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

Consolidated Enterprise Value

OIBDA - Adjusted and Proforma for Transactions

Enterprise Value – Adjusted and Proforma for Transactions

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.

Catalyst

Regulatory approval of the sale to Vodafone

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