LBTYA - Liberty Global

[scorpioncapital]

https://www.libertyglobal.com/wp-content/uploads/2019/02/Liberty-Global-plc-Q4-2018-Investor-Call-Presentation.pdf

 

Can someone help me reconcile page 7 and 18?

 

I see pro-forma they are saying continuing operations will generate FCF of 550 to 600 million a year. The Slide 7 says proceeds of $20 a share, so is something like $20/share + ~10x OCF (~2.6 billion 2019) = 26 billion / 742 million shares = $35 share + $20 share = $55 / share? Or am I double counting the proceeds which will reduce debt outstanding so it's just the Multiple of OCF of the remaining operations? They say FCF is 550m to 600m in 2019 so I'm not sure if I'm understanding why they value it on OCF and not FCF basis. I used the 10x OCF because that's what the other pieces sold for.

 

 

[dwy000]

https://www.libertyglobal.com/wp-content/uploads/2019/02/Liberty-Global-plc-Q4-2018-Investor-Call-Presentation.pdf

 

Can someone help me reconcile page 7 and 18?

 

I see pro-forma they are saying continuing operations will generate FCF of 550 to 600 million a year. The Slide 7 says proceeds of $20 a share, so is something like $20/share + ~10x OCF (~2.6 billion 2019) = 26 billion / 742 million shares = $35 share + $20 share = $55 / share? Or am I double counting the proceeds which will reduce debt outstanding so it's just the Multiple of OCF of the remaining operations? They say FCF is 550m to 600m in 2019 so I'm not sure if I'm understanding why they value it on OCF and not FCF basis. I used the 10x OCF because that's what the other pieces sold for.

 

Isn't OCF from continuing operations $4.4bn ($5.2bn less $750 for Switzerland, excludes Ziggo and excludes the $189 they add back for TSA on page 17)?  At 10x that is $44bn of enterprise value.  Add in the $15bn of cash from sale to Vodafone = $59bn.  Add $2bn for cash from Switzerland sale = $61bn.  There's $20bn of debt post sales ($30bn - $6bn going with UPC sale - $4bn going with Switzerland). 

 

So $61bn enterprise value less $20bn of debt = $41bn equity value.  That's $55/share.  Add in 50% of equity value of Ziggo, add in the cash they retain prior to sales, other dribs and drabs.  Subtract out the 40% of Telnet they don't own. 

= pretty good vs. $25/share today.

 

10x OCF is a sale value so you'd expect it to trade below that but back of the envelope shows there's a ton of value above today's price.

[WayWardCloud]

Sounds about right. I would replace the ~$20 cash (yes with a "~" because writing down 19 (15+2+2) would have been just too hard ><) proceeds per share claimed by Fries on slide 7 by $17/s instead because I don't know that adding their "tax assets" in there makes any sense. And as Dwy000 pointed out I wouldn't necessarily use a 10X OCF multiple for valuing continuing operations, although that seems to be the private market value and for all we know they could keep selling off other parts of the company.

 

Another way to think about it is that when the stock bottomed out a couple months ago around $20/share the market cap was at 15B yet they're about to get 15B of cash proceeds.

 

What I do not understand is why they go to such length in making a sum of the parts valuation for us which highlights the low stock price if they're about to buy back tons of shares. The only rational to want a stronger stock price is if they're about to embark in something else really big using the money + some equity (please don't!!!). I though Malone did a great job at acting cold about LBTYA during his last public interview which convinced me further they wanted a cheap price for the buybacks. Lastly, I don't understand announcing that you're about to significantly cut down on investment capex right when you're courting the EU regulators. Maybe Fries is just pathologically promotional and can't help himself...

[scorpioncapital]

Belgium seems just as bad as Switzerland and with majority shares in a public stock, can easily sell that too I guess. Not suretheir plans for telnet. They say it produces fcf growth but declining volumes of revenues and customers.

 

Another thing of curiosity for me is that data customers does not equal houses passed. Does this mean there is still only less than 50% of broadband subscribers in relation to total households? That seems strange as most households would take the data no doubt? I can't imagine why it's not 100%, although even at Charter it's not 100%. It'd be interesting to compare penetration of data in Europe versus USA.

 

But my estimate of value is a bit lower.

I take the $20 in cash proceeds and $4 telnet as on their charts and I add a 15x FCF multiple to the 550m they claim as the remaining FCF and that's $11/share + $20/share + 4/share = $35/share FV.

Of course the FCF is clouded by very large capex swings and if it will go down, then this will get more valuable. To me the difference between OCF and FCF is just huge for the remaining assets. Something like 23% conversion of OCF to FCF...I attribute this to capex right? The above figure is for 2019 already with the 20% reduced capex. If we use the 600m figure we get $36/share.

 

Anyway can someone point out why this number is too low? Do cable/broadband operators trade more on OCF than FCF because FCF is very shifty due to the large cycles of investment and then 'reaping what you harvest'? Do they trade higher when in the high FCF phase or does the market see through the cycle?

Or too high?

 

 

 

 

 

[Astrea]

Sounds about right. I would replace the ~$20 cash (yes with a "~" because writing down 19 (15+2+2) would have been just too hard ><) proceeds per share claimed by Fries on slide 7 by $17/s instead because I don't know that adding their "tax assets" in there makes any sense. A

 

Isn't it 15bn in cash divided by 742m shares outstanding which produces $20/share?

[WayWardCloud]

Sounds about right. I would replace the ~$20 cash (yes with a "~" because writing down 19 (15+2+2) would have been just too hard ><) proceeds per share claimed by Fries on slide 7 by $17/s instead because I don't know that adding their "tax assets" in there makes any sense. A

 

Isn't it 15bn in cash divided by 742m shares outstanding which produces $20/share?

 

My bad, you're totally right. Should have read the fine lines at the bottom of the page, thanks for pointing it out.

[dwy000]

Belgium seems just as bad as Switzerland and with majority shares in a public stock, can easily sell that too I guess. Not suretheir plans for telnet. They say it produces fcf growth but declining volumes of revenues and customers.

 

Another thing of curiosity for me is that data customers does not equal houses passed. Does this mean there is still only less than 50% of broadband subscribers in relation to total households? That seems strange as most households would take the data no doubt? I can't imagine why it's not 100%, although even at Charter it's not 100%. It'd be interesting to compare penetration of data in Europe versus USA.

 

But my estimate of value is a bit lower.

I take the $20 in cash proceeds and $4 telnet as on their charts and I add a 15x FCF multiple to the 550m they claim as the remaining FCF and that's $11/share + $20/share + 4/share = $35/share FV.

Of course the FCF is clouded by very large capex swings and if it will go down, then this will get more valuable. To me the difference between OCF and FCF is just huge for the remaining assets. Something like 23% conversion of OCF to FCF...I attribute this to capex right? The above figure is for 2019 already with the 20% reduced capex. If we use the 600m figure we get $36/share.

 

Anyway can someone point out why this number is too low? Do cable/broadband operators trade more on OCF than FCF because FCF is very shifty due to the large cycles of investment and then 'reaping what you harvest'? Do they trade higher when in the high FCF phase or does the market see through the cycle?

Or too high?

Yeah, Belgium top line and customers aren't pretty either! But at least cash flow there is improving strongly as they move onto their own network.

 

Homes passed is just the number of homes where Virgin products are available. There is still a lot of competition in the UK.  The whole play of Lightning was to offer the fastest data speeds available and it takes a long time to get customers to switch over once built. I think they were targeting 30% penetration in justifying the Lightning spend (someone correct me there if I misspoke).

 

In difference between OCF and FCF, dont forget to subtract interest expense as well as capex (and taxes). With $20bn of debt, that's a lot of interest to cover.

[scorpioncapital]

Right,. So capex is the key. Capex for growth, or if no growth , low capex and high fcf. I think I see a bit of the European socialist mentality here. Make them spend ...then still don't let them recover their investment. Although it could also be too much competition but still someone had to put in the money.

 

Today I saw this line, made me laugh , "Freenet, a German telecommunications and web content provider, concluded that Malone was getting too good a deal." )

 

With a name like freenet, you can tell what they stand for.

 

[Foreign Tuffett]

Adjusted for the asset sales, publicly-traded subsidiaries, and minority interests, the go-forward company looks to be trading at somewhere between 5 and 6X EV/OCF. That seems like an attractive price given that Virgin Media, which is (I think?) the best part of the company, comprises the bulk of their remaining assets.

 

Mike Freeze French Fries Frieza Fries probably isn't the genius CEO everyone thought he was several years ago when John Malone called him "probably the best CEO I know", but I think he is both competent and shareholder friendly.

 

Linked below is a good Seeking Alpha article that just came out this morning.

 

https://seekingalpha.com/article/4245158-liberty-global-sunrise-deal-might-still-fail

 

 

[vince]

Adjusted for the asset sales, publicly-traded subsidiaries, and minority interests, the go-forward company looks to be trading at somewhere between 5 and 6X EV/OCF. That seems like an attractive price given that Virgin Media, which is (I think?) the best part of the company, comprises the bulk of their remaining assets.

 

Mike Freeze French Fries Frieza Fries probably isn't the genius CEO everyone thought he was several years ago when John Malone called him "probably the best CEO I know", but I think he is both competent and shareholder friendly.

 

Linked below is a good Seeking Alpha article that just came out this morning.

 

https://seekingalpha.com/article/4245158-liberty-global-sunrise-deal-might-still-fail

 

On slide 7 of the earnings presentation it shows that they have 19 billion of cash and they claim that 742 million shares outstanding equals 20 dollars per share.  Now maybe i'm crazy and i have listened to lots of horse shit from these guys for almost 5 years now but those numbers dont add up.  What am i missing?

[vince]

Adjusted for the asset sales, publicly-traded subsidiaries, and minority interests, the go-forward company looks to be trading at somewhere between 5 and 6X EV/OCF. That seems like an attractive price given that Virgin Media, which is (I think?) the best part of the company, comprises the bulk of their remaining assets.

 

Mike Freeze French Fries Frieza Fries probably isn't the genius CEO everyone thought he was several years ago when John Malone called him "probably the best CEO I know", but I think he is both competent and shareholder friendly.

 

Linked below is a good Seeking Alpha article that just came out this morning.

 

https://seekingalpha.com/article/4245158-liberty-global-sunrise-deal-might-still-fail

 

On slide 7 of the earnings presentation it shows that they have 19 billion of cash and they claim that 742 million shares outstanding equals 20 dollars per share.  Now maybe i'm crazy and i have listened to lots of horse shit from these guys for almost 5 years now but those numbers dont add up.  What am i missing?

 

Nevermind I think they are just talking about the 15 billion and not the other 4 billion of assets within that box

[scorpioncapital]

The tax asset is debatable. I mean I saw this at other companies and it essentially reduces taxable income. In the end, this asset doesn't really exist, it just means you collect more cash each year than you would have otherwise. For sure I would discount this entirely from the calculation. I think they are trying to make it easy to calculate a valuation. 4.8 billion of OCF * 10x OCF = 48 billion + ~22/share of cash+investments = $64.69 + $22 = $86/share. Now I don't know if the 10x ocf would include or exclude debt per share of those businesses. When you place a multiple of OCF as a valuation sale price, usually that includes the whole package. Still take 86 and divide by 2 for a large margin of safety and you still get $43 versus $26 today, or 65% below. I'm a little skeptical of OCF valuations. I much prefer FCF valuations. What is the long term FCF ? They say 2019 will do 600 million. Let's say that is not quite yet the full low capex potential of the business but let's be generous and say 1 billion. Buffett seems to buy great businesses at maybe 13 to 15x and that's for him a bargain. So that would be 13 billion to 15 billion...$17 to $20 a share...plus the 22 in cash+investments is the $39-$42 range...If you think the current 2019 600m is the best it'll get that's $11/share + $22 is arounnd 33-34...so I'll say fair value is perhaps 33 to 43 conservatively measured. The stock should trade at least $5-$10 higher no matter what and I hope the sales will simplify and derisk it so the market starts to like it again.

 

 

add- https://www.gurufocus.com/news/827633/value-idea-contest-liberty-global-plc

 

His sum of the parts comes out to around 50...

 

[khturbo]

If you put a 10x OCF multiple on remainco then of course it's cheap. They might be able to find a buyer for those assets at 10x but no chance that remainco assets are worth even close to that on their own.

 

Charter trades at 10x EBITDA but has was less capex / EBITDA, is growing faster, less competition, NOLs, etc. etc.

[scorpioncapital]

The 10x ocf they got on the 3 big sales, swiss , germany, austria are for poor businesses, in regulated countries that don't like it if Americans make too big of a buck. Virgin is their crown jewel which is the main remaining asset.

 

What multiple should we place on it if not 10x?

I'm not sure if the logic that Charter is a good business in US market at 10x ocf implies that Virgin , a poorer business in UK is worth less. But if we value it at 5x OCF, then it has a value of zero. Why are they even holding it if their top business with the best chances of free cash flow is worth nothing?

 

 

[khturbo]

I do agree that if they sell it they should be able to get 10x+ on a sale. The way I think about those other sales is that LBTYK received some of the fixed/mobile synergies but just as cash up front. So say those businesses were worth 7-8x but they got 10x as their participation.

 

On the comparison to CHTR, if you value it as (EV / (EBITDA - capex)) you can see why CHTR should trade at a MUCH higher EV / EBITDA multiple. CHTR also has much better growth prospects. Thinking about it as above, I think that's why some people think that in a few years CHTR could sell for maybe 12x+. It's probably worth 10x by itself and if they get some of the synergies on the sale then they could get a bit higher of a price.

 

Right, I wouldn't say it's worth 5x. If I map everything out to the fcf and discount it I roughly get a value of 7-8x. Depends on your discount rate and other assumptions of course and there's a lot of variability due to the leverage. But I get something like a 20% IRR on CHTR at 10x and the same IRR on LBTYK in that 7-8x range. Obviously depends on assumptions.

 

Looks to me like the market is valuing it a bit less than that assuming the deals get done, so I do own a bit. But I also do think if the results keep being poor then maybe it isn't even worth 7x. I hope that either lightning will work out or they'll end it because that has been a huge drag on cash generation. Ex that the UK assets do look better than 7x to me.

[ander]

I do agree that if they sell it they should be able to get 10x+ on a sale. The way I think about those other sales is that LBTYK received some of the fixed/mobile synergies but just as cash up front. So say those businesses were worth 7-8x but they got 10x as their participation.

 

On the comparison to CHTR, if you value it as (EV / (EBITDA - capex)) you can see why CHTR should trade at a MUCH higher EV / EBITDA multiple. CHTR also has much better growth prospects. Thinking about it as above, I think that's why some people think that in a few years CHTR could sell for maybe 12x+. It's probably worth 10x by itself and if they get some of the synergies on the sale then they could get a bit higher of a price.

 

Right, I wouldn't say it's worth 5x. If I map everything out to the fcf and discount it I roughly get a value of 7-8x. Depends on your discount rate and other assumptions of course and there's a lot of variability due to the leverage. But I get something like a 20% IRR on CHTR at 10x and the same IRR on LBTYK in that 7-8x range. Obviously depends on assumptions.

 

Looks to me like the market is valuing it a bit less than that assuming the deals get done, so I do own a bit. But I also do think if the results keep being poor then maybe it isn't even worth 7x. I hope that either lightning will work out or they'll end it because that has been a huge drag on cash generation. Ex that the UK assets do look better than 7x to me.

 

So what stock price per share do you get to if LBTYK is worth based on your math of 7x? Thanks.

[khturbo]

There are about a million ways to slice and dice it, but if I calculate everything on a proportionate owned basis (i.e. I take 100% of Virgin and CEE OCF and debt, 50% of Netherlands, and 59.7% of Belgium) I get ~$4.78bb in OCF and $31.09bb of net debt. After the proceeds of 10.6bb euros and 6.3bb swiss francs at 7x I get ~$28 / share.

 

Since there's so much leverage, a small change in the multiple gets you a big change in the valuation. 8x, which also seems reasonable to me, would get you to $34.

 

Others might not consolidate the Netherlands like I did or make some other adjustments so the numbers could be kind of different but those are hopefully roughly in the right ballpark.

[ander]

Not sure if this is expected.

 

EU regulators to warn Vodafone, Liberty Global about $22 bln deal - sources

 

BRUSSELS, March 20 (Reuters) - EU antitrust regulators are set to warn Vodafone(VOD) and Liberty Global(LBTYA) about the possible anti-competitive effects of their $22 billion deal, two people familiar with the matter said on Wednesday.

 

The warning, via a statement of objections setting out the European Commission's concerns, is expected to be conveyed to the companies shortly, the people said.

 

The EU antitrust enforcer opened a full-scale investigation into the deal in December last year, saying that Vodafone's(VOD) purchase of Liberty Global's(LBTYA) assets in Germany and east Europe may hurt competition in Germany and the Czech Republic. (Reporting by Foo Yun Chee)

 

[dwy000]

Not sure if this is expected.

 

EU regulators to warn Vodafone, Liberty Global about $22 bln deal - sources

 

BRUSSELS, March 20 (Reuters) - EU antitrust regulators are set to warn Vodafone(VOD) and Liberty Global(LBTYA) about the possible anti-competitive effects of their $22 billion deal, two people familiar with the matter said on Wednesday.

 

The warning, via a statement of objections setting out the European Commission's concerns, is expected to be conveyed to the companies shortly, the people said.

 

The EU antitrust enforcer opened a full-scale investigation into the deal in December last year, saying that Vodafone's(VOD) purchase of Liberty Global's(LBTYA) assets in Germany and east Europe may hurt competition in Germany and the Czech Republic. (Reporting by Foo Yun Chee)

 

Hmm.  Not exactly sure what that means.  Are they warning that it won't get approved?  That there will need to be divestitures?  Or is this standard language that says "we'll approve it but we're keeping an eye on you".

[ander]

The following was in an updated article: "Vodafone (VOD) is expected to offer concessions to address EU concerns about the deal."

 

So I guess that's why it's viewed as a non-event so far.

[scorpioncapital]

https://www.broadbandtvnews.com/2019/03/25/german-industry-associations-oppose-vodafone-liberty-global-cable-deal/

[ander]

I wonder what kind of concessions they could make to rectify the concerns raised by the unions in that article.

[scorpioncapital]

I am not sure I understand the monopolize argument. Vodafone is a mobile company. If anything they would monopolize the cable-mobile market. But the mobile market is kinda large. If Liberty owned Unitymedia before was it not already monopolizing the market? And if Vodafone has operations in other countries, how does that impact Germany per say? I think one has to remember that everyone is talking their book/vested interest. I am SO glad Global has finally woken up to the very treacherous and anti-business environment in EU and decided to sell. I think even Latin American dictators are more reasonable than the EU )) However not all EU countries are the same. I think they make a mistake to sell CZ, but Romania, Belgium, Germany, Switzerland I agree. Poland is probably an interesting exception too. Seems Global is having it's own Cable-exit moment. It was easier to enter, but harder to exit.

 

[ander]

I am not sure I understand the monopolize argument. Vodafone is a mobile company. If anything they would monopolize the cable-mobile market. But the mobile market is kinda large. If Liberty owned Unitymedia before was it not already monopolizing the market? And if Vodafone has operations in other countries, how does that impact Germany per say? I think one has to remember that everyone is talking their book/vested interest. I am SO glad Global has finally woken up to the very treacherous and anti-business environment in EU and decided to sell. I think even Latin American dictators are more reasonable than the EU )) However not all EU countries are the same. I think they make a mistake to sell CZ, but Romania, Belgium, Germany, Switzerland I agree. Poland is probably an interesting exception too. Seems Global is having it's own Cable-exit moment. It was easier to enter, but harder to exit.

 

 

That's how I'm thinking about it as well that the mobile-cable market should be looked at together, but it will be interesting to see if the regulator is that objective, forward-thinking, and rational.

[Spekulatius]

I am not sure I understand the monopolize argument. Vodafone is a mobile company. If anything they would monopolize the cable-mobile market. But the mobile market is kinda large. If Liberty owned Unitymedia before was it not already monopolizing the market? And if Vodafone has operations in other countries, how does that impact Germany per say? I think one has to remember that everyone is talking their book/vested interest. I am SO glad Global has finally woken up to the very treacherous and anti-business environment in EU and decided to sell. I think even Latin American dictators are more reasonable than the EU )) However not all EU countries are the same. I think they make a mistake to sell CZ, but Romania, Belgium, Germany, Switzerland I agree. Poland is probably an interesting exception too. Seems Global is having it's own Cable-exit moment. It was easier to enter, but harder to exit.

 

5 Stages of a value investment in a European value stock:

 

1) We purchased a company in growth industry in XYZ land at a huge discount to intrinsic value and at half the multiple of a similar US company? This is the most obvious mispriced stock opportunity we have seen for a long time.

 

Several month later:

2) While results have somewhat disappointed, the discount to intrinsic value is even greater than at the time of our first purchase.We have visited management and discussed with them a path how the valuation gap can be closed.

 

3) The deterioration of the regulatory environment in XYZ land was not foreseeable and has further depressed the value of our investment in the short run, however the  long term outlook is unchanged  and the valuation is still compelling.

 

4) The business of our investment has come under pressure, but the company continues to outperform its competitors. The company has a strong balance sheet and plenty of liquidity to survive the current downturn.

 

5) We are appalled by to the very treacherous and anti-business environment in EU and decided to sell. We think even Latin American dictators are more reasonable than the EU.