitors are incumbent Swisscom and independent player Sunrise; both have wireline businesses they are leveraging to offer multi-play services in order to deepen their relationships with customers and upsell premium offerings. Take-up of multi-play packages is growing rapidly, with 24% of Sunrise's revenue-generating users (RGUs) taking such services as of mid-2017, while 49% of Swisscom's wireline RGUs were signed to its inOne convergence package. Both operators are seeing revenue growth or arrested revenue decline as a result of the move to these higher-value packages.

UPC Suisse is no slouch in the race to multi-play, as approximately 18% of its wireline RGUs were on dual-play packages as of mid-2017 while 38% were on triple-play. However, a move into mobile services, while positive, is yet to achieve critical mass and has not fundamentally changed convergence dynamics for the cable operator and is unlikely to do so without scale in the mobile arena.

With around 1.9mn mobile subscribers, Salt has the scale needed to enhance UPC's cable broadband business and add lustre to its relatively underwhelming service portfolio. The company has struggled to grow its mobile user base in what is now a mature and saturated market and must differentiate in order to survive. We therefore believe Salt will be actively considering buying UPC Suisse.

The main risk to a Salt-UPC deal is that, being privately owned, Salt may struggle to absorb the costs involved in firstly acquiring UPC and, subsequently, integrating the business then working proactively to retain customers should it seek to raise prices. We also believe that, with no prior experience in operating wireline broadband services or developing complex, valued-added services, Salt would struggle to capitalise on the opportunity before it. Curating and developing a vibrant content and service portfolio is key to building a sustainable convergence-led business, as we have often argued, and Salt's track record in this regard falls short relative to its peers.

One possible scenario is that Vodafone either buys UPC and then Salt, to develop a standalone converged services player capable of competing fully with Swisscom and Sunrise, or a similar deal is struck after an LGI-Vodafone merger is effected. However, Salt is unlikely to be able to wait that long, having already indicated that it might sell up if it cannot secure a more attractive share of the Swiss mobile spectrum universe in upcoming frequency auctions.

The most likely outcome is that Salt will be sold on to another private investor, one that will be reluctant to take on UPC as well while Salt's fortunes are turned around. This means that UPC Suisse itself is also at risk of falling prey to private investors as competition laws would prevent Sunrise or Swisscom from tabling an offer and the largest independent player, Quickline, lacks the resources to risk buying a substantially bigger player.