LBTYA - Liberty Global

[marazul]

it is not levered 5x equity is 5x cash flow which is very different.

[smathew]

leverage is only around 1:1

[ni-co]

I think that the market consensus is completely overestimating the risk of leverage at LBTYA. Cable co cash flows are almost comparable to multi-family REIT cash flows. People won't stop using their broadband access in harder times. I wouldn't be surprised if they even wouldn't cut cords at an increased pace.

[Liberty]

Interview with Mike Fries in Davos:

 

http://www.bloomberg.com/news/videos/2016-01-22/liberty-global-ceo-more-cable-consolidation-potential

[cleonard12]

Liberty Global released a preliminary proxy a couple days ago on the CWC deal. I read through and took some notes, found the Background to the Merger to be the most interesting part. Most of the other stuff was covered in prior filings:

 

 

Notes on Preliminary Proxy (1.22.2016)

 

2 reasons for voting:

- Enable Liberty Global to issue shares for the CWC deal

- Sign off on Malone’s 13% inside deal

- Shareholders aren’t actually voting on the deal, they are required to vote because Malone is a director of Global and a >5% owner of the company Global is acquiring

 

Date of shareholder meeting still TBD

 

The mechanics of the merger:

1 – UK sanctioned scheme of arrangement

2 – Creation of MegerCo LLC (English) that will be a subsidiary of Global

CWC assets transferred to this sub

 

Once complete, Global will attribute this sub to the LiLAC group in exchange for ~67% ownership in LILAC

- Existing LILAC owners will own ~25% of pro-forma LILAC

- Remainder are legacy CWC owners

 

Key Dates:

- Long Stop date: April 30, 2016

- Extended stop date (if FCC requires more): November 16, 2016

- Stated goal is to complete deal in Q2 2016

 

Break fee: $50mm Global would owe CWC (exclusive of VAT)

- Seems light for a $5.47B deal

o .91% of deal value, average is typically 3% - 4% according to: http://www.kirkland.com/siteFiles/Publications/MAUpdate_090612.pdf

- Takeover code prevents CWC from paying any breakup fee to LBTYK

 

Combined company:

- Global operates in 14 countries today, adding 15 through CWC

- Confirming “low double digit rebased” operating cash flow growth over medium term

- Not much extra operational detail, they do reference confidence in previously stated CWC-Columbus synergies

 

Background to Merger:

- In July 2014 Columbus (Malone’s cable co) started a process to sell itself

- Liberty Global submitted a non-binding IOI,  but CWC won

- CWC – Columbus deal closed on March 2015

- Two months later, May 2015, CWC meets with Global at Englewood, CO offices to discuss industry, possible combination

- June 2015 Letter from CWC to Global: CWC actually wanted to buy LiLAC, and the idea was Global would take a minority stake in CWC in consideration

 

- August 2015 proposal sent by Global: Global buys CWC at 78 pence (24% premium) through:

o 60% LBTYK stock

o 20% LILAC stock (this is disproportionate as LILAC is 1/20th of LBTYK)

o 20% cash

o CWC rejected this bid

 

- September 2015 proposal sent by Global: 84 pence (45% premium)

o 80% LBTYK stock

o 20% cash

o CWC rejected, they want 87 pence

 

- Another proposal was floated with 95% LBTYK and 5% LILAC (this is proportionate)

- October 22, 2015: market rumors, both sides confirm they are in talks

- Oct 23, 2015 Global Board meeting: advisors and board come up with the idea that Global would acquire CWC then complete the intergroup transfer to LILAC

- Final offer was not determined until November

 

Intergroup: LBTYK -> LILAC

- There is not any detail or explanation in this proxy on how Global arrived at 67% ownership in LILAC in exchange for the CWC sub

 

Approvals needed to close deal:

- Simple majority of LBTYK shareholder on merger/Malone thing

- 75% vote of CWC holders on scheme

o But 35% of shareholders have already signed up (Malone and other board)

- Regulatory

 

Termination:

- If in writing by both parties

- Basically if the time lapses, or if another group makes a bid for CWC

 

Malone’s stake in Global:

- Economic interest is 2.58%, for a value of ~$750mm

o Less than LMCA stake, even though Global is far larger company

- But voting interest is 24.9% through Class B shares

o B shares have 10x voting power

o He owns 83% of B shares

- About 17% of shares are pledged against margin account at Merrill Lynch and Fidelity

o No LILAC pledged

 

Fries’ stake in Global:

- ~$125mm in LBTYK (across all shares), ~$5.7mm in LILAC across all shares

o 40% of his shares are pledged against a margin account at Morgan Stanley

 No LILAC pledged

 

Irrevocable Undertaking:

- These are basically voting agreements in the back of the proxy for significant shareholders (Malone’s entity in CWC, Malone in Global, Brendan Paddick, etc.)

- They are signing that they won’t sell the shares and that they will vote for the deal

- Global has Malone and Orbis Investment signed on for ~34% of the vote

- CWC has Malone’s entity, Paddick (former CEO of Columbus) and others for ~35%

 

[Liberty]

Thanks for sharing your notes, much appreciated!

[rogermunibond]

WSJ is reporting VOD and LBTYA are in talks on a Netherlands JV.

 

http://www.wsj.com/articles/vodafone-in-talks-with-liberty-global-over-joint-venture-in-the-netherlands-1454420732

[cmlber]

Assuming management hit it's guidance for 15', this is at a 9.7% TTM FCF yield with EBITDA growing mid/high single digits and interest expense likely falling.

 

I know it's leveraged, which the market doesn't seem to like.  But are people in Europe really going to stop using broadband because China is growing slower and oil is cheaper?  And the debt maturities are 7+ years out and fixed.  Also pooled by country, not held at the holdco level.

 

Anyone buying here?

[Jurgis]

Anyone buying here?

 

Yes. Bought higher too, so not sure this tells you much. GL. :)

[ni-co]

Assuming management hit it's guidance for 15', this is at a 9.7% TTM FCF yield with EBITDA growing mid/high single digits and interest expense likely falling.

 

I know it's leveraged, which the market doesn't seem to like.  But are people in Europe really going to stop using broadband because China is growing slower and oil is cheaper?  And the debt maturities are 7+ years out and fixed.  Also pooled by country, not held at the holdco level.

 

Anyone buying here?

 

Agree with your analysis. I bought some calls. I'm not willing to put the trigger on the equity yet. But that's caused by my general market view, not by LBTYA. 

[Liberty]

Globa and Vodafone merging in the Netherlands:

 

http://www.libertyglobal.com/pdf/press-release/Liberty-Global-and-Vodafone-to-merge-Dutch-operations-FINAL.pdf

[muscleman]

Globa and Vodafone merging in the Netherlands:

 

http://www.libertyglobal.com/pdf/press-release/Liberty-Global-and-Vodafone-to-merge-Dutch-operations-FINAL.pdf

 

They didn't say how they come up with the Enterprise value and how much debt the Vodafone sub has.

Let's say they used 8xOCF to come up with the EV of 10.3 Bn for Ziggo, then what multiple did they use for Vodafone?

 

Is the deal good or bad?

[Munger_Disciple]

Liberty Global's Dutch business (EV) was valued at 11 times OCF and Vodaphone's was valued at 8 times OCF. So it seems like a reasonable deal for Liberty shareholders.

[giofranchi]

Liberty Global's Dutch business (EV) was valued at 11 times OCF and Vodaphone's was valued at 8 times OCF. So it seems like a reasonable deal for Liberty shareholders.

 

Thank you. I also think it should turn out to be a good deal.

 

Cheers,

 

Gio

[muscleman]

Assuming management hit it's guidance for 15', this is at a 9.7% TTM FCF yield with EBITDA growing mid/high single digits and interest expense likely falling.

 

I know it's leveraged, which the market doesn't seem to like.  But are people in Europe really going to stop using broadband because China is growing slower and oil is cheaper?  And the debt maturities are 7+ years out and fixed.  Also pooled by country, not held at the holdco level.

 

Anyone buying here?

 

EBITDA for 2015 is around $8bn, so the EV/EBITDA multiple is around 8.7. Is that cheap enough to buy? The EV consists of Equity of 27 BN and Long term debt of 45 bn, so 6% EBITDA growth would translate into about 15% equity value growth, assuming no buybacks. I think 15% growth is lower than my bar.

[Liberty]

Why do you assume no buybacks? They did $2.3bn of buybacks in the past 12 months, and with the 1bn of cash that they'll receive from VOD, they can possibly accelerate that further at the current depressed prices. They've guided to 4bn of buybacks by year-end 2017.

[prevalou]

Assuming management hit it's guidance for 15', this is at a 9.7% TTM FCF yield with EBITDA growing mid/high single digits and interest expense likely falling.

 

I know it's leveraged, which the market doesn't seem to like.  But are people in Europe really going to stop using broadband because China is growing slower and oil is cheaper?  And the debt maturities are 7+ years out and fixed.  Also pooled by country, not held at the holdco level.

 

Anyone buying here?

 

EBITDA for 2015 is around $8bn, so the EV/EBITDA multiple is around 8.7. Is that cheap enough to buy? The EV consists of Equity of 27 BN and Long term debt of 45 bn, so 6% EBITDA growth would translate into about 15% equity value growth, assuming no buybacks. I think 15% growth is lower than my bar.

 

Don't forget a  $5.9 B tax asset

[muscleman]

https://www.sec.gov/Archives/edgar/data/1570585/000157058516000395/lg201510-k.htm

"United Kingdom and Ireland. In the U.K., we have a number of significant competitors in the market for broadband internet services. Of these broadband internet providers, BT is the largest, serving 34% of the total market in the U.K. Virgin Media serves 20% of the total broadband market in the U.K. BT provides broadband internet access services over its own, VDSL network, which is available to approximately 85% of the U.K. population. BT Openreach, a division of BT, manages BT’s local access network and provides competitors access to BT’s networks. BT has announced its intention to rollout ultrafast speeds of up to 300 Mbps to 500 Mbps by the end of 2020 to up to 10.0 million premises using G-fast technology, a DSL standard designed for local loops less than 250 meters. This technology is also expected to eventually support a rollout of 1 Gbps service."

 

Really? I didn't expect DSLs to provide this kind of speed. In this case, what's the competitive advantage of cable vs fixed line telephony?  :o

[smathew]

" DSL standard designed for local loops less than 250 meters" . That means they need to run fiber  very near

to home (to uplink this connection) and they cannot reuse the existing local loop fully as it is (from central office to home).

This should very costly like Fiber to home.

 

 

 

[muscleman]

I agree that with the tax asset and the equity values of LILA and other equities, and share buybacks, the expected annual return can be 20% from here to 2018.

I think I previously missed these calculations.

[Shooter MacGavin]

if I model out 7% EBITDA growth, 50% of EBITDA as capex (half growth half maintenance), 6.5% interest, and maintain the 5x leverage....and use all the free cash to buyback stock, 13x exit on run-rate earnings (normalized capex)...then I'm getting about a 25%+ CAGR next 4 years or so.  I think normalized run-rate capex is typically 12-15% of revenue, they're much higher in the investment cycle now obviously, around 25%.

 

at ~$35, the stock seems to be trading at a 10x run-rate multiple of normalized earnings.  I'm not counting NOLs, that's just gravy...anyone else think that's too high or low?

[BraveChieftain]

You're too low on CapEx as a % of revenue and too high on interest rate for next few years

[marazul]

Capex right now is around 25% of revenues. Think they should approach 15% over time (3 years maybe). Interest rate should be 5% or a bit under that. If EBITDA grows at 7%, leverage remains at 5x and they manage to reduce capital intensity to the mid-teens over the medium term, this is a HR IMO. Double in 3 years seems very likely. We are assuming many things here though.

[Shooter MacGavin]

You're too low on CapEx as a % of revenue and too high on interest rate for next few years

 

Thanks.

 

I know Im high on interest rate on purpose...I think they're at weighted average of <5.00% for Global but since they will keep issuing debt to maintain the 5.0x net leverage, who knows what rates they get tomorrow.  I threw in 6.5% to be conservative.  Maybe you're right on capex as % of revenue if you count capital leases.  On a run-rate basis however, I think 12-15% is probably the right number.  That's higher than where Comcast's cable business is, and these guys are slightly larger than Comcast on the cable side. The one thing I worry about is ongoing Euro depreciation, which may affect Belgium, Germany, Netherlands etc, and maybe one should haircut the run-rate EBITDA, but its not a huge concern

 

I just bought today at around the bottom tick, and wondering if I should take a slug of Lilak too. Is Lilak potentially a better story after cable and wireless closes?

 

 

[Munger_Disciple]

Shooter

 

Can you explain how you get to 25% expected return based on your assumptions? Thanks