John Malone and his Liberty Global group are known for creating value for their investors. Through a combination of mergers, spinoffs, well-timed stock buybacks and efficient tax planning, Liberty Global has turned Malone into a billionaire and earned the respect of many of the world’s greatest investors.
In the Liberty empire, the Liberty LiLAC Group (LILA, Financial) entity is perhaps the most intriguing and misunderstood. LiLAC is the Latin American arm of Liberty Global and has been growing rapidly over the past 12 months. For the three months ended Sept. 30, 2016, LiLAC revenue more than doubled to $895 million, up from $309 million in the year-ago period.
Revenue for the nine months ending Sept. 30 hit $1.8 billion, up from $908 million in the year-ago period. Most of this growth was driven by the acquisition of Cable & Wireless Communications (LSE:CWC, Financial), which was purchased on May 16, 2016.
Excluding this bolt on growth, revenue expanded 5.2% year on year in the third quarter and 4.4% for the nine months ending Sept. 30. Operating cash flow expanded by 5% for the group as a whole to $708 million. As most of this was spent on acquiring new customers, free cash flow came in at $-55 million for the year to date.
Arriving at a value
As LiLAC shares are tracking shares, with no separate independent company underlying the equity, it is a bit difficult to compute a valuation for the stock. This could be why value investors such as Glenn Greenberg, Warren Buffett (Trades, Portfolio), the Bill and Melinda Gates Foundation and Tom Gayner and stock, as they see value hidden away.
Based on figures compiled in Liberty Global’s third-quarter 10K, the LiLAC share class has 174.1 million shares outstanding. The group net loss for nine months ending Sept. 30 was $223 million. The loss for the third quarter was $-82 million.
It seems management is betting on the acquired Cable & Wireless Communications’ growth and cost synergies to drive overall profitability. Throughout the fourth quarter, the subscriber base for LiLAC Group grew by 27,000 revenue-generating units (RGUs) to a total of 2.9 million customers and 5.4 million subscriptions. Unfortunately, overall growth was subdued with a net 20,000 customers leaving the wireless segment on an organic basis. Overall Cable & Wireless Communications reported revenue falling to 4% in the quarter due to competitive and economic pressures in the Bahamas, Barbados and Trinidad and Tobago.
Overall, Cable & Wireless Communications swung from a profit of $1.6 million a year ago to a loss of $21.9 million. To help offset falling profits management is now looking to cut $150 million in synergies from the Cable & Wireless Communications LiLAC merger on top of $125 million of efficiencies already announced after the Cable & Wireless Communications deal.
Long term, management is still expecting to see 7% to 9% operating cash-flow growth over the next few years. Operating cash flow came in at $355 million for the third fiscal quarter although thanks to Cable & Wireless Communications integration costs free cash flow was $-39 million.
Crunching numbers
LiLAC is not a simple business to understand because of the way it tracks stocks and the overall umbrella Liberty group has been organized. However, some back-of-the-envelope math gives some idea of how much the stock could be worth if everything goes to plan.
Assuming LiLAC returns to cash flow profitability as acquisition costs fall away, the first has the potential to generate a free cash flow of around $35 million per quarter, based on the free cash flow conversion rate seen in the third quarter of 2015. That works out around $140 million annualized or $1.24 per share. Based on the current share price, that works out to a free cash flow yield of 5.5%, not overly cheap but not too expensive either.
All in all, it looks as if LiLAC is a play on Malone and his team. If these financial wizards can drag LiLAC back to cash flow profitability, the group will be an attractive telecoms play on Latin America.
Disclosure: The author owns no stock mentioned.
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