The broadside from Sunrise's largest shareholder raises the stakes in a poker game that began in April, when Freenet blocked Sunrise's plans to authorise fresh capital to help pay for the agreed all-cash deal.
"This transaction is very unfavourable towards existing shareholders," CEO Christoph Vilanek told Reuters, as Freenet said the sale price should be lowered and risks reallocated that were borne disproportionately by existing shareholders.
The deal awaits approval from Swiss competition regulators, who Vilanek said were likely to rule next month. A shareholders' meeting to vote on a 4.1 billion franc rights issue would then need to be held within 30 days.
The capital raise requires a simple majority of outstanding shares, but with Freenet vowing to vote its 24.5% stake against the issue, Sunrise CEO Olaf Swantee could come up short of the votes he needs.
"The ball is now in Sunrise's court," Vilanek said, adding Sunrise faced a choice between renegotiating the deal or possible defeat. He described the rights issue - which is bigger than Sunrise's market capitalisation - as highly risky.
Shares in Sunrise rose by 3.2% in Zurich trading.
The standoff comes against a backdrop of European industry consolidation, as margins are squeezed by falling mobile data prices and mounting costs to launch super-fast 5G services.
Liberty is already beating a strategic retreat, having sold its German and central European businesses to Vodafone for $22 billion, and its Austrian cable unit to Deutsche Telekom for $2.2 billion.
Amid the Swiss standoff, attention has focussed on whether UPC's performance justifies its sale valuation. Last week it reported a 3.6% fall in revenue in the second quarter.
Sunrise, responding to Freenet on Friday, said UPC's results were in line with or even ahead of Liberty's turnaround plan, underscoring the deal's strategic rationale.
"Sunrise remains convinced that the acquisition of UPC Switzerland creates a stronger and more valuable Sunrise," it said, adding it would provide an update on the UPC acquisition when it reports results on Aug. 22.
Yet Vilanek said UPC had resorted to heavy discounting to keep its business going. "Based on our analysis, this is a falling knife," he said.
Freenet, which hired Citi in June to look at ways to improve the deal, called for Liberty to retain an equity interest in the merged entity, instead of being paid all cash to exit.
It also objects to saddling Sunrise with UPC's bonds, which Vilanek said were more costly than Sunrise's own borrowings. It called for Liberty to retain the bonds.
Liberty, founded by U.S. investor John Malone, did not immediately respond to a request for comment. Sources familiar with its thinking have, however, defended the deal and argued that, rather than bearing undue risks, Sunrise and its shareholders stood to profit most if the UPC deal works out.
(Reporting by Douglas Busvine; Additional reporting by Angelika Gruber in Zurich; Editing by Michael Shields and David Holmes)
By Douglas Busvine