LIBERTY GLOBAL PLC LBTYA
June 28, 2018 - 4:40am EST by
slim
2018 2019
Price: 28.32 EPS 0 0
Shares Out. (in M): 798 P/E 0 0
Market Cap (in $M): 22,606 P/FCF 0 0
Net Debt (in $M): 39,904 EBIT 0 0
TEV ($): 62,510 TEV/EBIT 0 0

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Description

I recommend the purchase of Liberty Global plc common stock.  Last month, LBTYA agreed to sell its operations in Germany (held through its subsidiary Unitymedia), Hungary, Romania, and the Czech Republic to Vodafone Group plc for approximately $22.7 billion.  The sales price represents a multiple of approximately 11.5x 2017 OIBDA, over 2.5 turns higher than the multiple at which LBTYA trades, and will yield cash proceeds of approximately $12.7 billion (over 50% of LBTYA's market capitalization).  The stock price declined on the news and remains below the level at which it traded before the deal was announced.  LBTYA was attractive prior to the deal's announcement; proforma for the Vodafone transaction it is now even more attractive, with cable operations trading at a reasonable valuation plus an enormous cash stockpile in the hands of John Malone, one of this generation's best capital allocators.

Company Background and Recent Transactions.  LBTYA is the largest international cable company with operations in 12 European countries.  The company offers video, broadband internet, and fixed line and (in certain markets) mobile telephone services.  Operations are located in the UK and Ireland (Virgin Media), Germany (Unitymedia), Belgium (Telenet, which itself is publicly-traded; LBTYA owns 58%), the Netherlands (a 50/50 joint venture between LBTYA's Ziggo subsidiary and Vodafone), and Switzerland, Austria, Poland, Slovakia, Hungary, Romania, and the Czech Republic (UPC).

goirish posted a comprehensive write-up on LBTYA in June 2016, and I refer readers to his report for an excellent review of LBTYA's business.  I will focus in this write-up on the significant changes that have occurred in the past two years.

First, LBTYA completed a hard spin of Liberty Latin America at the end of 2017, and no longer holds an interest in Liberty Latin America.

Second, in December 2017, LBTYA agreed to sell its Austrian operations (UPC Austria) to T-Mobile Austria (a Deutsche Telekom subsidiary) for approximately $2.2 billion in cash.  The sale price represents a multiple of nearly 11x UPC Austria’s estimated 2017 OIBDA.  The transaction is expected to close the second half of 2018.

Third, this past May, LBTYA entered into an agreement to sell its Unitymedia operations in Germany and its UPC operations in Hungary, Romania, and the Czech Republic to Vodafone for approximately $22.7 billion, resulting in cash proceeds of approximately $12.7 billion after the assumption of debt.  The transaction is expected to close in mid-2019.

LBTYA, which historically has been notoriously complex to analyze, will upon completion of these transactions consist of a relatively straightforward collection of businesses:  (1) wholly-owned cable operations operated by Virgin Media in the UK and Ireland and by UPC in Switzerland, Poland, and Slovakia; (2) a 58% interest in publicly traded Telenet, which operates cable and mobile systems in Belgium; (3) a 50% interest (through its Ziggo subsidiary) in a joint venture with Vodafone operating cable and mobile systems in the Netherlands; and (4) a collection of media and communications investments, most of which are publicly-traded.  In addition, the nearly $15 billion in cash proceeds from the sale of the Austrian operations and the sale to Vodafone will constitute approximately 60% of LBTYA's current market cap.

Because the transaction includes business operations in multiple countries, under EU antitrust laws the European Commission, rather than German Federal Cartel Office, has jurisdiction for regulatory approval.  This was by design, as the parties wished to avoid review by the Federal Cartel Office, which has generally been resistant to cable consolidation.  This is discussed further below.

Valuation.  Because of its complexity and ever-changing mix of assets, analysts have typically taken a variety of approaches to value LBTYA.  In calculating a company-wide EV/OIBDA multiple I prefer the following approach:  I include (obviously) the OIBDA and debt of LBTYA's wholly owned subsidiaries (after the transaction, Virgin Media and UPC's operations in Switzerland, Poland, and Slovakia).  I also include LBTYA's 50% share of the OIBDA and debt of the Ziggo Vodafone JV, notwithstanding that the JV is equity-accounted under GAAP.  However, notwithstanding that Telenet's financials are consolidated with LBTYA's, I exclude Telenet's OIBDA and debt, and instead treat LBTYA's 58% interest as an investment.

Below are OIBDA and enterprise value tables shown two ways:  (1) consolidated OIBDA and enterprise value (i.e., including 100% of Telenet's OIBDA and debt and not including any Ziggo Vodafone JV OIBDA or debt), with no adjustment for the pending sale of the Austrian operations and the pending sale to Vodafone; and (2) adjusted OIBDA and enterprise value (i.e., treating Liberty's interest in Telenet as an investment and including 50% of the Ziggo Vodafone JV's OIBDA and debt), proforma for the pending sale of the Austrian operations and the pending sale to Vodafone.  Amounts are $US millions.

Consolidated OIBDA

     

2018

 

% change

 

2019

Virgin Media

 

3,039

 

4.5%

 

3,176

Unitymedia (Germany)

 

1,785

 

5.0%

 

1,874

Telenet (Belgium)

 

1,358

 

4.0%

 

1,412

Switzerland/Austria

 

1,054

 

0.0%

 

1,054

Central/Eastern Europe

 

527

 

2.0%

 

538

Corporate and other

 

(400)

 

N/A

 

(400)

               

Total consolidated OIBDA

 

7,363

 

4.0%

 

7,654

 

Consolidated Enterprise Value

Market capitalization

       
 

Shares (millions)

 

798

   
 

Share price

 

28.32

   
 

Market capitalization

     

22,606

Debt

       
 

Virgin Media notes and credit facilities

 

14,620

   
 

Unitymedia notes and credit facilities

 

8,274

   
 

UPC notes and credit facilities

 

6,535

   
 

Telenet notes and credit facilities

 

4,828

   
 

Vendor financing - Unitymedia

 

440

   
 

Vendor financing - other

 

3,328

   
 

ITV Collar Loan

 

1,517

   
 

Sumitomo Share Loan

 

615

   
 

Derivative-related debt instruments

 

586

   
 

Sumitomo Collar Loan

 

179

   
 

Other

 

411

   
 

Capital lease obligations - Unitymedia

 

734

   
 

Capital lease obligations - other

 

717

   
 

Debt

     

42,783

Less cash

     

(555)

Less investments

       
 

ITV plc

 

913

   
 

Sumitomo

 

750

   
 

Lionsgate

 

125

   
 

Casa

 

76

   
 

ITI Neovision

 

169

   
 

Other

 

291

   
 

Total

     

(2,324)

           

Enterprise value

     

62,510

           
     

2018

 

2019

EV/OIBDA

 

8.5

 

8.2

Net Debt/OIBDA

 

5.7

 

5.5

 

OIBDA - Adjusted and Proforma for Transactions

     

2018

 

% change

 

2019

Virgin Media

 

3,039

 

5%

 

3,176

Vodafone Ziggo (50%)

 

983

 

2%

 

1,003

Switzerland

 

820

 

0%

 

820

Central/Eastern Europe

 

247

 

2%

 

252

Corporate and other

 

(400)

 

N/A

 

(400)

               

OIBDA-adjusted/proforma for transactions

 

4,689

 

3.5%

 

4,851

 

Enterprise Value – Adjusted and Proforma for Transactions

Market capitalization

       
 

Shares (millions)

 

798

   
 

Share price

 

28.32

   
 

Market capitalization

     

22,606

Debt – adjusted/proforma

       
 

Virgin Media notes and credit facilities

 

14,620

   
 

UPC notes and credit facilities

 

6,535

   
 

Vodafone Ziggo 3rd party debt (50%)

 

7,483

   
 

Vendor financing

 

3,328

   
 

ITV Collar Loan

 

1,517

   
 

Sumitomo Share Loan

 

615

   
 

Derivative-related debt instruments

 

586

   
 

Sumitomo Collar Loan

 

179

   
 

Other

 

411

   
 

Capital lease obligations

 

717

   
 

Debt

     

35,990

Less cash

       
 

Cash balance 3/31/2018

 

555

   
 

Austria proceeds

 

2,200

   
 

Germany/CEE proceeds net of debt

 

12,500

   
 

Total cash

     

(15,255)

Less investments

       
 

Telenet

 

3,206

   
 

ITV plc

 

913

   
 

Sumitomo

 

750

   
 

Lionsgate

 

125

   
 

Casa

 

76

   
 

ITI Neovision

 

169

   
 

Other

 

291

   
 

Total

     

(5,530)

           

Enterprise value - adjusted/proforma

     

37,811

           
     

2018

 

2019

EV/OIBDA

 

8.1

 

7.8

Net Debt/OIBDA

 

4.4

 

4.3

Three points regarding the post-transaction valuation:  (1) A multiple of 7.8x, while not screaming cheap, is not demanding, especially in light of the pending deal multiples of 11x or more.  (2) The foregoing analysis does not take into account LBTYA's sizable tax assets.  (3) Treating Telenet as an investment rather than a consolidated subsidiary increases the as-adjusted multiples, as Telenet itself is trading at relatively modest multiples of 7.6x (2018) and 7.3x (2019).

LBTYA can also be valued on a sum of the parts basis.  My back of the napkin SOTP, valuing Virgin Media at 10x 2018 OIBDA, LBTYA's 50% interest in the ZiggoVodafone JV at 10x 2018 OIBDA, UPC at 7x 2018 OIBDA, corporate overhead at 8x 2018 OIBDA, and investments (including Telenet) at market value, and including no value for tax assets, yields a per share value of $37.

Risks.

The primary risk is that the Vodafone transaction does not receive regulatory approval, or that approval is granted with conditions unacceptable to Vodafone such that it terminates the transaction (there is 250 million euro break fee).

By including Eastern European assets (Hungary, Romania, Czech Republic) in the sale, the parties structured the transaction to fall within the jurisdiction of the European Commission antitrust authority, thereby avoiding review by the German Federal Cartel Office.  The Federal Cartel Office has historically opposed cable consolidation, either by imposing significant remedies or rejecting such deals.  The parties expect the European Commission to provide a better reception, and LBTYA and Vodafone have both made persuasive arguments that the transaction will enhance broadband competition and investment (a priority of the European Commission) and that the transaction falls well within prior European Commission precedents.  However, Deutsche Telekom can be expected to vigorously oppose the transaction, and it remains to be seen how much influence the German government can bring to bear on the ultimate decision.

Another risk is poor operational execution by LBTYA.  LBTYA has had several operational missteps the past few years (e.g., Switzerland, the Netherlands, and Liberty Latin America) and it is fair to say management has lost some credibility with investors in this regard.

Finally, pending completion of the transactions LBTYA will maintain high financial leverage, as it always has.  Thus, any reduction in OIBDA multiples will have an outsized effect on the stock price.

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

Regulatory approval of the sale to Vodafone

Use of transaction proceeds (stock repurchases, value-enhancing strategic acquisitions)

    sort by    

    Description

    I recommend the purchase of Liberty Global plc common stock.  Last month, LBTYA agreed to sell its operations in Germany (held through its subsidiary Unitymedia), Hungary, Romania, and the Czech Republic to Vodafone Group plc for approximately $22.7 billion.  The sales price represents a multiple of approximately 11.5x 2017 OIBDA, over 2.5 turns higher than the multiple at which LBTYA trades, and will yield cash proceeds of approximately $12.7 billion (over 50% of LBTYA's market capitalization).  The stock price declined on the news and remains below the level at which it traded before the deal was announced.  LBTYA was attractive prior to the deal's announcement; proforma for the Vodafone transaction it is now even more attractive, with cable operations trading at a reasonable valuation plus an enormous cash stockpile in the hands of John Malone, one of this generation's best capital allocators.

    Company Background and Recent Transactions.  LBTYA is the largest international cable company with operations in 12 European countries.  The company offers video, broadband internet, and fixed line and (in certain markets) mobile telephone services.  Operations are located in the UK and Ireland (Virgin Media), Germany (Unitymedia), Belgium (Telenet, which itself is publicly-traded; LBTYA owns 58%), the Netherlands (a 50/50 joint venture between LBTYA's Ziggo subsidiary and Vodafone), and Switzerland, Austria, Poland, Slovakia, Hungary, Romania, and the Czech Republic (UPC).

    goirish posted a comprehensive write-up on LBTYA in June 2016, and I refer readers to his report for an excellent review of LBTYA's business.  I will focus in this write-up on the significant changes that have occurred in the past two years.

    First, LBTYA completed a hard spin of Liberty Latin America at the end of 2017, and no longer holds an interest in Liberty Latin America.

    Second, in December 2017, LBTYA agreed to sell its Austrian operations (UPC Austria) to T-Mobile Austria (a Deutsche Telekom subsidiary) for approximately $2.2 billion in cash.  The sale price represents a multiple of nearly 11x UPC Austria’s estimated 2017 OIBDA.  The transaction is expected to close the second half of 2018.

    Third, this past May, LBTYA entered into an agreement to sell its Unitymedia operations in Germany and its UPC operations in Hungary, Romania, and the Czech Republic to Vodafone for approximately $22.7 billion, resulting in cash proceeds of approximately $12.7 billion after the assumption of debt.  The transaction is expected to close in mid-2019.

    LBTYA, which historically has been notoriously complex to analyze, will upon completion of these transactions consist of a relatively straightforward collection of businesses:  (1) wholly-owned cable operations operated by Virgin Media in the UK and Ireland and by UPC in Switzerland, Poland, and Slovakia; (2) a 58% interest in publicly traded Telenet, which operates cable and mobile systems in Belgium; (3) a 50% interest (through its Ziggo subsidiary) in a joint venture with Vodafone operating cable and mobile systems in the Netherlands; and (4) a collection of media and communications investments, most of which are publicly-traded.  In addition, the nearly $15 billion in cash proceeds from the sale of the Austrian operations and the sale to Vodafone will constitute approximately 60% of LBTYA's current market cap.

    Because the transaction includes business operations in multiple countries, under EU antitrust laws the European Commission, rather than German Federal Cartel Office, has jurisdiction for regulatory approval.  This was by design, as the parties wished to avoid review by the Federal Cartel Office, which has generally been resistant to cable consolidation.  This is discussed further below.

    Valuation.  Because of its complexity and ever-changing mix of assets, analysts have typically taken a variety of approaches to value LBTYA.  In calculating a company-wide EV/OIBDA multiple I prefer the following approach:  I include (obviously) the OIBDA and debt of LBTYA's wholly owned subsidiaries (after the transaction, Virgin Media and UPC's operations in Switzerland, Poland, and Slovakia).  I also include LBTYA's 50% share of the OIBDA and debt of the Ziggo Vodafone JV, notwithstanding that the JV is equity-accounted under GAAP.  However, notwithstanding that Telenet's financials are consolidated with LBTYA's, I exclude Telenet's OIBDA and debt, and instead treat LBTYA's 58% interest as an investment.

    Below are OIBDA and enterprise value tables shown two ways:  (1) consolidated OIBDA and enterprise value (i.e., including 100% of Telenet's OIBDA and debt and not including any Ziggo Vodafone JV OIBDA or debt), with no adjustment for the pending sale of the Austrian operations and the pending sale to Vodafone; and (2) adjusted OIBDA and enterprise value (i.e., treating Liberty's interest in Telenet as an investment and including 50% of the Ziggo Vodafone JV's OIBDA and debt), proforma for the pending sale of the Austrian operations and the pending sale to Vodafone.  Amounts are $US millions.

    Consolidated OIBDA

         

    2018

     

    % change

     

    2019

    Virgin Media

     

    3,039

     

    4.5%

     

    3,176

    Unitymedia (Germany)

     

    1,785

     

    5.0%

     

    1,874

    Telenet (Belgium)

     

    1,358

     

    4.0%

     

    1,412

    Switzerland/Austria

     

    1,054

     

    0.0%

     

    1,054

    Central/Eastern Europe

     

    527

     

    2.0%

     

    538

    Corporate and other

     

    (400)

     

    N/A

     

    (400)

                   

    Total consolidated OIBDA

     

    7,363

     

    4.0%

     

    7,654

     

    Consolidated Enterprise Value

    Market capitalization

           
     

    Shares (millions)

     

    798

       
     

    Share price

     

    28.32

       
     

    Market capitalization

         

    22,606

    Debt

           
     

    Virgin Media notes and credit facilities

     

    14,620

       
     

    Unitymedia notes and credit facilities

     

    8,274

       
     

    UPC notes and credit facilities

     

    6,535

       
     

    Telenet notes and credit facilities

     

    4,828

       
     

    Vendor financing - Unitymedia

     

    440

       
     

    Vendor financing - other

     

    3,328

       
     

    ITV Collar Loan

     

    1,517

       
     

    Sumitomo Share Loan

     

    615

       
     

    Derivative-related debt instruments

     

    586

       
     

    Sumitomo Collar Loan

     

    179

       
     

    Other

     

    411

       
     

    Capital lease obligations - Unitymedia

     

    734

       
     

    Capital lease obligations - other

     

    717

       
     

    Debt

         

    42,783

    Less cash

         

    (555)

    Less investments

           
     

    ITV plc

     

    913

       
     

    Sumitomo

     

    750

       
     

    Lionsgate

     

    125

       
     

    Casa

     

    76

       
     

    ITI Neovision

     

    169

       
     

    Other

     

    291

       
     

    Total

         

    (2,324)

               

    Enterprise value

         

    62,510

               
         

    2018

     

    2019

    EV/OIBDA

     

    8.5

     

    8.2

    Net Debt/OIBDA

     

    5.7

     

    5.5

     

    OIBDA - Adjusted and Proforma for Transactions

         

    2018

     

    % change

     

    2019

    Virgin Media

     

    3,039

     

    5%

     

    3,176

    Vodafone Ziggo (50%)

     

    983

     

    2%

     

    1,003

    Switzerland

     

    820

     

    0%

     

    820

    Central/Eastern Europe

     

    247

     

    2%

     

    252

    Corporate and other

     

    (400)

     

    N/A

     

    (400)

                   

    OIBDA-adjusted/proforma for transactions

     

    4,689

     

    3.5%

     

    4,851

     

    Enterprise Value – Adjusted and Proforma for Transactions

    Market capitalization

           
     

    Shares (millions)

     

    798

       
     

    Share price

     

    28.32

       
     

    Market capitalization

         

    22,606

    Debt – adjusted/proforma

           
     

    Virgin Media notes and credit facilities

     

    14,620

       
     

    UPC notes and credit facilities

     

    6,535

       
     

    Vodafone Ziggo 3rd party debt (50%)

     

    7,483

       
     

    Vendor financing

     

    3,328

       
     

    ITV Collar Loan

     

    1,517

       
     

    Sumitomo Share Loan

     

    615

       
     

    Derivative-related debt instruments

     

    586

       
     

    Sumitomo Collar Loan

     

    179

       
     

    Other

     

    411

       
     

    Capital lease obligations

     

    717

       
     

    Debt

         

    35,990

    Less cash

           
     

    Cash balance 3/31/2018

     

    555

       
     

    Austria proceeds

     

    2,200

       
     

    Germany/CEE proceeds net of debt

     

    12,500

       
     

    Total cash

         

    (15,255)

    Less investments

           
     

    Telenet

     

    3,206

       
     

    ITV plc

     

    913

       
     

    Sumitomo

     

    750

       
     

    Lionsgate

     

    125

       
     

    Casa

     

    76

       
     

    ITI Neovision

     

    169

       
     

    Other

     

    291

       
     

    Total

         

    (5,530)

               

    Enterprise value - adjusted/proforma

         

    37,811

               
         

    2018

     

    2019

    EV/OIBDA

     

    8.1

     

    7.8

    Net Debt/OIBDA

     

    4.4

     

    4.3

    Three points regarding the post-transaction valuation:  (1) A multiple of 7.8x, while not screaming cheap, is not demanding, especially in light of the pending deal multiples of 11x or more.  (2) The foregoing analysis does not take into account LBTYA's sizable tax assets.  (3) Treating Telenet as an investment rather than a consolidated subsidiary increases the as-adjusted multiples, as Telenet itself is trading at relatively modest multiples of 7.6x (2018) and 7.3x (2019).

    LBTYA can also be valued on a sum of the parts basis.  My back of the napkin SOTP, valuing Virgin Media at 10x 2018 OIBDA, LBTYA's 50% interest in the ZiggoVodafone JV at 10x 2018 OIBDA, UPC at 7x 2018 OIBDA, corporate overhead at 8x 2018 OIBDA, and investments (including Telenet) at market value, and including no value for tax assets, yields a per share value of $37.

    Risks.

    The primary risk is that the Vodafone transaction does not receive regulatory approval, or that approval is granted with conditions unacceptable to Vodafone such that it terminates the transaction (there is 250 million euro break fee).

    By including Eastern European assets (Hungary, Romania, Czech Republic) in the sale, the parties structured the transaction to fall within the jurisdiction of the European Commission antitrust authority, thereby avoiding review by the German Federal Cartel Office.  The Federal Cartel Office has historically opposed cable consolidation, either by imposing significant remedies or rejecting such deals.  The parties expect the European Commission to provide a better reception, and LBTYA and Vodafone have both made persuasive arguments that the transaction will enhance broadband competition and investment (a priority of the European Commission) and that the transaction falls well within prior European Commission precedents.  However, Deutsche Telekom can be expected to vigorously oppose the transaction, and it remains to be seen how much influence the German government can bring to bear on the ultimate decision.

    Another risk is poor operational execution by LBTYA.  LBTYA has had several operational missteps the past few years (e.g., Switzerland, the Netherlands, and Liberty Latin America) and it is fair to say management has lost some credibility with investors in this regard.

    Finally, pending completion of the transactions LBTYA will maintain high financial leverage, as it always has.  Thus, any reduction in OIBDA multiples will have an outsized effect on the stock price.

    I do not hold a position with the issuer such as employment, directorship, or consultancy.
    I and/or others I advise hold a material investment in the issuer's securities.

    Catalyst

    Regulatory approval of the sale to Vodafone

    Use of transaction proceeds (stock repurchases, value-enhancing strategic acquisitions)

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