LBTYA - Liberty Global

[Foreign Tuffett]

Recent selling from Berkshire (probably a Tedd/Todd position), which has owned shares since 2013. I think this is the first time Berkshire has sold any of its shares.

 

 

 

 

[Nelg]

Wondering if anyone is still following Liberty Global? Someone sent me these two attached reports which I found pretty interesting (1x 2025 FCF???)

Redburn Report - Liberty Global - 2021-05.pdf Redburn Report - Liberty Global - 2020-11.pdf

[ander]

Many investors seem to have given up on LBTYK. I'm still a stockholder. Not happy with my IRR so far, but am looking forward to a re-rating.

A summary of thesis (not dissimilar to Redburn notes) on VIC last year: Value Investors Club / LIBERTY GLOBAL PLC (LBTYK)

 

[changegonnacome]

Hi Nelg -

 

Thanks for the reports - if you could put your hand on Bank of America’s Anaylst report that would be great as it also has a very bullish outlook with a street high PT I believe something like $56

 

This is a relatively big position for me built post-COVID at prices around ~$17 - ~$21……….I have an affinity with the business so am somewhat biased but hopefully not blinkered…………household family members in Europe have been paying the various companies that own the cable coming into my boyhood home c.100 euro a month for as long as I can remember and the owners of that house will in my estimation continue to pay that amount for as long it stands. Virgin Media UK/Ireland, on its footprint, has currently the clear speed advantage and is the premuim provider for what is, IMO now more than ever, an essential service. I might have argued pre-pandemic that it was becoming completely commoditized but now I think people will pay up for the premuim provider given data connectivity’s importance in work/entertainment

 

When I bought at $17 it was bargain…..now its back to somewhat pre-COVID levels but no higher really than when they tendered for a bunch of shares at $27, I’m going to say in 2018 post their German sale and when they had serious gobs of cash to get rid off. Its been a go nowhere stock in many ways for a certain vintage holders and so lots of fatigue in the stock….it was optically cheap during that period of time too…..however there were genuine concerns then around (1) irrational forced competition in European markets where LBTYA operates (2) the future viability of DOCSIS in a fiber world and (3) emergent idea that 5G was going to destroy fixed connectivity providers. To my mind those three issues have been put to bed

 

On (1) European regulators in the markets where LBTYA operates I think have realized they went too far with wholesaling/blocking mergers etc.….everyone wants infrastructure built out for the digital age and you cant get that done by the sovereign (because of debts levels) and you cant get it done by companies earning less than their cost of capital. Regulators  have in the UK/Netherlands/Belgium & Switzerland taken their foots ever so slightly off the necks of connectivity providers with the kickback being they invest in 5G/Fibre etc. Rational competition is breaking out in those markets.

 

On (2) DOCSIS has proven to be way more robust platform for increasing speed and there exists a pathway to 10gb/s down for the technology….it can be argued now that with 1gb/s almost done on footprint by LBTYA that your really talking about speed beyond that which wont really matter to customers. A 1 gig down line is going to run numerous 4K streams while downloading the latest Call of Duty in no time at all. The Fibre advantage going on footprint with LBTYKA is not really an issue anymore 1 gig is 1gig whether devliered over HDFC or Fibre the consumer doesn’t care and brand/track record matters here more than ever. Virgin/LBTYA have been investing in their brands for years before the arrival of alt nets.

 

On (3) the hyperbole about what 5G was going to do that permeated bear thesis in the mid-2010’s has popped………its an incremental speed bump for the average consumer who’s TikTik video may load a microsecond faster because of it. The cell providers must hate it in a way - its an unbelievable capex expense with no pricing power….its literally an outreagous maintenance capex expense with ARPU’s still trending downwards regardless. Anyway its promise to allow people to ‘cut the internet cord’ and go to cell devliererd internet for their homes is now over…..it may work in some instances for some people but the use case is modest and so its ability to disrupt the cable internet provider concern I think is gone. The very first thunderstorm where your Netflix starts buffering on the kids will put a stop to any dreams of running everything through your cell provider. The second piece which removes (3) is that basically LBTYKA buddied up with mobile provider in each of their markets to create an Fixed Mobile Converged national champion no.1 or no.2 player (Virgin-O2 in UK, Sunrise-UPC in Switzerland, Vodafone-Ziggo in Netherlands etc,……..this has allied the 5G is gonna kill fixed concerns. This has also meant greater wallet share and lower churn to help with (1) or even the re-emergence of (1). 

 

I see a very clear OFCF story emerging here where synergies in the UK and Switzerland are going to drive a lot of cash to the holdco conservatively $2bn a year pretty soon……..which LBTYA is very comfortable to deploy into buybacks……..whether the market ‘likes’ LBTYA in the short or medium term eventually they buy back so many shares at these levels that Malone will be rubbing the markets nose in LBYTA’s Price to OFCF story.

 

I’m holder here all the way up to ~$40 at which point I’ll re-look…..but broadly I sleep very well at night dreaming of all the houses I know sending 100euro a month to Mike, Malone and the boys & girls in Denver.

 

Interested in your thoughts or what you might come across on your travels.

Edited June 15, 2021 by changegonnacome

[Spekulatius]

^ I doubt there are many consumers paying 100€ month for broadband. Try 30€ or 50€ for higher speed. 1 GIG/s is still pretty elusive in many parts in Europe, unless you have FTTH.

[changegonnacome]

Sorry should have been clearer - 100 euro a month for Broadband, Cable TV bundle, Landline & Mobile phone……..triple play or quad pay bundle…fixed mobile convergence in action!….this is basically 80% of my friends and family that are on footprint with Virgin Media in the UK and Ireland……….Liberty’s 1 gig broadband product is already rolled out on most of the footprint in UK/Ireland, same with the Netherlands & UPC in Switzerland along with Telenet…….its pretty impressive and places LBYTA as the clear speed winner at scale vs. incumbent telcos who are delivering DSL over legacy copper or rolling out expensive Fibre  

Edited June 16, 2021 by changegonnacome

[Nelg]

@changegonnacome

I don't have access to Bank of America's report, unfortunately - though you seem to know the company/industry pretty well anyway. I recently bought a position (B shares - hopefully there's a DISCB-type scenario ) but am still digesting the investment thesis - so I am coming in with a naive and unsophisticated view here. 

 

The 2 things that stand out to me:

1) Incumbents are basically the only European telcos that have made somewhat-respectable returns on capital in the last 10+ years. I understand this is mostly due to their fixed networks which they've used to charge wholesale (mobile backhaul and/or reselling internet services) fees. As you mentioned, the LBTY JVs businesses seem like they're basically an incumbent except with a better/faster fixed network. 

2) Some months back, I came across a Barclays report which analyzed deal-by-deal why the last ~decade of European mergers did not seem to have "worked". The conclusion was the cost/capex synergies appear very real, but these were generally offset by lower revenues (due to the regulatory approval conditions that effectively encouraged irrational competition, which as you mentioned may finally be changing after years of industry underinvestment). 

 

Admittedly, I'm mostly relying on broker reports. But it seems like an interesting place to look if an analyst basically says they're pretty certain it's trading at 1x 2025 FCF after likely share repurchases - but oh wait, there's no immediate catalyst, so maybe don't buy much just yet...??

 

[changegonnacome]

Yeah the catalyst is that most hated of 'catalysts" a slow and grinding narrative change to a highly stable/slightly growing FCF story as synergies are realized (but not without significant costs to capture in the short term) & LBTYA is allowed to buyback ~10-15% of the company a year with the market just shrugging its shoulders............the good news is broadly LBTYA under promises on synergies and over delivers with a timeline usually earlier than expected.

 

What they are undertaking in the UK and Switzerland has been played out in Holland & Belgium before. I expect churn to go down, NPS to go up & ARPU to rise with a corresponding uptick in FCF. They do have a FMC playbook and it should be fairly finally tuned at this stage.

 

The reality in some ways for a patient holder is you hope nobody gives a shit about Liberty Global for the next few years and it aggressively repurchases shares at these levels.........and then one day you/the market wakes up and UK/Switzerland FMC project is 'done', subsidiary companies are listed or a being listed....LBTYA Hold Co. is stably collecting $2bn a year in cash with all the debt sitting at the OpCo level and the market re-prices it.

 

In an expensive market I'm a happy holder here knowing that I dont really see much downside at all, while my ownership is tax efficiently rising each year on stable/slightly growing business that sells an essential service & I do ultimately have faith that Malone/Liberty will do deals that make sense to create value within the LBTYA envelope. 

 

 

[Gregmal]

Holding a complex and convoluted enterprise in an out of favor sector is tough sledding. 

[changegonnacome]

On 6/16/2021 at 8:33 PM, Gregmal said:

Holding a complex and convoluted enterprise in an out of favor sector is tough sledding. 

 

True! but it somewhat functions as a better than/substitute for cash position…….think Buffet with Verizon……but with two way crappier names subbing for both of them  I just dont see it getting much cheaper from here basically. The worst outcome is the move sideways continues for a while more but obviously I dont think that.

 

The story is becoming way less complex/convoluted over time........plus it has a nice 'free' inflation hedge element.......hard infrastructure type assets with pricing power underpinning the HoldCo business.........with gobs of debt sitting at the OpCo levels that I'd be happy to see inflated away if inflation ever gets going.

Edited June 18, 2021 by changegonnacome

[scorpioncapital]

On 6/18/2021 at 2:48 AM, changegonnacome said:

 

True! but it somewhat functions as a better than/substitute for cash position…….think Buffet with Verizon……but with two way crappier names subbing for both of them  I just dont see it getting much cheaper from here basically. The worst outcome is the move sideways continues for a while more but obviously I dont think that.

 

The story is becoming way less complex/convoluted over time........plus it has a nice 'free' inflation hedge element.......hard infrastructure type assets with pricing power underpinning the HoldCo business.........with gobs of debt sitting at the OpCo levels that I'd be happy to see inflated away if inflation ever gets going.

 

I would like LBTYA even more if it paid a dividend. I don´t want share buybacks from a utility. I want cash in hand, like VZ.

I do own LBTYA but have reduced somewhat because I do believe European, including UK pricing will not allow for such higher margins as other countries. Anyone can borrow at 4% and make 8%, I think markets sniff out capital efficiency and ROIC and this will get more and more important especially as more capital needs to be ploughed into the venture to keep the same level of cashflows.