LBTYA - Liberty Global

[dontdodebt]

If the operational risk and technical and regulatory risk is this high as it seems reading this thread....who in there right mind would do that massive buy back of share instead of derisking as good as possible by pay back debt for example? It seems insane if there is significant operative risks going forward

 

I couldn't agree more.

 

Malone made his money investing in the cable industry with high leverage and operating with minimal capex.  It's been a successful playbook but then cable has done well for the past 40 years or so, at least until recently.  You have also had interest rates steadily grind their way down.  I sometimes wonder how smart he is versus just, maybe just a little bit, lucky.

 

Well, I didnt necessarly say that the buybacks were crazy, stupid or risky.. It´s a sincere question. IF the operational risk is this high like many in this thread seems to claim, wouldnt it be mad for them to do this HUGE recent buy back? It seems like an act of insanity if so..  My question is more in the line of "Is it likely they would be THAT stupid ? " As an investor, you shouldn´t invest if you don´t understand something because sooner or later you really will go on a mine.. but the signal value of their huge buy back signals to me that they in general are not seeing much of _serious_ and significant technical/regulative/operational risks going forward.  If they do, they are maniacs.

 

This is an interesting case.. but overall too many question marks..

[scorpioncapital]

How exactly does repayment of debt affect fcf? I take fcf to be the operating cash flow section minus the capex section.

[maybe4less]

How exactly does repayment of debt affect fcf? I take fcf to be the operating cash flow section minus the capex section.

 

They do a lot of vendor financing which pushes off equipment purchases for up to a year. So these vendor debt repayments are really deferred capex payments. Correspondingly, they increase PP&E in the current quarter via a noncash vendor financing transaction.

 

So, for example, they added $2B in property and equipment in the first three quarters of 2019, but $1.3B was vendor financed and they didn't have to spend any cash on. There are some other smaller adjustments, but the net cash number was $900M of cash spent on capex.

 

However, they also spent an additional $3B in cash paying back vendor financing from previous periods.

 

The way management accounts for this is by subtracting the $3B of vendor financing repayments from FCF to provide adjusted FCF.

 

However, if you want to track actual current "spending", you probably want to look at the gross capex number of $2B (instead of the $900M) and not subtract out the debt repayments, since the latter were for equipment added in earlier periods.

[cameronfen]

How exactly does repayment of debt affect fcf? I take fcf to be the operating cash flow section minus the capex section.

 

They do a lot of vendor financing which pushes off equipment purchases for up to a year. So these vendor debt repayments are really deferred capex payments. Correspondingly, they increase PP&E in the current quarter via a noncash vendor financing transaction.

 

So, for example, they added $2B in property and equipment in the first three quarters of 2019, but $1.3B was vendor financed and they didn't have to spend any cash on. There are some other smaller adjustments, but the net cash number was $900M of cash spent on capex.

 

However, they also spent an additional $3B in cash paying back vendor financing from previous periods.

 

The way management accounts for this is by subtracting the $3B of vendor financing repayments from FCF to provide adjusted FCF.

 

However, if you want to track actual current "spending", you probably want to look at the gross capex number of $2B (instead of the $900M) and not subtract out the debt repayments, since the latter were for equipment added in earlier periods.

 

Thanks for clarifying I was a bit confused as well. 

[dwy000]

2019 adjusted free cash flow is 700 to 750m. At $21.89, what some already call a depressed stock price that's a 13.8 billion equity valuation or 19x Free cash flow. If you include the debt, and add back a billion of interest a year, that's 1.725 billion~ and a valuation of 39 billion (maybe if you say they should keep 3-5 billion cash around we might say 35 billion) or 20x around a 4.9% yield. So...even at $21.89, Liberty appears quite expensive given the risks, low growth, and alternatives to cable broadband in Europe. Given the European competitive structure, profits are not on an up escalator.  European government regulation and 5g are the #1 and #2 risks to Liberty achieving anything but a declining business over time.

 

I suspect the theory is that of the $13.8bn market cap, theres $7.4bn of cash which brings net market value of the business to $6.4bn when it's generating $700-$750 of free cash flow and growing as capex flattens or declines. 

 

if they can monetize Switzerland and Ziggo (and maybe Belgium) you are getting Virgin Media very very cheaply.

[scorpioncapital]

When I look at very cheap equity valuations with cash on the b/s , I also like to look at the gross debt. Of course this is always a sword dangling over any company's valuation. Almost always when I saw a company with lots of cash and a cheap equity value, high debt, slowly declining revenues, and low return on invested capital were often the usual suspects. Cable utilities today seem to have leverage ratios similar to real estate. They can probably price at or above inflation. The risk of alternatives however should cause non-US wired broadband to lower their leverage ratios somewhat but this is something that I'm paying Malone and co to figure out. I do hope they figure out correctly.

Btw, this simple valuation analysis seems to imply a 35% undervaluation at a 13% discount rate. With a 10-30 year bond at around 3 percent it's priced for ~13% returns a year if you believe the inputs - https://simplywall.st/news/a-look-at-the-fair-value-of-liberty-global-plc-nasdaqlbty-a/

 

 

[skanjete]

When I look at very cheap equity valuations with cash on the b/s , I also like to look at the gross debt. Of course this is always a sword dangling over any company's valuation. Almost always when I saw a company with lots of cash and a cheap equity value, high debt, slowly declining revenues, and low return on invested capital were often the usual suspects. Cable utilities today seem to have leverage ratios similar to real estate. They can probably price at or above inflation. The risk of alternatives however should cause non-US wired broadband to lower their leverage ratios somewhat but this is something that I'm paying Malone and co to figure out. I do hope they figure out correctly.

Btw, this simple valuation analysis seems to imply a 35% undervaluation at a 13% discount rate. With a 10-30 year bond at around 3 percent it's priced for ~13% returns a year if you believe the inputs - https://simplywall.st/news/a-look-at-the-fair-value-of-liberty-global-plc-nasdaqlbty-a/

 

The analysis from simplewallstreet is not the correct way to look at this I think.

 

Liberty Global is indeed a complex and murky story to look at, and probably that's a reason why it's misunderstood and undervalued.

 

I tend to look at it from a sum-of-the-parts point of view with a great capital allocator overseeing the thing.

According to my estimates, this is selling at less than 50cents on the dollar.

 

 

[scorpioncapital]

Given the politics in the UK, I see endless capex spending on Lightning and other jvs for fiber.  I am not sure when the free cash flow will appear at the end of the rainbow if regulators force them to build new networks with profits promised sometime down the road.

 

https://www.opendemocracy.net/en/oureconomy/bread-roses-and-broadband-too/

 

"As many pointed out at the time, digital infrastructure is a natural monopoly that depends on economies of scale. Delivering it through competing providers makes absolutely no sense. The cost of the government’s free market fundamentalism has been high – the UK has the fourth worst coverage in Europe with only 8% full-fibre compared with (for example) 75% in Spain. In that time, BT has paid out £54bn in dividends to shareholders, which would cover the capital costs for a nationwide fibre network twice over."

 

There is a very real risk liberty global goes to zero or is sold at a low price to the government. I'd like to hear how management addresses the backlash against privately held digital infrastructure. It seems it is an industry at very high risk of government destruction

 

 

[NotSoWise]

It is interesting that four years ago the discussion was how much will it grow, subs, arpus, M&A, buybacks, etc. Fast forward to now and the discussion is about x cents on the dollar, whether its worth above zero going forward, liquidation value, etc. Quite a change in investment thesis. I bought it 4 years ago and patiently waited. I think the mistake was to keep it when the thesis changed (after the fact its so much easier...).

 

Another interesting point is why keep Global any longer? For example one can buy TIGO at reasonably good price (should be even better over the next few weeks or even months) with pretty much "unlimited" upside over time, where on Global you are capped at its private market value (unlikely to increase, not obvious how long will it take to get there).

[cameronfen]

Given the politics in the UK, I see endless capex spending on Lightning and other jvs for fiber.  I am not sure when the free cash flow will appear at the end of the rainbow if regulators force them to build new networks with profits promised sometime down the road.

 

https://www.opendemocracy.net/en/oureconomy/bread-roses-and-broadband-too/

 

"As many pointed out at the time, digital infrastructure is a natural monopoly that depends on economies of scale. Delivering it through competing providers makes absolutely no sense. The cost of the government’s free market fundamentalism has been high – the UK has the fourth worst coverage in Europe with only 8% full-fibre compared with (for example) 75% in Spain. In that time, BT has paid out £54bn in dividends to shareholders, which would cover the capital costs for a nationwide fibre network twice over."

 

There is a very real risk liberty global goes to zero or is sold at a low price to the government. I'd like to hear how management addresses the backlash against privately held digital infrastructure. It seems it is an industry at very high risk of government destruction

 

This is like people saying the stock market will go down 50% if Elizabeth Warren wins so lets take precautions.  Corbyn is likely not going to win.  Even if he does win he likely will have a patchwork coalition and this will be both a controversial and low priority issue. Politicians say stuff to get elected.  After they get elected they have to focus on the realities of their office.  Cable companies have lobbiests and can push back against blanket regulation that will force them to be unprofitable.  It’s not like Corbyn throws some red meat to hungry liberals and that becomes law. 

 

Another thing with Malone companies.  Fcf doesn’t often appear at the end of the rainbow or at least if it does you only see it in buybacks, so it’s always used in investing in the company. They typically build more cable because they can use the depreciation as a tax shield.  Thus you never get much fcf in the company, you just get more valuable infrastructure.  That being said, if you normalize their payments of principle to vendors, you get unlevered FCF of around 2.5b forecast for this year and a large share of that (probably almost 1/2 I can only find OCF broken out)  is UK.  That comes out to be like a 5.5 multiple on market cap.  But again with Malone and other high debt companies EV/something is more apt than unlevered FCF.  The fact that they are always expanding might be good or bad depending on your beliefs, but it is what Liberty does. But as they demonstrate, they can ultimately monetize through sales of assets.   

[cameronfen]

It is interesting that four years ago the discussion was how much will it grow, subs, arpus, M&A, buybacks, etc. Fast forward to now and the discussion is about x cents on the dollar, whether its worth above zero going forward, liquidation value, etc. Quite a change in investment thesis. I bought it 4 years ago and patiently waited. I think the mistake was to keep it when the thesis changed (after the fact its so much easier...).

 

Another interesting point is why keep Global any longer? For example one can buy TIGO at reasonably good price (should be even better over the next few weeks or even months) with pretty much "unlimited" upside over time, where on Global you are capped at its private market value (unlikely to increase, not obvious how long will it take to get there).

 

Sure I was not long when this was a growth story, so I cannot speak to the mission creep. I will say that it’s different people (myself included at times) who said cable companies had an existential threat than people who were long.  However they likely sold the German assets for good value and I think there is a lot of ammunition for buybacks given that this thing is now trading at 5 or 6x EBITDA when private markets value it at 10x.  Either the price goes up and I sell, or the price goes down and the buyback will be very accretive.  Unless 5g decimates cable in the next couple years, I find that it will be a trade with a high expected value. 

 

I will buy TIGO, but what reason is there to buy it until they cut the dividend?

 

A side note: why do you say “unlimited” upside? 

[NotSoWise]

"Unlimited" upside for TIGO in the sense that:

1) cable penetrations are very low and it will take a while to get to maturity levels (10-15 years?)

2) you build infrastructure cheap now but with economies developing (labor costs up) you will price up

3) good country market shares and reasonable number of competitors. Countries TIGO is in are on the smaller side and you have scale over many geographies (with same language)

4) plus M&A and buybacks when organic opportunities slow down

5) on top you have a good CEO to execute with personal money invested in the business

 

Risks being currency and politics to balance things

 

You never know for sure what is already priced in, but most likely better to buy after they cut the dividend

 

regarding Global, there is also a third option - because they slowed down capex, they may get pressured on revenues and their FCFs may start to moderately decline over medium term (after initial rise due to capex). With high leverage this may get unpleasant. Last quarter was pretty bad in this regard. Its interesting why they decreased capex  - is it due to focus on exiting the businesses? Is it due to CF covenants (but then they have cash on BS so probably not)?. Why are they not doing buybacks at this level - due to CF covenants? M&A? Can they exit all businesses at good valuations (like in Germany)? Or they will have issues like in Swiss? - just couple of questions I am thinking about but so far without success regarding the answers.

[cameronfen]

"Unlimited" upside for TIGO in the sense that:

1) cable penetrations are very low and it will take a while to get to maturity levels (10-15 years?)

2) you build infrastructure cheap now but with economies developing (labor costs up) you will price up

3) good country market shares and reasonable number of competitors. Countries TIGO is in are on the smaller side and you have scale over many geographies (with same language)

4) plus M&A and buybacks when organic opportunities slow down

5) on top you have a good CEO to execute with personal money invested in the business

 

Risks being currency and politics to balance things

 

You never know for sure what is already priced in, but most likely better to buy after they cut the dividend

 

The one problem with TIGO and this applies to megacable and LIberty Latin America, is a lot of people are forgoing internet on computers and just sticking mainly with their phone, which gives a bigger opportunity to 5G.  So while their will be some switching to cable the trajectory won’t be as attractive as developed countries and there is the question of will these cable assets still be as valuable in 15 years in an era of 5g or beyond.  I am long a bit of Megacable and will look to buy TIGO so I agree but it’s has its own risks as well. 

[NotSoWise]

Agree with both arguments, with exit multiple being the one that is more scary to me. The million dollar question is about the economics of the new "integrated communications" providers - are they going be closer to mobile (commoditized) or closer to broadband providers in concentrated markets (quasi monopoly)? Again dont know the answer...

 

Good thing going forward is that TIGO has both mobile businesses and broadbands, so they will do 5G themselves (at what capex and what return - who knows?).

I think you will still need broadband at least for families/ households with kids - for entertainment, for multiple mobile phones use at home not to go beyond data cap, etc. If you e.g. dont work from home and you are single, then you dont need broadband at home.

 

[colinwalt]

https://www.valueinvestorsclub.com/idea/LIBERTY_GLOBAL_PLC/5924588272

 

You can sign up as a guest and get access to the main report and many of the subsequent messages (some are hidden to guests)

 

[vince]

It is interesting that four years ago the discussion was how much will it grow, subs, arpus, M&A, buybacks, etc. Fast forward to now and the discussion is about x cents on the dollar, whether its worth above zero going forward, liquidation value, etc. Quite a change in investment thesis. I bought it 4 years ago and patiently waited. I think the mistake was to keep it when the thesis changed (after the fact its so much easier...).

 

Another interesting point is why keep Global any longer? For example one can buy TIGO at reasonably good price (should be even better over the next few weeks or even months) with pretty much "unlimited" upside over time, where on Global you are capped at its private market value (unlikely to increase, not obvious how long will it take to get there).

 

Sure I was not long when this was a growth story, so I cannot speak to the mission creep. I will say that it’s different people (myself included at times) who said cable companies had an existential threat than people who were long.  However they likely sold the German assets for good value and I think there is a lot of ammunition for buybacks given that this thing is now trading at 5 or 6x EBITDA when private markets value it at 10x.  Either the price goes up and I sell, or the price goes down and the buyback will be very accretive.  Unless 5g decimates cable in the next couple years, I find that it will be a trade with a high expected value. 

 

I will buy TIGO, but what reason is there to buy it until they cut the dividend?

 

A side note: why do you say “unlimited” upside?

 

I look at the buybacks in the same way....when you have highly defensible assets it's an absolute no-brainer to purchase fcf yields above 10%, and aggressive buybacks at those same yields basically forces double digit returns to the patient investor.  But Fries is killing us!! Aside from the fact that nobody is buying his bullshit of the last 4 years his buybacks have been terrible.  He paid 27 dollars for 2.7 billion worth of buybacks....a price thats WELL ABOVE THE AVERAGE PRICE OF LAST COUPLE YEARS.  And I have a strong feeling that he will not be aggressive in the near future, because in my opinion they need that liquidity for a Swiss acquisition now that their asset sale failed.  Another big mistake that brings another hit to his credibility.

[scorpioncapital]

Of course it could change next year, but if 2019 estimates of 750m fcf is realized, that's a 5.5% yield even at $21.6 on the Y share.

 

On the transcript he kept saying they are going to take their time, they are not going to rush with the cash...Hmmm...bit of a rush to buy 2.7 billion out the gate of Vodafone sales and now say we will be patient. Well at least maybe he also realizes to be careful now. Switzerland I see possibly trying to negotiate an exit something like Vigo in Netherlands. Either with a consolidating partner or without, perhaps they could reduce the exposure to 50% via the public markets. If they can hold minority interests in all the EU countries, that would derisk the business. Of course, what happens in the UK is also a little uncertain with Government trying to incentivize more fiber buildout. One or two less broadband competitors in the UK would make it start looking more like the US market. And they might also choose to hedge their 5G risk with a partner there, although without a mobile merger (is that even allowed?) MVNO is a glorified affiliate program with revenue share of your subscriber mailing list.

 

I read that Brookfield, an infrastructure investor is very interested to buy up telecom assets globally so I can imagine Liberty and Brookfield might get into a killer venture together. Not sure Malone is even aware that there are infrastructure investors outside other telecoms looking to own these legacy cable assets. I tend to think if Brookfield is sniffing around these assets are on the cheap side in an otherwise expensive market because they tend to be pretty disciplined value investors.

 

PS. How do you measure return on invested capex on cable businesses when capex is usually ongoing. Say you invest 3 billion to upgrade your asset, how can you tell what is the incremental return that regulators will allow on this 'upgrade? I suppose you could go to oxcom and see if they say what is acceptable return...or you could measure revenue increase and convert that into a standardized maintenance capex but what are reasonable numbers here? It appears Global has had revenue decline so maybe those investments today are playing catch up?

[scorpioncapital]

Don't know if this was posted before,

apologies if so -

 

 

 

[NotSoWise]

Did he say anything interesting in this video except his usual b.s.?

[scorpioncapital]

It's a historical view but he said some interesting things

 

- global is about buying and selling, reshuffling. They go anywhere and everywhere. They were even in Australia, Asia. Obviously today they've cut the company in half and are downsized, focused on a few markets for now.

 

- he talked about some stories where some countries just raised taxes overnight on them but generally countries see the benefit of good business.

 

- he said Malone was a huge influence on the company to add strategic wisdom and patience. I wonder how much influence Malone had in causing them to downsize.

 

- he said data is growing huge 30-40% a year and the video business is a little better in Europe than USA because it seems there are perhaps less programming fees?

 

- he said mobile is bigger in europe and they actually pioneered MVNO and actually ahead of USA on this.

 

- he talked about how in 'rest of the world' there is no limit on market share. In USA, 30% for 3 companies. He said in Europe a company could have even 50% or 80%. (I'm a bit skeptical of this claim but there are some places where they have big share, but usually small countries)

 

- he talked a little about the universe around cable and speculated on some areas of interest like b2b. He said convergence is here to stay but vertical integration is situational.

 

The one thing he didn't touch much upon and what I feel is going to represent the fate of this investment is the regulatory environment in Western Europe. Is there room for growth via consolidation? And are there rewards for investment? Is there pricing power? I'd love to see a comparison between USA and UK pricing power and return on capital investment. I suspect the returns are somewhat lower than in the USA. Is this entirely due to consolidation? No. It definitely has to do with regulators deciding what is 'too much' in their countries.

Still, at a low enough price, one has to judge if this is a cap or not. I'd like to figure out the return on all the money they pump into their network growth. Is it 8%, 5%, 10% more? Frankly 5% is too low and would cause the stock to be depressed pretty much unless deregulation comes about. 8% is fair and with leverage...and if you have pricing power of 2-3% to inflation that's great. I prefer 10-12% range as that is what my other investments are yielding. Remember a stock eventually trades down to its return on investment. Even if the stock has a one time pop from undervaluation, say 20%, it will still tend to deflate to the return % level. However even if they yield a lowly 8% and currently it trades at a 5% return it should in theory make up the difference.

Europe has a big regulatory risk and a negative interest rate environment which may cause mis-allocation of capital into 5G buildout. That's good for the present as you get the infrastructure built but you will have more indebted governments and companies and probably there will be zero return later on. Still, it doesn't help the low rates. Strangely, like financial stocks, I see broadband stocks as getting better with higher rates, so if you want a play for higher rates in the future, broadband might not be a bad indirect speculation on this.

[NotSoWise]

I went through the video and my impression is that:

 

1. They want to sell out (or at least j.vs) to mobiles in Europe, to benefit from consolidation trend and private market multiples. Unless there is something opportunistic.

2. Being based in Denver he is just supervising subsidiaries, his role is not to operate. Being a decent deal maker, his job going forward might be to execute point 1 above (he just renewed his contract for another 5 years). John is paying him for M&A. If John wanted better operator, he would have fired Mike already few times in the past.

3. It reassured me about Mike being a b.s. guy (5 years at investment banking says it all). He havent said anything smart, just repeated what he heard from others... unlike his boss John, who is smart. This point is nothing new to anybody I guess.

 

I have Global since 4 years and probably will wait one more quarter and then decide what to do with this. Current situation is far from my original investment thesis. In optimistic case its more like 2x in few years if they execute exits and return money. Otherwise its more like 1-1.5x if operations stay flat and they wont collapse revenue/ arpu-wise.

 

Do you guys see this differently?

 

[scorpioncapital]

This is also very very dangerous. What is the chance it happens ? Wholesale just will destroy further virgin business.

 

https://www.google.com/amp/s/www.telecomtv.com/content/wholesale/virgin-media-wholesale-rumour-the-sign-of-a-rattled-cableco-34800/amp/

 

 

I am also holding until next year and then reallocating a portion slowly into something with less crowded competitors and government meddling. There is too much capital chasing broadband Infrastructure and not sure when it will decrease. I suspect the loss of video subs is the headline risk. Note when charter had a quarter with large video losses the stock tanked...but it was temporary because later huge gains in broadband customers has now seen the stock trading at all time highs. Virgin has about 5.5 million subscribers right ? So 10 percent of the entire UK. To match charter they'd need to get 20 percent more market share. There is room for growth. But it's interesting as fries also said cable in Europe is regional. While in USA some states have charter and others Comcast. It will be harder for virgin to get new customers to switch but not impossible...just there is no state monopoly protection and openreach probably has some first mover advantages.

 

I note that debt decreased by 2 billion adjusted for the asset sales in 9 months. This suggests fcf is quite high. I don't know where this discrepancy comes from. I guess they used some cash for debt pay down in addition to the share buybacks?

 

 

An interesting video on cable broadband build out in Europe.

 

And a very good reply from virgin to oxcom

 

https://www.google.com/url?sa=t&source=web&rct=j&url=https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/727879/VM_response_to_Future_Telecoms_Infrastructure_Review_FNL_FNL_FNL_Non_Con.pdf&ved=2ahUKEwjw7OqksIDmAhWRbVAKHR_dAC04ChAWMAl6BAgFEAE&usg=AOvVaw3t0WJihPo8Q1UNRkQifuUy

 

 

 

[skanjete]

Did anyone see this one yet? Interesting!

 

[scorpioncapital]

Unfortunately he says next to nothing about Global. It would be nice if the Liberty complex investor day included Global as one of the presentation or discussion entities. I have no idea why they exclude it since Malone is on the Board too.

[NBL0303]

Hello - are any shareholders on here that are long Liberty Global be willing to post a very brief summation of their thesis? I think I am interested in this company and would love to know from a very high perspective the thesis of other shareholders? Thank you!