Moody’s Lowers Virgin Media Outlook to Negative

Rating Agency Cites Poor Performance After Telewest, Virgin Mobile Deals
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Moody’s lowered its outlook for Virgin Media to negative from stable Thursday, saying that the company has performed below expectations in the wake of its merger with Telewest Global and acquisition of Virgin Mobile.

The rating agency said the change is a reflection of the increased competitive environment and continued subscriber losses in both its telephony and mobile businesses. Moody’s does not expect the company to generate net subscriber additions for full-year 2007 in its mobile or cable segment, which includes broadband and telephony. Virgin’s cable segment recorded net subscriber losses of 70,300 in the second quarter.

While the company’s ongoing strategic review was not a factor in the outlook revision, Moody’s has said that it will place Virgin on review for downgrade upon confirmation of negotiations with a potential bidder. A downgrade is likely if any change in ownership results in debt/EBITDA (earnings before interest, taxes, debt and amortization) increasing to more than 5.5 times cash flow.

Virgin opened up to potential suitors after receiving an unsolicited bid from private-equity firm The Carlyle Group. Other private-equity names reportedly expressed interest, as did strategic bidders, such as U.S. cable operators. But the turmoil in the credit markets delayed the process.

Moody’s expects the company to generate positive free cash flow for the year, despite subscriber losses, but it does not expect performance in the near term to warrant a swing in the outlook back to stable.

The change in outlook affects the company’s corporate-family ratings, as well as its credit facilities and senior notes.

Virgin, the largest cable operator in the United Kingdom, released its quarterly results earlier Thursday.

The company narrowed its second-quarter loss to £119 million ($240.8 million) from £195 million ($394.5 million) in Q2 2006 through a lower interest expense in 2007 and a gain from foreign-currency transactions versus a loss last year.

Revenues in Q2 increased 12.5% to £995 million ($2.103 billion) from £884 million ($1.789 billion) in Q2 2006. Expenses rose in tandem by 13%, resulting in operating income of £3 million ($6.07 million) versus £6.3 million ($12.75 million) a year ago.

Operating cash flow in the quarter was £315.3 million ($637.9 million) versus £305.7 million ($618.5 million) a year earlier.

Virgin said second-half numbers should improve based on expanded TV offerings and continuing cost initiatives. The company recently struck a deal with Setanta, which carries Barclay’s Premier League and FA Cup football, to offer its six sports channels as part of the operator’s basic package, which does not result in an extra charge for subscribers.

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