LBTYA - Liberty Global

[Fat Pitch]

Posted this in a separate thread but really meant here. To the people who own some of these Liberty tracking stocks: what is it you actually own when you own a tracking stock? Is it a bonafide, no shit, economic interest in a sub, but with no voting rights? Or is it more like a promise that your stock will participate in the economics of the sub?

 

A tracking stock is merely an economic interest in the performance of what is being tracked. What's being tracked is merely sliced up from the parent's balance sheet but it's still technically part of it. A common use of tracking stocks is to create a currency to speed up acquisitions but still have access to the parent company balance sheet.

[Liberty]

Posted this in a separate thread but really meant here. To the people who own some of these Liberty tracking stocks: what is it you actually own when you own a tracking stock? Is it a bonafide, no shit, economic interest in a sub, but with no voting rights? Or is it more like a promise that your stock will participate in the economics of the sub?

 

My understanding is that technically, you're really a shareholder in the parent, Liberty Global. But in practice, you will track the assets of the tracking stock.

 

Or the lazy way to think about it is, if it's good enough for John Malone, it's good enough for me.

[ni-co]

Posted this in a separate thread but really meant here. To the people who own some of these Liberty tracking stocks: what is it you actually own when you own a tracking stock? Is it a bonafide, no shit, economic interest in a sub, but with no voting rights? Or is it more like a promise that your stock will participate in the economics of the sub?

 

A tracking stock is merely an economic interest in the performance of what is being tracked. What's being tracked is merely sliced up from the parent's balance sheet but it's still technically part of it. A common use of tracking stocks is to create a currency to speed up acquisitions but still have access to the parent company balance sheet.

 

I answered it there, too  ;)

 

The point of tracking stocks is that they can be the first step towards a real spin-off. This can be really interesting when they aren't quite ready for prime time and you want to keep the two companies' balance sheets together for tax and financial reasons. This is the way John Malone uses tracking stocks, anyway. So, with tracking stocks you can participate in a kind of "pre-spin-off spin-off" but you have to trust management that prime time will come someday. Listen to maestro himself:

 

[Ham Hockers]

Posted this in a separate thread but really meant here. To the people who own some of these Liberty tracking stocks: what is it you actually own when you own a tracking stock? Is it a bonafide, no shit, economic interest in a sub, but with no voting rights? Or is it more like a promise that your stock will participate in the economics of the sub?

 

My understanding is that technically, you're really a shareholder in the parent, Liberty Global. But in practice, you will track the assets of the tracking stock.

 

Or the lazy way to think about it is, if it's good enough for John Malone, it's good enough for me.

 

So it's sort of a separation in an accounting presentation sense, but not really a true legal/structural separation. And presumably, your blow up risk is still to the entire consolidated parent?

[ni-co]

Posted this in a separate thread but really meant here. To the people who own some of these Liberty tracking stocks: what is it you actually own when you own a tracking stock? Is it a bonafide, no shit, economic interest in a sub, but with no voting rights? Or is it more like a promise that your stock will participate in the economics of the sub?

 

My understanding is that technically, you're really a shareholder in the parent, Liberty Global. But in practice, you will track the assets of the tracking stock.

 

Or the lazy way to think about it is, if it's good enough for John Malone, it's good enough for me.

 

So it's sort of a separation in an accounting presentation sense, but not really a true legal/structural separation. And presumably, your blow up risk is still to the entire consolidated parent?

 

Yes, the blow-up risk but also the financial firepower.

[Ham Hockers]

Posted this in a separate thread but really meant here. To the people who own some of these Liberty tracking stocks: what is it you actually own when you own a tracking stock? Is it a bonafide, no shit, economic interest in a sub, but with no voting rights? Or is it more like a promise that your stock will participate in the economics of the sub?

 

My understanding is that technically, you're really a shareholder in the parent, Liberty Global. But in practice, you will track the assets of the tracking stock.

 

Or the lazy way to think about it is, if it's good enough for John Malone, it's good enough for me.

 

So it's sort of a separation in an accounting presentation sense, but not really a true legal/structural separation. And presumably, your blow up risk is still to the entire consolidated parent?

 

Yes, the blow-up risk but also the financial firepower.

 

How so? I can see how you'd get the benefit of extra security (and related, more borrowing capacity?) but in a non-blowup scenario, aren't you only promised the economics of the specific subs that you're tracking?

[Liberty]

Yes, the blow-up risk but also the financial firepower.

 

How so? I can see how you'd get the benefit of extra security (and related, more borrowing capacity?) but in a non-blowup scenario, aren't you only promised the economics of the specific subs that you're tracking?

 

LiLAC will benefit from Global's balance sheet to reduce its borrowing costs, can leverage its scale to negotiate on content deals, use its technology (Horizon boxes), etc. It's still paying Global something for some services, but as a standalone it wouldn't have access to nearly what it does by being part of Global.

[rpadebet]

Yes, the blow-up risk but also the financial firepower.

 

How so? I can see how you'd get the benefit of extra security (and related, more borrowing capacity?) but in a non-blowup scenario, aren't you only promised the economics of the specific subs that you're tracking?

 

LiLAC will benefit from Global's balance sheet to reduce its borrowing costs, can leverage its scale to negotiate on content deals, use its technology (Horizon boxes), etc. It's still paying Global something for some services, but as a standalone it wouldn't have access to nearly what it does by being part of Global.

 

This is a bet on John Malone being the benevolent dictator and being as rational as he has always been. No point thinking of voting rights as JM controls everything anyway. If there is a risk of this blowing up, I am sure he would consolidate it back to take advantage of tax benefits :). Tracking stock makes sense here as Liberty mentioned it gives LILA more ability to borrow at lower rates. JM has done this in US with TCI, in Europe with LBTYA. I don't see why he would fail in Latam.

 

This was a stock I have been waiting on for a long time. The spin off dynamics are just icing on the cake. Sell Index funds Sell!!

 

[fa21212]

If you run the math on this this is seriously overvalued. It's selling at 35x 2016 FCF / share. It's not growing fast enough (they guided to mid to high single digit EBITDA growth, given historical growth rates after they get a one time benefit for synergies I would argue it's on the lower end of this range) to merit that kind of a multiple. Can they do accretive M&A? Yes. But they have to do a ton of it for you to even make reasonable 15% returns. A major headwind to M&A in the sector is the very high debt prices. They're not using debt recourse to Liberty Global Europe as a means of funding Lilac. This arrangement would essentially be a transfer of wealth from LBTYK to LILAK and John Malone is smarter in terms of taking debt risk siloed to individual entities rather than making it recourse to the group. Do the math if your cost of debt is 11% (as is the swapped cost of debt in Chile) and you're buying assets around 8x EBITDA, it's not that accretive. The reason that cable deals in Europe and the US are so accretive is because your cost of debt is more like 5%-6% even for longer dated maturities. Charter was issuing 40 year debt at 6.9% last week to fund the TWC deal. In Chile, you're getting 7 year debt at 11%. There's a massive difference in value created when the delta is that high. When you're paying 35x FCF / share, it's pretty tough for you to make money. Just look at investing in Malone Liberty related entities during the tech boom in 2000 to get a sense of what the long term ramifications are of massively overpaying for assets.

[loganc]

If you run the math on this this is seriously overvalued. It's selling at 35x 2016 FCF / share. It's not growing fast enough (they guided to mid to high single digit EBITDA growth, given historical growth rates after they get a one time benefit for synergies I would argue it's on the lower end of this range) to merit that kind of a multiple. Can they do accretive M&A? Yes. But they have to do a ton of it for you to even make reasonable 15% returns. A major headwind to M&A in the sector is the very high debt prices. They're not using debt recourse to Liberty Global Europe as a means of funding Lilac. This arrangement would essentially be a transfer of wealth from LBTYK to LILAK and John Malone is smarter in terms of taking debt risk siloed to individual entities rather than making it recourse to the group. Do the math if your cost of debt is 11% (as is the swapped cost of debt in Chile) and you're buying assets around 8x EBITDA, it's not that accretive. The reason that cable deals in Europe and the US are so accretive is because your cost of debt is more like 5%-6% even for longer dated maturities. Charter was issuing 40 year debt at 6.9% last week to fund the TWC deal. In Chile, you're getting 7 year debt at 11%. There's a massive difference in value created when the delta is that high. When you're paying 35x FCF / share, it's pretty tough for you to make money. Just look at investing in Malone Liberty related entities during the tech boom in 2000 to get a sense of what the long term ramifications are of massively overpaying for assets.

 

If LiLAC is massively overvalued, then how do you explain the transaction that was made to purchase the minority 20% of VTR using LBTYK stock at a total equity valuation of 2.1B?  The total LiLAC equity is trading at close to that value presently and the 60% of LCPR is obviously not worth zero.  Do you think LBTYK stock is also massively overvalued?  I am hard pressed to believe that Global mgmt would massively overpay for the minority VTR interest. 

 

How are you computing maintenance capex when you model FY16 FCF? 

[Liberty]

If you run the scenario where Lilac does no M&A

 

What are the chances of that happening?

[jay21]

Ok - Ebitda doubles in 10yrs. Let's use hypothetical numbers to illustrate at 8x:

 

Current EBITDA of $1, TEV $8, Debt $5, Equity $3

 

Future EBITDA of $2, TEV $16, Debt $10, Equity $6

 

You get no FCF during that period b/c of interest pmts and CapEx etc but equity value doubles and you raise $5 of debt to go to equity, pay for CapEx or do deals. Can still be a good return, no?

[loganc]

Logan, good question. When I spoke with the company about the valuation they paid (it does seem very high in hindsight, but this was due to the massive depreciation of the Chilean peso) they didn't have a good answer as to why it made sense. Obviously the investment hasn't done well so far. It's a fair point though given that they are very smart in terms of transactions that they do. It still doesn't get around the fact that it's trading at 35x FCF / share in 2016 and the valuation is very high. The other thing to keep in mind is a $400mm investment in Liberty Global is peanuts. Doesn't really make that much of a difference to total equity returns if that grows at 5% or 15% given how small the investment is. Liberty Global Europe is trading at a high teens multiple in terms of FCF / share and can grow FCF / share at 20% a year with no M&A. If you run the scenario where Lilac does no M&A you're literally making 5% compounded returns assuming a 15x FCF / share exit. I have maintenance capex running starting off at 19% of sales and getting down to 15-16% over time. I guess my question to you is, if you like the stock a lot, what's the scenario in which you make a lot of money on this? How do you make say 25%-30% compounded returns. I've done sensitivity on a wide variety of M&A scenarios and I'm tough pressed to get to very high return levels given cost of debt in Latin America combined with asset valuations in the region.

 

Maintenance capex of 19% of sales?  I think that is what the pro forma entity is spending on all capex at this point and the entity is growing.  In any event, if you have capex as a percentage of sales ramping down, then looking at the multiple in 2016 may not be the best way to say whether or not something is overvalued.  I doubt LiLAC generates any free cash flow based straight off of the cash flow statement in 2015, but I wouldn't say it is overvalued because it is trading at an infinite multiple. 

 

In terms of running scenarios with no M&A, are you modeling equity shrink?  In my view there will be real cash above both growth and maintenance capital spending that could be used to repurchase equity over the next 5 years.  When you talk about getting 20% FCF per share growth from Global Europe, you obviously are assuming the levered equity shrink. 

 

In terms of the 400MM of LBTYK stock, I agree that it is small relative to the size of the enterprise.  However, I am hard pressed to believe that anyone wants to just burn nearly half a billion dollars. 

 

Getting 25% to 30% compounded seems high relative to the numbers that I have run, but my numbers without M&A, assuming equity shrink, and no incremental debt can get me closer to something like high teens IRR.  I would imagine that I am assuming higher growth rates and lower maintenance capital spending than you are modeling.  Obviously, there would be upside to my estimates if they could engage in accretive M&A and there would be downside due to currency going against you, etc. 

[ni-co]

Do the math if your cost of debt is 11% (as is the swapped cost of debt in Chile) and you're buying assets around 8x EBITDA, it's not that accretive.

 

You may rest assured that Malone & Co. did the math on this. If there is a management team out there that does the math it's Liberty's. Do you believe that Malone is paying 6.5% above the 10y Chilean government bond yield? This is just a crazy assumption.

 

In January 2014, VTR issued 6.875% $1.4 billion of Senior Secured Notes due 2024.

 

Why would you buy Latin American assets with fully swapped debt?

[Fat Pitch]

Logan, would love to discuss with you more offline. In terms of your questions, with a 5 year levered equity shrink with a 15x FCF / share exit multiple I get to a 5% compounded return at $45. This assumes capex as a % of sales gets to 17% or so. I would argue that if you taken a maintenance FCF number, while you may put get a higher FCF number, you should put a lower multiple on it because it's not growing. I wouldn't pay 15x FCF / share for a no growth maintenance FCF number for Latin American cable assets that have very high debt costs. What's your math on getting a much higher IRR with just a levered equity shrink and no M&A? Are you assuming a very high exit multiple in terms of FCF / share?

 

You are dealing with a cable company with a tiny asset base. 1 or 2 M&A will change the company significantly. Scale will improve and content costs will drop. The company also has the ability to pass on inflation costs semi annually. The higher interest is just the cost of doing business in a region with above average inflation, but with above average growth. The upside here is the company pivoting into media/content once they obtain a larger subscriber base.

 

If you read Cable Cowboy you'll realize TCI started off as a cable company with high debt and interest rates. There was plenty of struggle but once the scale kicked it... well you know how the story ended :P

[loganc]

Logan, would love to discuss with you more offline. In terms of your questions, with a 5 year levered equity shrink with a 15x FCF / share exit multiple I get to a 5% compounded return at $45. This assumes capex as a % of sales gets to 17% or so. I would argue that if you taken a maintenance FCF number, while you may put get a higher FCF number, you should put a lower multiple on it because it's not growing. I wouldn't pay 15x FCF / share for a no growth maintenance FCF number for Latin American cable assets that have very high debt costs. What's your math on getting a much higher IRR with just a levered equity shrink and no M&A? Are you assuming a very high exit multiple in terms of FCF / share?

 

I think your point about exit multiple is fair.  I also believe that the substantial difference between our numbers is likely due to differences in OCF growth rate beyond FY15.  I certainly could be overly optimistic.  Check your DM about offline discussion.

[Fat Pitch]

Fat Pitch, how specifically will 1 or 2 M&A deals change the company. What are your underlying assumptions. Chile's cost of debt is 11%, Megacable / Televise are at 8-9%. Megacable trades at roughly 10x EBITDA. If you purchase an asset at 10x EBITDA with 8% debt, it's not that accretive. What are your assumptions that make you believe that this entity will go from compounding at 5% to 25% through a single deal or two deals?

 

You just have to go with the words from Mike Fries

• "We think there’s a significant opportunity to expand in this region where broadband penetration is just 25% and 6 of 10 homes don’t have pay-TV."
  
• "In addition to the organic growth we see in Chile and PR, we’re pretty certain that our M&A experience and 20+ years in the region will create some very interesting consolidation opportunities that may get lost as part of the bigger group."
  

 

There's lots of fragmented cable systems that are adjacent to their current systems. It's very difficult to model potential M&A, but the business model that Malone runs is pretty simple and effective. Just think of these cable systems as factories with low utilization rates. The debt to finance them may be high and the present OCF may look low, but that spare capacity will be used with very little additional capital down the road.

 

[rogermunibond]

Chile market has a few cable/broadband providers they could acquire - Entel and GTD.  And then maybe a deal with AMX or Telefonica could get through the regulators?

 

Puerto Rico market is pretty saturated.

[Munger_Disciple]

There are synergies on the content side across Latin America for LILA where most of the programming is in Spanish though it is hard to quantify. LILA will try to play the old TCI game in Latam. In the end this is a jockey stock.

[folivera13]

I like the business as a "start-up" with many potential M&A opportunities as many here also believe.  A couple of interesting observations (maybe they have been mentioned before):

 

- Searchlight (which owns 40% of Liberty Puerto Rico) was co-founded by Eric Zinterhofer, who is the current Chairman of Charter (Rutledge will become Chairman post merger)

 

- Programming in Puerto Rico (I'm Puerto Rican) closely resembles domestic US programming, which is why a US operator could extract significant synergies by purchasing Liberty PR.  Malone states this in his mavericks lecture (which is on Youtube).  I don't think you have much programming synergies between PR and other areas in LatAm.

 

- This brings me to my final point- you have a PE firm that will eventually need to exit and the potential of a US operator (like CHTR) to extract significant synergies in a sale. I think LiLAC could eventually exit PR and put the capital to work elsewhere or they could partner with a US based operator to buy Searchlight's stake.  If CHTR buys the stake- it could lead to CHTR expanding outside of the US down the road.

 

One more thing: many people seem to think LiLAC will look at Mexico for M&A opportunities.  I spoke with a former Liberty PR executive- he believes Peru, Ecuador, Colombia or Panama are more likely.

[folivera13]

Liberty Global CEO says investment in Latin America is the next big idea

 

http://www.bizjournals.com/denver/blog/finance_etc/2015/07/at-the-biennialliberty-global-ceo-says-investment.html

[Liberty]

Looks like the indexes truly are done dumping LiLAC, because volumes have gone down and sellers are harder to find. Both the As and the Cs are up around 8% right now.

[merkhet]

Didn't the same thing happen a few days ago?

[Liberty]

Didn't the same thing happen a few days ago?

 

Similar, if not quite as dramatic.

[innerscorecard]

What determines index dumping timing?