LBTYA - Liberty Global

[ni-co]

http://www.libertyglobal.com/pdf/press-release/LG-Earnings-Release-Q3-14-FINAL.pdf

 

 

Record Q3 Subscriber Growth of 344,000, 928,000 YTD

Rebased OCF Growth of 5% in Q3 and 6% YTD

YTD Adjusted Free Cash Flow of $1.4 Billion, Up 45%

Completed Tender Offer for Ziggo

 

Right on track to $2.5bn Adj. FCF for 2014.

[Liberty]

Right on track to $2.5bn Adj. FCF for 2014.

 

They're guiding 2.0bn adj. FCF in 2014. Did you mean 2015?

 

http://www.libertyglobal.com/pdf/presentations/Liberty-Global-Q3-2014-Investor-Call-Presentation-FINAL.pdf

 

Page 13.

[ni-co]

Right on track to $2.5bn Adj. FCF for 2014.

 

They're guiding 2.0bn adj. FCF in 2014. Did you mean 2015?

 

http://www.libertyglobal.com/pdf/presentations/Liberty-Global-Q3-2014-Investor-Call-Presentation-FINAL.pdf

 

Page 13.

 

I know. Yet, the Virgin Media acquisition has been FCF accretive +40% every quarter (YOY) for 2014 so far. Maybe, I'm overlooking something. Some special event in Q4 2013? Mind you that FCF was $807m in Q4 2013. If they continue to achieve 40% YOY growth in FCF, 2014 should come in at ~$2.5bn.

[ni-co]

Very nice profile on Malone and his tax avoidance strategies:

 

Guided by advisers at Shearman & Sterling LLP, Liberty Global took those new regulations and put them to work for a purpose the government never imagined. Liberty Global devised a transaction that would indeed generate income -- but credited those profits to a newly created U.K. unit, not subject to U.S. tax. Because the income satisfied the U.S. government’s test, investors weren’t subject to any capital-gains tax. And since the U.K. has different tax rules, that particular income didn’t generate any U.K. tax bill either.​

 

The result was that Malone and his fellow shareholders didn’t have to pay the tax bill that inversion would normally generate.

 

“Malone threw a multi-billion dollar left hook at the Treasury Department,” said Samuel C. Thompson, a law professor at Pennsylvania State University. “They didn’t see it coming.”

 

http://www.bloomberg.com/news/2014-11-03/malone-gained-double-tax-break-in-liberty-address-shift.html

 

As a shareholder of LBTYA you got to love this. I'm just wondering why Malone seems to be one of only a few people who really think about the tax implications while doing their ROI calculations.

[merkhet]

So I did a quick perusal of LiLAC (VTR + Cablevision Puerto Rico), and it looks like the numbers break down roughly as follows:

 

Revenue: ~ $1.2 billion

EBITDA: ~ $480 million

Debt: ~ $2.1 billion

 

Roughly 1/4 of that EBITDA will come from Cablevision Puerto Rico, which is only 60% owned by Liberty Global, so you figure the "economic" interest that shareholders have is about 90% of what's there.

 

Liberty Global trades at almost 10x EBITDA.

 

Figure LiLAC spins off at somewhere between 7x and 10x EBITDA itself, and that puts the "economic" equity value of LiLAC at somewhere between $1.134 billion and $2.43 billion, and this is coming off a company that currently trades at $36 billion in market cap.

 

Furthermore, there's a currency issue that causes the Chilean VTR's revenue comps to look pretty terrible and mask organic growth.

 

Put it all together, and it looks like you have something primed to sell off.

[Wilson-TPC]

I have 8.9x for EV/EBITDA.

[ItsAValueTrap]

So I did a quick perusal of LiLAC (VTR + Cablevision Puerto Rico), and it looks like the numbers break down roughly as follows:

 

Revenue: ~ $1.2 billion

EBITDA: ~ $480 million

Debt: ~ $2.1 billion

 

Roughly 1/4 of that EBITDA will come from Cablevision Puerto Rico, which is only 60% owned by Liberty Global, so you figure the "economic" interest that shareholders have is about 90% of what's there.

 

Liberty Global trades at almost 10x EBITDA.

 

Figure LiLAC spins off at somewhere between 7x and 10x EBITDA itself, and that puts the "economic" equity value of LiLAC at somewhere between $1.134 billion and $2.43 billion, and this is coming off a company that currently trades at $36 billion in market cap.

 

Furthermore, there's a currency issue that causes the Chilean VTR's revenue comps to look pretty terrible and mask organic growth.

 

Put it all together, and it looks like you have something primed to sell off.

 

What's going on with VTR's wireless operations?  Perhaps there is something funky there that investors won't get???

[ItsAValueTrap]

So skimming through the DEF 14A filing:

 

It talks about Chilean mobile services:

the migration of Chilean mobile services to a full mobile virtual network operation;

 

It talks about OneLink:

These revisions included adjustments [...] to the OneLink Acquisition plan for Puerto Rico

http://en.wikipedia.org/wiki/OneLink_Communications

 

The acquisition should have closed around the fourth quarter of 2012.  http://www.businesswire.com/news/home/20120626006729/en/Liberty-Global-Searchlight-Acquire-OneLink#.VGr7Esl5V0Y

 

[loganc]

Does anyone have a take on why they aren't doing a full spin of VTR et al. versus doing the tracker?  I think it was a question on the last call but Fries answered a different question.  In other words, I understand the reasoning behind separating the assets, but not exactly why a tracker is the best option here.

 

Regardless, I think Global looks pretty attractive here and I noticed that Lou Simpson initiated a position in Q3. 

[ni-co]

Does anyone have a take on why they aren't doing a full spin of VTR et al. versus doing the tracker?  I think it was a question on the last call but Fries answered a different question.  In other words, I understand the reasoning behind separating the assets, but not exactly why a tracker is the best option here.

 

Regardless, I think Global looks pretty attractive here and I noticed that Lou Simpson initiated a position in Q3.

 

This is the Malone method™

 

If you have two businesses and one is a growth business with large capital needs (Latin America) and the other business is more of a mature business throwing off cash (Europe), it's very tax efficient (and much cheaper to finance) when you combine those businesses and they share one balance sheet. You reinvest your European cash flows directly into the Latin American entities and therefore don't pay taxes (or significantly less taxes) on them. This way your cash is worth say 30% more (your tax and interest savings) and the whole entity consisting of the two assets compounds very nicely.

 

When the growing business matures itself you can spin it off completely, thereby separating the balance sheets.

 

Malone talks about it at length in this lecture:

[loganc]

Does anyone have a take on why they aren't doing a full spin of VTR et al. versus doing the tracker?  I think it was a question on the last call but Fries answered a different question.  In other words, I understand the reasoning behind separating the assets, but not exactly why a tracker is the best option here.

 

Regardless, I think Global looks pretty attractive here and I noticed that Lou Simpson initiated a position in Q3.

 

This is the Malone method™

 

If you have two businesses and one is a growth business with large capital needs (Latin America) and the other business is more of a mature business throwing off cash (Europe), it's very tax efficient (and much cheaper to finance) when you combine those businesses and they share one balance sheet. You reinvest your European cash flows directly into the Latin American entities and therefore don't pay taxes (or significantly less taxes) on them. This way your cash is worth say 30% more (your tax and interest savings) and the whole entity consisting of the two assets compounds very nicely.

 

When the growing business matures itself you can spin it off completely, thereby separating the balance sheets.

 

Malone talks about it at length in this lecture:

 

I understand all of that and it is obviously great.  But, is that what is really happening in this particular case?  Is VTR not self funding?  It appears so in this case based on the recent results. 

[Guest wellmont]

there's not a lot of difference in trackers and hard spin. I think he goes hard spin when he is sure about the strategic direction, and is closer to taking action. I think he uses trackers to signal to the markets that there is a valuation gap here and that changes may be in store to close the gap. trackers are not as final. they are still one C corp. and you can move around pieces, changing the mix of assets and liabilities, before you do the hard spin. they can also be reversed.

[ItsAValueTrap]

With tracking stocks:

1- Tax efficient.

2- Operating synergies.  When they negotiate for content, they can do it as one company.

When they buy set-top boxes (one of the largest capex expenses), they do it as one company.

If My Prime gains traction (it probably won't), they can scale that across the whole company.

[ni-co]

Now, this sounds interesting: http://video.cnbc.com/gallery/?video=3000331576

 

Here are several parts of the whole interview: http://www.valuewalk.com/2014/11/john-malone-talks-liberty-investor-conference-videos/

[rogermunibond]

Now, this sounds interesting: http://video.cnbc.com/gallery/?video=3000331576

 

Here are several parts of the whole interview: http://www.valuewalk.com/2014/11/john-malone-talks-liberty-investor-conference-videos/

 

Thanks for posting!

+1

[rpadebet]

Does anyone have a take on why they aren't doing a full spin of VTR et al. versus doing the tracker?  I think it was a question on the last call but Fries answered a different question.  In other words, I understand the reasoning behind separating the assets, but not exactly why a tracker is the best option here.

 

Regardless, I think Global looks pretty attractive here and I noticed that Lou Simpson initiated a position in Q3.

 

This is the Malone method™

 

If you have two businesses and one is a growth business with large capital needs (Latin America) and the other business is more of a mature business throwing off cash (Europe), it's very tax efficient (and much cheaper to finance) when you combine those businesses and they share one balance sheet. You reinvest your European cash flows directly into the Latin American entities and therefore don't pay taxes (or significantly less taxes) on them. This way your cash is worth say 30% more (your tax and interest savings) and the whole entity consisting of the two assets compounds very nicely.

 

When the growing business matures itself you can spin it off completely, thereby separating the balance sheets.

 

Malone talks about it at length in this lecture:

 

I understand all of that and it is obviously great.  But, is that what is really happening in this particular case?  Is VTR not self funding?  It appears so in this case based on the recent results.

 

This is just conjecture on my part, but reading the last quarter transcript I feel they are creating a tracking stock instead of a hard spin off, in order to create a "currency" for acquisitions and consolidation in Latam. I think we are going to see a lot of transactions in Latam going forward. The characteristics of this tracker spin off seem very very interesting when viewed from that perspective. The part of the transcript I am referring to is as follows

 

We also announced the creation of a tracking stock for our Latin American Caribbean asset that we have been talking about for a while. This will require shareholder approval and a bit of time to officially implement. But we continue to believe that this is the best way to create value for shareholders, by highlighting our fast growing operations in Chile and Puerto Rico, and positioning us to explore new opportunities in the region with massive broadband upside.

 

The tracker allows them to leverage their european balance sheet to borrow money for acquisitions in Latam, while also allowing them to buy those assets without giving up portions of european equity.

[Liberty]

LILA is definitely interesting.

 

If Liberty Global in Europe is TCI 2.0, will LILA be TCI 3.0, will they try to rerun the playbook in the region?

[ItsAValueTrap]

This is just conjecture on my part, but reading the last quarter transcript I feel they are creating a tracking stock instead of a hard spin off, in order to create a "currency" for acquisitions and consolidation in Latam.

 

Both spinoff and tracking stock can be used as currency.  If LILA was spun out, its shares could potentially fetch a higher valuation than a tracking stock.  Tracking stocks make things complicated and that may depress the share price.

[rpadebet]

This is just conjecture on my part, but reading the last quarter transcript I feel they are creating a tracking stock instead of a hard spin off, in order to create a "currency" for acquisitions and consolidation in Latam.

 

Both spinoff and tracking stock can be used as currency.  If LILA was spun out, its shares could potentially fetch a higher valuation than a tracking stock.  Tracking stocks make things complicated and that may depress the share price.

 

You probably are correct, but the advantage of a tracker is the tracker gets to use the balance sheet of the parent and associated debt capacity. By itself, it probably wouldn't be able to fund some large scale acquisitions should those opportunities appear. If it gets to use the LBTY debt capacity, LILA carries a larger checkbook.

 

This gives them many options. buy with stock if tracker is expensive or buy with debt if debt is cheap and tracker is undervalued. That optionality is in all likelihood more valuable than the one time value gain in a hard spinoff.

[Liberty]

According to Bloomberg, Vodafone is looking at Liberty Global. Hence the spike right before the close.

 

 

Edit: Here's the piece:

 

http://www.bloomberg.com/news/2014-11-28/vodafone-said-to-eye-takeover-of-malone-s-liberty-global.html

 

More details here (via TXlaw) (nov 25):

 

http://www.broadbandtvnews.com/2014/11/25/liberty-global-looks-at-german-cable-deal-with-vodafone/

 

Liberty Global has effectively encouraged Vodafone to consider taking over its German cable business, arguing that the competition watchdogs would probably not oppose such a deal which would enable Vodafone to create a nationwide German cable giant through the merger of its subsidiary Kabel Deutschland with Liberty Global’s Unitymedia Kabel BW.

 

Earlier piece (nov 21):

 

http://www.bloomberg.com/news/2014-11-21/liberty-global-sees-german-watchdog-open-to-vodafone-deal.html

[ni-co]

According to Bloomberg, Vodafone is looking at Liberty Global. Hence the spike right before the close.

 

 

Edit: Here's the piece:

 

http://www.bloomberg.com/news/2014-11-28/vodafone-said-to-eye-takeover-of-malone-s-liberty-global.html

 

More details here (via TXlaw) (nov 25):

 

http://www.broadbandtvnews.com/2014/11/25/liberty-global-looks-at-german-cable-deal-with-vodafone/

 

Liberty Global has effectively encouraged Vodafone to consider taking over its German cable business, arguing that the competition watchdogs would probably not oppose such a deal which would enable Vodafone to create a nationwide German cable giant through the merger of its subsidiary Kabel Deutschland with Liberty Global’s Unitymedia Kabel BW.

 

Earlier piece (nov 21):

 

http://www.bloomberg.com/news/2014-11-21/liberty-global-sees-german-watchdog-open-to-vodafone-deal.html

 

This comes really as quite a surprise to me. Not because it wouldn't make sense but because they think Malone would approve it. Maybe he sent a signal to them that he would be willing to consider it. Yet, hearing him talk about LBTYA I didn't get the impression that he was willing to sell.

[Liberty]

This comes really as quite a surprise to me. Not because it wouldn't make sense but because they think Malone would approve it. Maybe he sent a signal to them that he would be willing to consider it. Yet, hearing him talk about LBTYA I didn't get the impression that he was willing to sell.

 

That's my impression too. I've been having a discussion about this on Twitter with a few people, and basically, I can't see a way that would make much sense for this to happen. Malone hates taxes, and he hates not having control (he learned this the hard way). He wouldn't take VOD stock for the whole thing, and he wouldn't want cash (tax hit). And if the premium is high enough to entice Malone, then the deal is probably bad for VOD, so Malone would want to stay away from VOD stock even more...

 

Maybe they'd sell some assets (there's speculation about the German sub) for a really high price and redeploy into some other bargain (but there aren't many things left in Europe with the right scale and growth environment; maybe somehow in LatAm? But they could do that just with cheap debt, no need to sell a crown jewel), but that's also a weird move; everything they've been doing has been to build scale, and Germany is one of their biggest and best-performing markets... Losing scale and their best asset would require a really crazy high premium to compensate.

[ItsAValueTrap]

They sold Jcom a while back.  I don't think scale is that important.  Though Jcom is Japanese, so the CPE technology is different because Japan has its own analog TV standards.  Their programming needs are unique because Japanese culture is weird.

 

I think there's a lot of turnaround opportunities at Virgin/UK that Malone likes.  Selling only the German assets might make sense.  He might also see if he can swap the German cable assets for something else.

 

[Liberty]

He might also see if he can swap the German cable assets for something else.

 

That's exactly what I just thought, came here to write that. This would certainly be tax efficient and in keeping with Malone's MO.

[loganc]

He might also see if he can swap the German cable assets for something else.

 

That's exactly what I just thought, came here to write that. This would certainly be tax efficient and in keeping with Malone's MO.

 

There is a lot of potential with LBTYA German assets with respect to broadband penetration.  That being said, some sort of asset swap makes more sense to me than an outright sale of the company.  What premium would Malone take?  Would he even agree to a deal for a 100% premium?  I wouldn't..