LBTYA - Liberty Global

[Liberty]

Vodafone in talks to buy Liberty Global assets

 

https://www.reuters.com/article/us-vodafone-m-a-liberty-global/vodafone-in-talks-to-buy-liberty-global-assets-idUSKBN1FM24W

 

 

[WayWardCloud]

I wonder what the new raison d'etre of Liberty Global will become if they do end up selling all those assets.

After all, they've just spent the past 15 years bringing them together through M&A in the first place...

 

We'd be left with a reduced scale cable provider, mostly just the UK and Belgium, plus a boatload of cash?

Something tells me a special dividend is very unlikely because it would trigger taxation.

I was also surprised to hear of a cash purchase rather than some complex stock swap with Vodafone.

I've just never seen a Liberty entity shrink so I'm not sure what to expect in terms of Malone's playbook here.

[maybe4less]

I was also surprised to hear of a cash purchase rather than some complex stock swap with Vodafone.

 

I doubt there is a cash purchase if this happens. More likely an asset swap, which is what is mentioned in the article Liberty posted.

 

Did you see somewhere else a reference to a cash purchase?

[WayWardCloud]

My bad, I recalled the Bloomberg article mentioning a €14B deal but either they've updated their article since yesterday or I was tired and made it up  ::)

[Liberty]

https://www.broadbandtvnews.com/2018/02/19/liberty-global-considers-acquisitions-for-upc-switzerland/

[WayWardCloud]

https://www.bloomberg.com/news/articles/2018-02-22/malone-s-new-hurdle-to-vodafone-deal-is-an-angry-german-ceo

 

If Deutsche Telekom is getting pissed off then Liberty/Vodafone might be doing the right thing :)

Anyone familiar with EU regulators? I read that Liberty has strong lobbying in Brussels but DT must be powerful too... especially in their own country.

[wisborough]

i am becoming convinced this company is  a short.  its recent results were terrible - its spending over 30% of its sales on capex in the UK and its barely growing - in fact its broadband adds were negative in q4 in the UK outside of its ' Lightening ' territory. it raised its capex AGAIN, who is to say that it isn't capitalising costs so it can show OCF growth .  it suddenly started the new 'talks'  with Vodafone just before its Q4 release - so the shorts wouldn't pounce.  i have totally run out of patience with this company.  levered equity growth models DO NOT work without genuine growth. 

[Liberty]

I don't know if it's a short, because someday they could actually do a big merger or M&A thing that the market happens to like and it could jump on the news, but in general I've become disillusioned with it and sold my shares last fall. I felt like there were better places to put the capital. This capitulation probably means we're at the bottom, though, so it might actually be a good time to buy...

[ABM]

i am becoming convinced this company is  a short.  its recent results were terrible - its spending over 30% of its sales on capex in the UK and its barely growing - in fact its broadband adds were negative in q4 in the UK outside of its ' Lightening ' territory. it raised its capex AGAIN, who is to say that it isn't capitalising costs so it can show OCF growth .  it suddenly started the new 'talks'  with Vodafone just before its Q4 release - so the shorts wouldn't pounce.  i have totally run out of patience with this company.  levered equity growth models DO NOT work without genuine growth.

 

This has been the short argument really since they began issuing guidance a few years back. It comes back to how much you trust management. We will not know the "truth" until hindsight is available so all investors can do is evaluate management's integrity and skill level based on what factors you see fit.  Each investor has to make their own decision.  If the short case is true then it means investors are being lied to which is a big deal and many conclude that this would fly in the face of what they consider to be an honest and transparent record for the leadership.

 

In my opinion, management has proven to be consistently rational so they should have no qualms of exiting if the returns just are not there to preserve value.  This is in stark contrast to many management teams that are hyper-focused on value accumulation that it often comes at the expense of making rational decisions. These decisions ultimately lead to things like like expensive acquisitions and owning assets with deteriorating quality given natural resistance to divestitures.

[vince]

can someone please share what lbtya's real ebitda is? i hear analysts and others saying roughly 8 billion, but it clearly shows ltm of 7 billion on 4th qtr slides.  Is the difference attributable to equity method in Ziggo? and if so how would you incorporate that into enterprise value.  basically trying to figure out what the true ev to ebitda is.  i have owned a position for 4 years and have not made any money and i share the frustration of other posters.  in addition i cant stand the way the ceo acts and speaks and he is the main reason the stock is still undervalued despite shrinking the equity considerably since i owned it.  why do i say its undervalued? it has equity cap of 26 billion.  imo it can grow fcf by 5 percent annually while spending 20-22 percent of revenues.  with free cash flow around 2.5 billion(when elevated capex falls) you have a mid teens compounder with a constant multiple and a very good chance of multiple expansion.  another way to look at it is if the company sold for 11 times ebitda(which is reasonable considering the fact that much smaller assets sell for that multiple where scale is valuable)you get somewhere between 77 and 88 billion.  lets say 80 billion enterprise value minus 35 billion debt equals 45 billion equity compared to market cap of 26 or so.  i would say thats a good place to be in an overvalued market where mgmt is having talks that could potentially bring some of that to the surface.  even if u give a haircut to fcf, growth rates and lower exit ebitda multiples, u can still do good here over a few years with buybacks at these low prices

[ABM]

can someone please share what lbtya's real ebitda is? i hear analysts and others saying roughly 8 billion, but it clearly shows ltm of 7 billion on 4th qtr slides.  Is the difference attributable to equity method in Ziggo? and if so how would you incorporate that into enterprise value.  basically trying to figure out what the true ev to ebitda is.  i have owned a position for 4 years and have not made any money and i share the frustration of other posters.  in addition i cant stand the way the ceo acts and speaks and he is the main reason the stock is still undervalued despite shrinking the equity considerably since i owned it.  why do i say its undervalued? it has equity cap of 26 billion.  imo it can grow fcf by 5 percent annually while spending 20-22 percent of revenues.  with free cash flow around 2.5 billion(when elevated capex falls) you have a mid teens compounder with a constant multiple and a very good chance of multiple expansion.  another way to look at it is if the company sold for 11 times ebitda(which is reasonable considering the fact that much smaller assets sell for that multiple where scale is valuable)you get somewhere between 77 and 88 billion.  lets say 80 billion enterprise value minus 35 billion debt equals 45 billion equity compared to market cap of 26 or so.  i would say thats a good place to be in an overvalued market where mgmt is having talks that could potentially bring some of that to the surface.  even if u give a haircut to fcf, growth rates and lower exit ebitda multiples, u can still do good here over a few years with buybacks at these low prices

 

it is trickier than most because the unconsolidated interests and the big minority interest in Telenet.

 

I tend to use the "proportionate" or "fully attributed" approach which is essentially looking through to the underlying assets and taking their proportionate earnings and net debt given LBTYK's economic stake.  Using this approach and for this company you really only need one other set of financials which are Ziggo's which can be found on LBTYK's website.

 

If you are going to use GAAP financials then you need to add minority interest to EV because their proportionate OCF is include in the consolidated OCF figure.  On the equity accounted JV assets ex Ziggo are pretty immaterial so you can treat these as cash net of some discount/haircut, if any, but doesn't really make a difference b/c of ltd magnitude. You can choose not to include them at all to be conservative. Oh and LBTYK has $1B receivable from Ziggo seperate from its 50% stake. You can do what you like with that but again it's pretty small part of grand plan.

 

2017 OCF = $7.4B (att) vs. $7.1B per FS

 

Net debt including capital lease obligations = $43.8B (att) vs. $40.8B per the FS

[vince]

Thanks, very much appreciated

[WayWardCloud]

https://www.bloomberg.com/news/articles/2018-03-20/liberty-is-said-to-hold-talks-with-sunrise-for-swiss-partnership

 

UPC Switzerland had an MVNO agreement with Orange since 2014, they switched to Swisscom just two months ago and said they were thrilled with the quality of this new deal in the Call... Now they may be instead looking at a full joint venture with Sunrise for their quad play service. Glad the CEO is leaving no stone unturned but there doesn't seem to be a unified vision behind his moves (they almost exited this market all together in December).

 

Because of these incessant early "leaks" and the absence of organic growth, the rumor mill has become the main factor Liberty Global trades upon... I wish they'd fix their existing businesses instead of changing the parameters constantly and releasing a new bullshit guidance "excluding such and such" every quarter.

 

By the way thank you for sharing your calculations ABM and Vince!

[been stuck in this for almost two years now (Liberty family + lots to consolidate in Europe + it seemed cheap no matter what metric I used)]

 

[Spekulatius]

I think the cable stocks will not like the increasing interest rates eventually. Considering how utilities have and continue to sell of, I am surprised how well cable stocks have held up.

[maybe4less]

I think the cable stocks will not like the increasing interest rates eventually. Considering how utilities have and continue to sell of, I am surprised how well cable stocks have held up.

 

Higher interest rates will surely hurt cable companies in terms of higher interest costs, but utilities are generally a totally different beast. High quality cable systems are growing with attractive opportunities to deploy capital.

 

Utilities are unable or unwilling to make similar types of investments. They are therefore growing minimally and are treated probably correctly like bond equivalents with much of the duration you would expect long-term bonds to have.

[Spekulatius]

I think the cable stocks will not like the increasing interest rates eventually. Considering how utilities have and continue to sell of, I am surprised how well cable stocks have held up.

 

Higher interest rates will surely hurt cable companies in terms of higher interest costs, but utilities are generally a totally different beast. High quality cable systems are growing with attractive opportunities to deploy capital.

 

Utilities are unable or unwilling to make similar types of investments. They are therefore growing minimally and are treated probably correctly like bond equivalents with much of the duration you would expect long-term bonds to have.

 

So you say. I don’t see any evidence of highly attractive opportunities to deploy capital for LBTY, based on the results from the last few years. I think this should be treated as an utility and not a very profitable. I think investors make the mistake to equal Europe with the US cable business, but in fact Europe is way more competitive.

[vince]

Hang in there WayWard.  I am just as frustrated as you and have owned it longer.  But it is so obvious that the cable line is advantaged and growing more valuable every month.  Even with mismanagement, and even with slow growth (does anyone really believe that they will have multiple years of negative growth?) that asset will save us.  They could sell the whole thing tomorrow for 11 times and everyone knows it.  If the business was truly starting to shrink in value, Dr M will know exactly what to do to make a large profit at today's prices.  And every dollar of buybacks at these prices are certain to end up in our pockets.

[scorpioncapital]

There have been academic studies showing cable cos in the US at least have been able to raise prices above the rate of inflation. ...EU cable and internet packages are much lower than in USA. Not sure why there is a cost difference. Maybe regulation in EU preventing higher prices? Or just not able to sustain higher prices given the local markets? Either way makes sense profit margins are lower than in the US if there is the inability to get a higher return on invested capex.

 

 

 

[marazul]

Cable bills are higher in the US due to higher content costs...for this reason Euro cable has higher EBITDA margins but lower ARPU...doesn´t have a significant impact on overall profit, but the customer has less pressure because of a lower bill ...Competition is tougher in many European countries becuase Telcos have a better network (more FTTH) than US telcos, city densities (shorter copper distances) and there are open networks (companies can resell services by using a third party network)

[Spekulatius]

Plus the public TV channels are basically free / low cost so the commercial channels need to match them and also distribute free. You buy a satellite dish and receiver and get the TV (> 50 channels) free. There are pay channels like premium soccer or HBO equivalent but the rest is free.

[Shooter MacGavin]

can someone please share what lbtya's real ebitda is? i hear analysts and others saying roughly 8 billion, but it clearly shows ltm of 7 billion on 4th qtr slides.  Is the difference attributable to equity method in Ziggo? and if so how would you incorporate that into enterprise value.  basically trying to figure out what the true ev to ebitda is.  i have owned a position for 4 years and have not made any money and i share the frustration of other posters.  in addition i cant stand the way the ceo acts and speaks and he is the main reason the stock is still undervalued despite shrinking the equity considerably since i owned it.  why do i say its undervalued? it has equity cap of 26 billion.  imo it can grow fcf by 5 percent annually while spending 20-22 percent of revenues.  with free cash flow around 2.5 billion(when elevated capex falls) you have a mid teens compounder with a constant multiple and a very good chance of multiple expansion.  another way to look at it is if the company sold for 11 times ebitda(which is reasonable considering the fact that much smaller assets sell for that multiple where scale is valuable)you get somewhere between 77 and 88 billion.  lets say 80 billion enterprise value minus 35 billion debt equals 45 billion equity compared to market cap of 26 or so.  i would say thats a good place to be in an overvalued market where mgmt is having talks that could potentially bring some of that to the surface.  even if u give a haircut to fcf, growth rates and lower exit ebitda multiples, u can still do good here over a few years with buybacks at these low prices

 

it is trickier than most because the unconsolidated interests and the big minority interest in Telenet.

 

I tend to use the "proportionate" or "fully attributed" approach which is essentially looking through to the underlying assets and taking their proportionate earnings and net debt given LBTYK's economic stake.  Using this approach and for this company you really only need one other set of financials which are Ziggo's which can be found on LBTYK's website.

 

If you are going to use GAAP financials then you need to add minority interest to EV because their proportionate OCF is include in the consolidated OCF figure.  On the equity accounted JV assets ex Ziggo are pretty immaterial so you can treat these as cash net of some discount/haircut, if any, but doesn't really make a difference b/c of ltd magnitude. You can choose not to include them at all to be conservative. Oh and LBTYK has $1B receivable from Ziggo seperate from its 50% stake. You can do what you like with that but again it's pretty small part of grand plan.

 

2017 OCF = $7.4B (att) vs. $7.1B per FS

 

Net debt including capital lease obligations = $43.8B (att) vs. $40.8B per the FS

 

I more or less get the same thing excluding UPC Austria as well.  Look through EPS of about $2.60 for 2018 and if we count the fair value of securities, the UPC Austria sale price of $2.2B and the publicly held securities for ITV etc, I think there's about 4.5B of excess capital on the balance sheet now (assuming $500M of W/C). 

 

Mediocre execution, tougher business than it used to be, cheap debt...but cheap stock.  I've been frustrated for 2 years as well but by my math, if EBITDA goes up 6%-7%, this stock compounds around mid to high twenties % for the next 4-5 years.

[vince]

Hey Shooter, you mean ebitda growth of 6-7 percent annually? I felt that was achievable a few years ago but probably not gonna happen on a consistent basis.  But ya, I agree, no doubt it will compound at 20 plus percent if we get that growth!!

 

[vince]

Hey Shooter, what adjustments are you making to get your eps number.  Are you saying look thru and owner earnings are equivalent?

[Shooter MacGavin]

Hey Shooter, what adjustments are you making to get your eps number.  Are you saying look thru and owner earnings are equivalent?

 

Hey Vince,

 

I think either we get the 6% -7% EBITDA growth through new build , or we see cash flow grow and repurchases increase because capex goes down 10% (of revenue and marketing drops 2% of revenue).  In other words, i don't think they're going to spend a full $4B capex in 2019 if the new build doesn't work.  But why shouldn't it work?  They're telling you how you get to roughly 30% IRR on this project so unless they're delusional, I think it'll work to some degree and we'll get some combination of FCFE growth through RGU adds or a slow down in spending.  Now are they incredibly promotional?...yes...but I think they do know what they're doing. Though this story has waaay too many moving parts. 

 

In terms of my EPS estimate for 2018, I sort of cheated...I stripped out the 46% of Telenet not owned and added 50% of Ziggo and excluded $200M of UPC Austria right at the EBITDA level ( gets me $7.560B..which is basically annualized 4Q).  Then I assumed the debt was going to stay at around 5.2x on a gross basis (so basically all subs have this debt ratio even though this isn't exactly right), cost 5.5% (be a bit more conservative), and my run rate depreciation is roughly 20% of revenue ($2.5B). I taxed it at 20% and used a fully diluted share count of around 884M.  Didn't give them any credit for any income earned on cash or the note.  gets me to around $2.60 EPS.

 

 

 

Threw this modification in afterwards:

Yes, I'm saying the "look through" to the shareholder is my adjusted number above...I'm saying EBITDA for how they define OCF.

 

Another modification:

 

Since the public shares like sumimoto and ITV etc are financed and pledged, maybe we don't count them as excess capital.  Just whatever is the equity value over the financed portion probably, although i havent done the math.

 

 

 

 

 

 

 

[jgyetzer]

How do people on this board attribute capex to growth investment vs. maintenance for this LBTYA and other cable/broadband providers?  To me it seems like upgrades to existing networks would be treated differently than new builds and both of these different from on-site customer hardware/equipment.  Another way to look at it would be comparing SAC to lifetime value of customers, but it seems difficult to get a fix on these numbers.  Is anyone on the board aware of any cable providers that break this information out in detail either in SEC documents or conference calls?