LBTYA - Liberty Global

[bizaro86]

I understand that they are getting net back 1.5 billion gbp after accounting for the 2.5 b to telefonica.

I'm assuming they are getting back somehow 4 billion.

I see it as a bit of a divestiture - but of a much larger operation.

50% of virgin + o2 instead of 100% of virgin.

Imagining in time the balance sheet will look like liberty media. A line item for each 'equity investment'. So they can sell each one and just looks like you and I selling a stock from the portfolio

 

From the linked telefonica presentation, they're paying out at close, then the JV is doing a big re-fi. So the cash in is coming from new leverage, while the cash out is coming from buying more assets. Seems like a case where they're buying assets with debt?

[changegonnacome]

I understand that they are getting net back 1.5 billion gbp after accounting for the 2.5 b to telefonica.

I'm assuming they are getting back somehow 4 billion.

I see it as a bit of a divestiture - but of a much larger operation.

50% of virgin + o2 instead of 100% of virgin.

Imagining in time the balance sheet will look like liberty media. A line item for each 'equity investment'. So they can sell each one and just looks like you and I selling a stock from the portfolio

 

Yes this is the way its going - they've hinted at Vodafone Ziggo being listed in the Netherlands or merged into Telenet and pointed towards the value of UPC Switzerland with positive albeit not great FCF being a possibly prized asset by Swiss income investors if listed as a separate entity with a descent dividend yield attached. The thesis being that in a negative rate environment like Switzerland such positive 'stable' cash flows would highly prized unlocking the value of UPC.

[WayWardCloud]

New webcast at the Bank of America Telecoms and Media Conference between Mike Fries and David Wright (BofA).

https://www.libertyglobal.com/investors/presentations-and-webcasts/

 

UK: excited about the merger with O2. Forecasts a capex heavy decade ahead for both BT and Virgin/O2 rushing to roll out 1GBPS to every home + eventually 5G. They seem to be ready to take BT head on in an arms race more than before. Although paradoxically no more of the talks from a few months ago about increasing Lightning rhythm of new builds (about 400k/y) or establishing a new platform with outside investor to roll out fiber. The brought back their call centers from abroad (India?) to the UK to increase the quality of service (Charter's playbook).

 

Benelux: Sounds like a merger between Vodafone/Ziggo and Telenet is unlikely but a partial IPO of Vodafone/Ziggo is likely.

 

Switzerland: They're stuck. At least now he admits it. Neither Sunrise nor Salt in active discussion. Hints at partial IPO as well once the cash flows stabilize. They're not trying to compete for market share, only for growing FCF, which is not going to be easy being squeezed on every side by competitors the way they are.

 

Overall I didn't learn much new information. Fries insists on switching Global from being an integrated pan european cable-telco provider to a simple holding company comprised of stakes in several publicly traded entities à la Liberty Media. I see that as a relief given his solid track record as a deal maker and terrible one as an operator.

 

Any idea why the stock went up so much today? +6.66% and an extra +1.56% after hours.

 

 

[WayWardCloud]

Liberty Global to buy Sunrise in an all cash transaction :

https://finance.yahoo.com/news/liberty-global-acquire-100-sunrise-044500283.html

https://finance.yahoo.com/news/liberty-global-consider-ipo-sunrise-064603057.html

 

They are paying a dear price of 10X EBITDA (7.5 post synergies) compared to Swisscom which apparently trades around 6X (I didn't verify) but I believe they simply didn't have a choice. The Germans at Freenet played their cards well and Liberty had to pay up or stay trapped in a never ending sub-scale situation. It was the right thing to do and now all four of their markets are on track to be FMC and at scale. I assume it will take about a year to close all the transactions, then maybe 2+ to really merge and realize synergies. At some point in the next 3-5 years they also make it clear they want to do IPOs and hope to get re-rated by the market.

They have also succeeded at moving their capital mostly outside of the European Union which I think was part of the plan, even they never said it.

 

Say what you want about the operational side, at least M&A/Strategy has been delivering!

[Liberty]

“ Liberty Global plans to take over Switzerland's Sunrise Communications in a surprise $7.4 billion deal”

[scorpioncapital]

I fail to see how you initially want to get out of a bad market, then get more into it. I guess they see an IPO and then can "offload" it to the public. Personally I would have taken a lower price and sold the sub-scale UPS.

[changegonnacome]

Cant ever accuse Mike/Liberty of sitting on their hands.

 

They have national champion / fixed mobile convergence thesis which I think is legitimate - they obviously would have preferred to exit Switzerland......but this is the least worst option for the Swiss assets.

 

Looks to me like they'll ultimately end up with a converged national champions in the UK, Netherlands & Switzerland + $7bn in cash still. Not bad.

 

Five years down the road I see an IPO of each asset in its home jurisdiction to close the price to value gap at the hold co:

VodafoneZiggo

Virgin/O2 UK

UPC/Sunrise

 

Only catch is the Telenet example - while better than LBTYA - it doesn't show a huge appetite from European investors for the levered free cash flow proposition which is Liberty's game.

[ander]

I fail to see how you initially want to get out of a bad market, then get more into it. I guess they see an IPO and then can "offload" it to the public. Personally I would have taken a lower price and sold the sub-scale UPS.

 

I agree with that sentiment. Question is even if they do an IPO, how do we ultimately recognize value per share at LBTYK? On a SOTP-basis the company is cheap. You can see the market multiple of the non-public stub. I'd think one of the better uses of cash at this price level is share buybacks rather than going in deeper on a region they wanted to exit.

[scorpioncapital]

After the IPO, Liberty would probably put out a document similar to a secondary offering with them being the selling shareholder. So they could in theory sell everything down to zero, but very slowly. Or maintain like 1/3 of everything and use the cash for new acquisitions, buybacks or special dividend.

[dwy000]

I fail to see how you initially want to get out of a bad market, then get more into it. I guess they see an IPO and then can "offload" it to the public. Personally I would have taken a lower price and sold the sub-scale UPS.

 

I'm not sure they saw it as a bad market long term, I think they saw that they couldn't compete as effectively without the full solution of wireless/broadband.  It made sense for both sides to sell to Sunrise and combine the businesses but Freenet scuppered that deal.  It still makes sense to combine the 2 entities and get the synergies as opposed to having an incomplete and costly product suite.  The biggest irony is that Freenet blew up the deal at essentially the same valuation as Liberty is taking ownership of the deal.

[ander]

After the IPO, Liberty would probably put out a document similar to a secondary offering with them being the selling shareholder. So they could in theory sell everything down to zero, but very slowly. Or maintain like 1/3 of everything and use the cash for new acquisitions, buybacks or special dividend.

 

Agreed that's how other cos often exit. LBTYK - have they done a large secondary in any of their markets? Typically he spins out to shareholders as Malone is avoids pay taxes wherever he can. I feel like they typically just end up owning until they can swap for better assets in a non-taxable or tax-efficient transaction.

[Munger_Disciple]

The problem with Liberty Global is Fries. He is a terrible operator of cable business. Count on him to pi$$ away the cash they got from Vodaphone deal. For the Swiss business I have some sympathy for him as he tried to sell it to Sunrise before. I am beginning to think the real genius in the cable business is not Malone but Rutledge. And US appears to be a far better cable market than Europe or LatAm since wireless/fixed broadband convergence is not necessary to do well. If you look at Liberty's cable portfolio, the US (Charter) investment is doing great and outside investments (Global/LatAm) are not.

[NotSoWise]

I would risk being accused stupid, but I think there is a good chance LILAK will turn next year (AT&T, CR, economics of marginal customer in an underpenetrated market, almost everywhere quad play, cost cuts, growing scale and reasonable competition). I have to admit that this was what I have been thinking every 3rd quarter in the past three years... yet this year I am somehow more convinced. Bad C&W deal plus few bad lucks delayed good things by +/- 3 years.

 

As for LBTYK I see no hope with Mike. I think there is a conflict of interest between Mike and the shareholders. He seems to be more interested in preserving status quo for as long as possible. He is overpaid for his performance and "managing" European business from Colorado, which is a joke.

The return should be better than bonds, but not sure it will be much more. EU regulations are too strict to have CHTR returns, plus Mike is no Rutledge.

[ander]

Impossible to get into the mind of Malone of course, but what do you think Malone's view on Fries is today? is he as unhappy as most shareholders seem to be? Why not replace Fries? Malone is no fool and is regarded as doing an above average job of finding good talent (e.g., Diller).

[NotSoWise]

I have asked this question myself many times and thought about the following:

 

- Mike is not bad in M&A, but terrible in operations

- Malone might think that most value is to be gained or rather preserved via M&A. He might not see much upside via better managing operations. EU is not US.

- Bringing in a new guy is risky.... I would say 50/50 or worse. At least Mike is good in M&A, which is probably 70% of value going forward (buying/ selling assets).

 

The question is - what is private market value of LBTYK. Is it what it used to be in terms of historic transaction multiples or is it less - as the EU market is overregulated and cables are not allowed to earn good money like in US.

[Munger_Disciple]

Impossible to get into the mind of Malone of course, but what do you think Malone's view on Fries is today? is he as unhappy as most shareholders seem to be? Why not replace Fries? Malone is no fool and is regarded as doing an above average job of finding good talent (e.g., Diller).

 

If you read Cable Cowboy, Malone let things slip away towards the end of his tenure at TCI (a few years prior to the ill-fated AT&T buyout) especially in the cable division. There were several changes at the top. At one point one of the long term institutional investors of TCI called Malone to warn him about deterioration of operations at TCI. I am concerned that a similar situation now exists at Liberty Global. Malone is a lot older now and has been in retirement mode for a couple of years. He is either not paying enough attention to Global or not prepared to change the jockey.

 

In addition, I think European cable doesn't have the same economics as US cable. Of course it is easier to see that in hindsight. But the choice of CEO is completely in Malone's hands. I think he made a big mistake by letting Fries run Global for so long with so little to show for it.

[scorpioncapital]

"EU regulations are too strict to have CHTR returns, plus Mike is no Rutledge."

 

are they too loose or too strict ? eu seems more competitive but who determines pricing? market or government? via forced capex or price increases? usa has this duopoly structure and regs allow reasonable returns. not sure how long that lasts though with 5g and musk's satellites. this utility like business is being assaulted on all sides in time.

malone probably wants out but it seems a case of easier to enter (we want your money absolutely!) and harder to exit (now wait just a second, you want to sell you say?). the Germans much prefer to get cash then to spend cash. no wonder freenet agreed to getting paid rather than having to pay. let's hope there is an ipo market for all these subs in 5 years...

 

[ander]

"EU regulations are too strict to have CHTR returns, plus Mike is no Rutledge."

 

are they too loose or too strict ? eu seems more competitive but who determines pricing? market or government? via forced capex or price increases? usa has this duopoly structure and regs allow reasonable returns. not sure how long that lasts though with 5g and musk's satellites. this utility like business is being assaulted on all sides in time.

malone probably wants out but it seems a case of easier to enter (we want your money absolutely!) and harder to exit (now wait just a second, you want to sell you say?). the Germans much prefer to get cash then to spend cash. no wonder freenet agreed to getting paid rather than having to pay. let's hope there is an ipo market for all these subs in 5 years...

 

 

on the "5g and musk's satellites" point, is there a real concern with fixed mobile convergence? Re: 5G, if LBTYK has a mobile presence, they should do reasonably well going forward. Question becomes do they lose the advantage of having laid the fiber-to-the-home? My understanding is that the 5G will need a fiber backbone so in some cases the FTTH that was put down will not be as advantageous. The Musk satellites or FB satellites, etc projected pricing is relatively similar if not a little bit more than broadband -- unless if those guys will do things as a loss leader - so my assumption was that it will help rural markets or markets that do not have broadband access currently. Do those points sound right?

 

[Spekulatius]

The problem with Liberty Global is Fries. He is a terrible operator of cable business. Count on him to pi$$ away the cash they got from Vodaphone deal. For the Swiss business I have some sympathy for him as he tried to sell it to Sunrise before. I am beginning to think the real genius in the cable business is not Malone but Rutledge. And US appears to be a far better cable market than Europe or LatAm since wireless/fixed broadband convergence is not necessary to do well. If you look at Liberty's cable portfolio, the US (Charter) investment is doing great and outside investments (Global/LatAm) are not.

 

I am not sure if it’s just Fries to blame. I realized a while ago that the cable business environment In the US is unique in that it gives opportunity for good returns. The cable business almost anywhere else has far worse economics and that’s why LBTYA and LILAK and TIGO don’t work.

[Munger_Disciple]

The problem with Liberty Global is Fries. He is a terrible operator of cable business. Count on him to pi$$ away the cash they got from Vodaphone deal. For the Swiss business I have some sympathy for him as he tried to sell it to Sunrise before. I am beginning to think the real genius in the cable business is not Malone but Rutledge. And US appears to be a far better cable market than Europe or LatAm since wireless/fixed broadband convergence is not necessary to do well. If you look at Liberty's cable portfolio, the US (Charter) investment is doing great and outside investments (Global/LatAm) are not.

 

I am not sure if it’s just Fries to blame. I realized a while ago that the cable business environment In the US is unique in that it gives opportunity for good returns. The cable business almost anywhere else has far worse economics and that’s why LBTYA and LILAK and TIGO don’t work.

 

As I wrote in my previous post, I agree that US has better economics than Europe and perhaps LatAm. But if you followed Fries & his conf calls, he has been permanently bullish and never admitted the problems. He was saying Virgin Media was going to get 30% returns on capital on fiber expansion. He bought CWC at a crazy multiple (when LiLAC was part of Global). He also runs European business from Colorado, not an optimal choice for HQ. Plus he is ridiculously overpaid. Overall he has been a big negative for Liberty Global shareholders IMHO. While he is not the only problem, he is a large part of the problem.

[jgyetzer]

I am not sure if it’s just Fries to blame. I realized a while ago that the cable business environment In the US is unique in that it gives opportunity for good returns. The cable business almost anywhere else has far worse economics and that’s why LBTYA and LILAK and TIGO don’t work.

 

Do you think that’s due to regulatory differences or greater value that Americans place on entertainment/connectivity?

[Spekulatius]

I am not sure if it’s just Fries to blame. I realized a while ago that the cable business environment In the US is unique in that it gives opportunity for good returns. The cable business almost anywhere else has far worse economics and that’s why LBTYA and LILAK and TIGO don’t work.

 

Do you think that’s due to regulatory differences or greater value that Americans place on entertainment/connectivity?

 

It’s a combination of legacy (TV started out and is for the most part free), regulation and the presence of national phone carriers (also owning or competing with cable and often keeping prices low).

 

TV in Germany was state sponsored and free via OTA 3 channels only) until 1984 when two private channels got a license too for add supported programming. Later, in the 90’s satellite  TV got started, but it was all ad supported only so nobody really had to lay anything except the smallish TV tax the Public channel (which is easy to avoid laying)

 

For a mobile, cable and internet’s Deutsche Telekom was always the incumbent and generally had scale and often existing infrastructure in place and kept prices low.

 

I think in the US, prices might have been lower when ATT had not been broken up around 1984 in ATT long distance and the Baby bells ironically, but we can’t know for sure.

[WayWardCloud]

I am not sure if it’s just Fries to blame. I realized a while ago that the cable business environment In the US is unique in that it gives opportunity for good returns. The cable business almost anywhere else has far worse economics and that’s why LBTYA and LILAK and TIGO don’t work.

 

Do you think that’s due to regulatory differences or greater value that Americans place on entertainment/connectivity?

 

It’s a combination of legacy (TV started out and is for the most part free), regulation and the presence of national phone carriers (also owning or competing with cable and often keeping prices low).

 

TV in Germany was state sponsored and free via OTA 3 channels only) until 1984 when two private channels got a license too for add supported programming. Later, in the 90’s satellite  TV got started, but it was all ad supported only so nobody really had to lay anything except the smallish TV tax the Public channel (which is easy to avoid laying)

 

For a mobile, cable and internet’s Deutsche Telekom was always the incumbent and generally had scale and often existing infrastructure in place and kept prices low.

 

I think in the US, prices might have been lower when ATT had not been broken up around 1984 in ATT long distance and the Baby bells ironically, but we can’t know for sure.

 

^ All of this plus two more things:

- European countries are smaller, which makes for a smaller area to blanket with your cell towers.

- Denser legacy urban planning meant to be walked and biked through instead of the American car culture, which makes your copper/HFC/fiber cheaper per home.

 

Both those impairments in the US make it naturally harder to justify an overbuild from competition and paradoxically make for a better business even though the capex requirement per customer is higher.

[scorpioncapital]

"Musk satellites or FB satellites, etc projected pricing is relatively similar if not a little bit more than broadband -- unless if those guys will do things as a loss leader - so my assumption was that it will help rural markets or markets that do not have broadband access currently. Do those points sound right"

 

Yes, I agree that 5G will be better for Global, for example, Charter hasn't even started the convergence yet in the US, just via MVNO.

 

Do you think satellite broadband has a 'coolness factor'? I have seen in the past sometimes good marketing and a new technology brings out people even if the price is the same! We are in a high liquidity, money is free world so you tend to get overbuilding, or misguided building. But I can easily imagine a future (say more inflationary) where suddenly the money stops and uneconomic developments suddenly become extremely uncompetitive. Of course by that time you've already built the asset. That's why they say that negative rates can distort market signals. You have both collateral damage and have no idea if something was worth doing or not in a more normal environment.

 

 

 

[Spekulatius]

"Musk satellites or FB satellites, etc projected pricing is relatively similar if not a little bit more than broadband -- unless if those guys will do things as a loss leader - so my assumption was that it will help rural markets or markets that do not have broadband access currently. Do those points sound right"

 

Yes, I agree that 5G will be better for Global, for example, Charter hasn't even started the convergence yet in the US, just via MVNO.

 

Do you think satellite broadband has a 'coolness factor'? I have seen in the past sometimes good marketing and a new technology brings out people even if the price is the same! We are in a high liquidity, money is free world so you tend to get overbuilding, or misguided building. But I can easily imagine a future (say more inflationary) where suddenly the money stops and uneconomic developments suddenly become extremely uncompetitive. Of course by that time you've already built the asset. That's why they say that negative rates can distort market signals. You have both collateral damage and have no idea if something was worth doing or not in a more normal environment.

 

Satellite broadband has likely line of sight issues and won’t work indoors. You will still need some sort of antenna. I do think it is an alternative for rural and they will likely try to grab some  A-CAM funding. That may mean competition for the $NUVR or $LICT possibly.