LBTYA - Liberty Global

[Munger_Disciple]

LBTYA mgmt (Fries) and even Malone made the argument that European cable dynamics were better on the payTV side.  Less cost for content, less cordcutting, benefits from triple or quad play.  Also more opportunities for consolidation despite the regulatory environment.

 

The thesis has been largely proven false.

 

Which is why LBTYA is in the position it's in.

 

Liberty Global didn't have mobile network in most countries. And Fries never articulated what Liberty's strategy was or is. It now looks like they are trying to sell whatever they could to whoever they could. And once in a while they make investments in media properties (for example LionsGate, Univision). And then they totally screwed shareholders with CWC purchase. This company is a prime example of an unfocused, chaotic strategy with no real plan to address problems. I don't know why Fries thinks they will succeed in UK when they failed everywhere else.

[scorpioncapital]

It will go a long way if they jettison upc Switzerland. It has the lowest arpu of all their businesses and one of the highest relative debt. The buyer said no to the price tag. It will be very difficult for them to go back with their tail between their legs with a lower offer. Unfortunately I believe even that is preferable to holding it. Hopefully some clarity other than we'll keep it because nobody wants to buy it would be nice.

[WayWardCloud]

Liberty Global didn't have mobile network in most countries. And Fries never articulated what Liberty's strategy was or is. It now looks like they are trying to sell whatever they could to whoever they could. And once in a while they make investments in media properties (for example LionsGate, Univision). And then they totally screwed shareholders with CWC purchase. This company is a prime example of an unfocused, chaotic strategy with no real plan to address problems. I don't know why Fries thinks they will succeed in UK when they failed everywhere else.

 

I agree and I'd even put the LionsGate deal in the same basket as the CWC one in terms of screwing the shareholder. That was essentially Malone losing faith in his personal stake in a company and diluting his mistake by moving the shares from his own accounts to an entity he controls in order to share the burden. Heads he wins, tails he shares the loss. ...And Fries is always happy to oblige.

 

Rutledge on the other hand demonstrated he has a backbone and works for his shareholders when he passed on M&A offers Malone was excited about a couple years ago (not saying he was necessarily right, I don't know, but that shows independence).

 

However, maybe the better comparison would be Maffei / Fries and Rutledge / Lutz Schüler + Severina Pascu. Those two seem like strong operators and I am much more optimistic than most cobaf-ers on the UK turnaround.

[scorpioncapital]

With such overbuilding , is there any chance that with high debt and no pricing power broadband in the UK (like global) can ever make a decent return ?

 

https://www.ispreview.co.uk/index.php/2020/02/say-hello-to-the-first-uk-street-with-3-full-fibre-broadband-isps.html

[Spekulatius]

Lousy results, lousy 2020 outlook. The only thing that appears to go up is stock based compensation.

https://2zn23x1nwzzj494slw48aylw-wpengine.netdna-ssl.com/wp-content/uploads/2020/02/Liberty-Global-Q4-2019-Press-Release.pdf

 

It just looks like a melting ice cube too me.

[scorpioncapital]

It's not so black and white. Take another stock seritage. They are in investment phase. Like 100 percent + capex . But that capex is going to earn say 12 percent.

To global...fcf is depressed to 1 billion for 2 reasons, no growth (some mild decline) and high capex. Focusing on the capex (because I think growth will return to uk ) what portion is maintenance versus growth capex? This is a crucial question to determine earnings power and return on Invested capital. I don't know how to separate maintenance vs growth capex in a case where it has been high for a very very long time. Any insights ? Is there a rule of thumb what percentage of their capex is maintenance or growth ?

It's an important question because earnings power may be 2 billion or 1.5 or more if they had a choice to not invest for growth.

The irony is they have no growth with all this investment so one could say it's 90 percent maintenance capex ?)

Is it like airline industry where all benefits go to consumer and it's 100 percent maintenance capex just to stand still (this happens in high inflation environment too btw)? Although in airline case there was passenger growth over the years, but also broadband data is growing at a rapid pace too.

 

[skanjete]

The optics of their results aren't great.

 

On the other hand, the shares don't imply a great future eather. The stock is dirt cheap at this point.

 

LBTYA is clearly turning into a free cash flow machine.

They forecast an adjusted FCF of 1.000m$ for 2020. Add another 250m$ from VodafoneZiggo and we have 1.250m$ for the year.

 

So the stock is trading at less than 10x free cash flow, and that with reasonable debt ratio : 3,7x OCF.

 

The free cash flow will keep rising in the following years if their capital investments stay at the current level.

The adjusted free cash flow is being hurt a lot by the repayments of the vendor loans from past capital investments.

Capital investments are about 1$b lower than last year, so if the current level stays or lowers, the repayments of the vendor loans will diminish and so free cash flow will rise.

 

If you consider free cash flow, not adjusted for the vendor loans, then free cash flow was 1640m$ (ex. 40% telenet) and about 540m$ from VodafoneZiggo, so in total 2.180m$. For next year something like 2400-2500m$.

So if the lower capital investment trend is sustainable, which is quite possible, considering the evolution at Comcast and Charter, the adjusted free cash flow should trend to these numbers.

 

So if they can stabilise the business (let alone grow), the current price is really cheap for the future free cash flow that can be expected.

 

[scorpioncapital]

Is there a reason their fcf guidance excludes cash from viggo or Telenet ? Are dividends received treated differently?

[dwy000]

The results are typical Liberty Global.  A massive rat's nest of reporting metrics that you need a chain saw to hack through. Adjusted Operating Free Cash Flow Pro Forma Rebased Continuing Operations.  Its like they try as hard as they can to obfuscate the definition to come up with something positive.

 

The big takeaway for me was the whopping hit to organic numbers in the UK.  This is where Lightning is being built and they are putting most of the hopes for the future.  Yet customer numbers are dropping hard.

 

Malone needs to pull some magic out of a hat from an M&A perspective here before the customer and top line declines overwhelm the capital structure and they blow all the cash on the balance sheet.

 

I've given up on Fries. It's all bluster and talk without results.

[skanjete]

I also don't understand why they don't mention VodafoneZiggo.

These results weren't bad at all (especially in consideration of their results in the past)

 

https://www.libertyglobal.com/wp-content/uploads/2020/02/VodafoneZiggo-Fixed-Income-Q4-2019-Release.pdf

[skanjete]

Is there a reason their fcf guidance excludes cash from viggo or Telenet ? Are dividends received treated differently?

 

I think Telenet is included, but you have to take into account that they only have 60% of it.

 

VodafoneZiggo on the other hand is not included I think.

[Spekulatius]

Stop loss triggered for me at $19.4. I rarely do stop losses, but feel like in this case it is warranted. I think it is the outlook that killed the stock. On a high level, Leveraged bets on a shrinking business just don’t work. I think something like BERY has a better chance of working out.

[scorpioncapital]

So I looked at the presentation slides. The fcf includes viggo and everything. So 1 billion for 2020 includes 50 percent viggo share. You can see this on pg 14 and 15 where for 2019, 770 fcf they show the 214m fcf share from viggo. No reason 2020 estimate would exclude it.

 

 

[forest81]

Market Cap: 12.3b

Liquid Cash not required by business: 11b

Free Cash Flow per year minimum 1b? max 2b?

 

What does it matter too much about business degradation? If this was a private business would anybody sell for the market cap with the above? I know Mikes involved but cmon surely getting a bit silly here now? Maybe that's what Klarman sees. I see he has just added making it his biggest holding at 15% weighting of his portfolio.

[Foreign Tuffett]

Stop loss triggered for me at $19.4. I rarely do stop losses, but feel like in this case it is warranted. I think it is the outlook that killed the stock. On a high level, Leveraged bets on a shrinking business just don’t work. I think something like BERY has a better chance of working out.

 

General comments:

I couldn't agree more. I think a trap value investors frequently fall into is buying a leveraged businesses with organic revenue declines because they are "cheap" (the stock price has fallen, and TTM multiples look attractive). But are they really cheap if facing secular decline and/or the prospect of ongoing negative organic growth? In most cases no. They becomes less valuable with each passing year, with all of that decline hitting the equity.

 

This is the crux of why I have avoided AMC, GME, and KHC.

 

Liberty Global specific:

Agree with scorpioncapital on the Vodafone Ziggo issue. Even though LBTYA's ~50% stake isn't consolidated for reporting purposes, they are almost surely including its contribution to cash flow

 

 

 

 

 

[skanjete]

So I looked at the presentation slides. The fcf includes viggo and everything. So 1 billion for 2020 includes 50 percent viggo share. You can see this on pg 14 and 15 where for 2019, 770 fcf they show the 214m fcf share from viggo. No reason 2020 estimate would exclude it.

 

Sorry, I made a mistake. They include the dividends and interest they received from Ziggo in adjusted FCF.

 

I had only looked at the press release where Ziggo isn't mentioned and hadn't seen the presentation yet.

 

However, they do include the dividends and interest they receive from Ziggo, but not the free cash that Ziggo actually generates, which is somewhat higher I think.

 

 

In any case I agree with posters over here that the numbers are very coloured, almost misleadingly so.

So indeed, this troubles me too.

 

But, even so, I still think the shares are very cheap.

[Munger_Disciple]

From the press release:

 

And while we expect some unavoidable headwinds in 2020, we believe the medium-term outlook in the U.K. remains attractive, especially as we evaluate strategic options for value creation.

 

Translation: UK business sucks, and we hope someone buys us out at an inflated valuation when there is a temporary uptick (Fries hopes) in the business in the medium term (whatever that means). I guess UK business sucks long term?

 

[Munger_Disciple]

I only look at high speed fixed internet subs, and the news is not good on this front except for Poland. When you compare Dec 31, 2019 vs Dec 31, 2018 numbers, here is what I see:

 

Switzerland: -5.6% (661K vs. 700K)

Poland: +4.6% (1230K vs. 1175K)

UK: +0.8% (5271K vs. 5225K). UK numbers are misleading because homes passed increased from 14.4M to 14.9M in one year so penetration actually went down from 36.3% to 35.4%. This is where they are spending a s**t load of money on project lightning. 

Ireland: flat (378K vs. 376K)

Belgium: flat (1664K vs. 1658K)

 

 

 

[scorpioncapital]

I find it interesting that their results are below gdp growth of these nations which in turn are near zero. But I don't know if their loss is someone else's gain. Bt is doing terribly too. I think it may be regulatory. When the government handcuffs you the last thing you want is 4x leverage.

[nodnub]

I find it interesting that their results are below gdp growth of these nations which in turn are near zero. But I don't know if their loss is someone else's gain. Bt is doing terribly too. I think it may be regulatory. When the government handcuffs you the last thing you want is 4x leverage.

 

Could it be due to younger generation migrating to mobile data plans and cancelling residential internet?  In some cities there is so much wifi access you don't even really need mobile internet (if willing to sacrifice the always-on connection for your laptop)

[vince]

Lousy results, lousy 2020 outlook. The only thing that appears to go up is stock based compensation.

https://2zn23x1nwzzj494slw48aylw-wpengine.netdna-ssl.com/wp-content/uploads/2020/02/Liberty-Global-Q4-2019-Press-Release.pdf

 

It just looks like a melting ice cube too me.

 

Frustrating for sure and not performing anywhere near my original expectations.  But a multiple of 3.7 times operating cash flow is ridiculous

[vince]

My sincere apologies.....thats just the net debt multiple of operating cash flow.  Multiple is just over 6, still cheap but nowhere near what I claimed

[Spekulatius]

Lousy results, lousy 2020 outlook. The only thing that appears to go up is stock based compensation.

https://2zn23x1nwzzj494slw48aylw-wpengine.netdna-ssl.com/wp-content/uploads/2020/02/Liberty-Global-Q4-2019-Press-Release.pdf

 

It just looks like a melting ice cube too me.

 

Frustrating for sure and not performing anywhere near my original expectations.  But a multiple of 3.7 times operating cash flow is ridiculous

 

It also has 3.7 turns of net debt. So equity is half the capital structure and the valuation is 7.4x cash flow. This is cheap, but it’s not that cheap if it is a shrinking business.

 

I kind of kick myself for net selling earlier or at least at the open today. I generally find that it’s best pull the weeds early. My underlying assumption was that the shrinking business would stabilize this year, but it’s just not happening. Then we have to discount weak management on top of that sickly business with a levered capital structure. It just doesn’t seem like a straightforward way to win.

[NotSoWise]

I thought for a moment about alternative scenario - that CEO tries to keep the numbers down to take it private with PE help. But then what does not fit with the story is recent lowering capex to boost CF. If that was CEO's plan, he wouldnt do it probably to such large degree. The reason to lower capex seems mainly rather high debt (covenants) and possibly low return on capex growth. This 11bn liquidity (3 revolver) is BS I think - this is the reserve to pay down debt on a declining EBITDA situation with high leverage (3,6x after using all cash is more adequate in this deteriorating situation). This is why there is only 1bn on buybacks in 2020. Possibly more if they exit more subsidiaries (e.g. Poland, etc).

 

So all in all, I think operating situation is quite poor, they feel threatened by high debt (with EBITDA going down - unthinkable still one year ago) and took measures to keep money if things go down more or not improve. In the mean time they may try to exit some businesses at hopefully above 10x (but not obvious for all subsidiaries unless synergies for new buyer - e.g. but we had Swiss situation, even despite synergies). New liquidity from exits will go to debt repayment and possibly buybacks. So I think the perceived discount is probably not as big as it looks when compared to 11x multiple. In Vodafone deal they sold a better part of the company. What remains is more like 8-9x with synergies for the buyer. On top, the unknown variable is time => +/- 40% upside in 2 years is not the same as 40% upside spread over 5 years (its in Mike's interest to prolong things given his salary and Malone's age). My experience is that time variable "fuc..ed" several value situations (e.g. took 2-3 years longer) and then returns were mid/ high single digits, rather than low/ mid teens.

 

Overall, I dont find it attractive after some thinking. One may not lose money from current price, but also may not make a lot from this over the next 5 years. This business is a dog and its CEO is terrible.

[scorpioncapital]

Mike said it right. They must improve operation if they want to have a chance at a sale at 10x+. Who will buy it now ?

 

Also 11 billion is double bs. It includes 3 billion of their line of credit ! When they got 25 billion of bond debt on top. Talk about loose with the truth. Sounds like chest thumping like we can take out all the shares with the liquidity. Possible, but reckless.

 

Everything hinges on your view of the UK and Western Europe . In 5 years is uk going to be thriving like an independent nation ? Well there is still competition and regulation. Look at Shaw in Canada. Canada is independent. It has free trade deals with others. It does not mean regulators don't gut the telecom business considering it a strategic national asset with pricing caps and wholesaling.

What fries (and Malone too) need to ask is if the economics of this business make sense outside the USA. Perhaps one can get a 8 to 10 percent a year return from here. Better than a bond for sure but I don't think cable Telecom stocks outside USA should be managed with 3.7x debt when returns are so low. To me this is a business in Europe where all the benefits accrue to consumer (both mobile and fixed ) and all the costs and speed upgrade capex accrue to the company. If you can raise prices 2 percent a year , perhaps you should invest less. I am surprised by all these overbuilders. What kind of returns are they getting? We see the dark side of low interest rates where people are so desperate that they will take even a few percent above the cost of massive debt . Someone in the future is going to have a wile e. Coyote moment, just don't know when!