Liberty Global PLC (LBTYA, Financial) is a holding communication company which owns several subsidiaries (mostly cable networks) in Europe.
The company is headed by CEO Mike Fries, and the chairman of the board is the legendary investor (and outstanding capital allocator) John C. Malone.
I first became interested in Liberty Global after reading about it in a March 2019 GuruFocus article written in by user Batbeer as part of the Value Idea Contest. His investment thesis (supported by a sum of the parts valuation) is summarized by the following sentence:
"Shares of the company currently trade at $26. This means the market considers Liberty Global's Dutch and British assets to be worthless. That's irrational.
"
Liberty trades for around $22 as of today, so let's check if, after more than one year, that conclusion still holds (in which case, the margin of safety would be even larger).
A tale of M&A deals
At the time of the aforementioned article, the company was in the process of selling its operations in Germany, Hungary, Romania and the Czech Republic to Vodafone (LSE:VOD, Financial).
The deal had the potential to unlock significant value for the company (and it actually did, in my view). However, the market was still skeptical about it, and the stock traded for around 5 times free cash flow at the time.
On July 31, 2019, the deal was completed and the company received $21.3 billion (which represented a combined 11.5 times operating cash flow multiple), with net cash proceeds of $11.3 billion. Liberty engaged in significant share repurchasing activities after that event.
Another pending deal was related to the announcement Liberty made in February 2019 regarding the acquisition of UPC Switzerland (a Liberty Global subsidiary) by Sunrise Communication (XSWX:SRCG, Financial). The deal was supposed to be completed upon a payment of 6.3 million Swiss francs ($6.8 million), which represented an operating cash flow multiple of around 10. Unfortunately for Liberty, the deal fell apart because Freenet AG (XTER:FNTN, Financial), a major shareholder who owned 24.5% of Sunrise, was not happy about Sunrise's proposed equity and rights offering subsequent to the announcement and voted against it.
Fast forward to 2020, two additional important deals have recently been announced by the company.
The first is a 50-50 Joint Venture announced in May 2020, in which Liberty Global and the Spanish operator Telefonica (XMAD:TEF, Financial) will merge their U.K. operations.
Liberty's U.K. operations, represented by Virgin Media, are based on a broadband network (but with very little mobile presence), while O2, Telefonica's U.K. business, has the country's largest mobile platform.
Virgin Media is Liberty's most important and valuable asset, and the joint venture is building on the ongoing consolidation momentum in order to power the integration of fast cable (or fiber) speed with the upcoming wave of 5G developments. The newly formed giant will have more than 46 million subscribers and 11 billion British pounds ($14 billion) of revenue. There are significant potential synergies, with the possibility to add more customers and have a better price power than the current stand-alone companies.
With the latest announced deal on Aug. 12, in which Liberty Global is set to acquire Sunrise Communication, the company intended to find a solution for its previously failed deal in Switzerland. The UPC business is currently languishing. Liberty Global will offer 6.8 billion Swiss francs to acquire Sunrise. The deal is intended to integrate UPC Communication with Sunrise in order to create a fixed-mobile operator in Switzerland that can compete with companies like Swisscom (XSWX:SCMN).
This time Freenet is not opposing the deal, adding that it "appreciates the value that Sunrise has created over the past five years." This is a proof that the integration of UPC and Sunrise made sense from the beginning and that Freenet's opposition was purely due to economic reasons and not to strategic ones.
A few days ago, the company announced that the tender offer for Sunrise met the minimum acceptance threshold (which is set to two-thirds of outstanding shares). Consequently, the deal will be closed before mid-November.
Let's do the math
CEO Mike Fries has recently repeatedly suggested that Liberty Globals's shares are undervalued, but he was never so explicit as in the first-quarter 2020 earnings conference call. In order to explain his view, he prepared the following slide:
Commenting on the presentation, he said:
"We're not trying to be prescriptive here. But more than a few investors have asked us to put forward a simple sum of the parts analysis that shows the value gap we talked about[...] there is an implied transaction value for the underlying Virgin Media business when we combine. And we had to agree, as I just mentioned, £18.7 billion, which after debt represents an implied value for the equity today of around $14 per share of Liberty Global. If you add all that up, you get to about $23 per share. That's just on the U.K. business."
Here, Fries is giving his view on the value of 50% of the Virgin-Media/O2 Joint Venture, summing up the deal value, the subsequent synergies and deal proceeds, boiling down to a $23 per share price tag.
This would mean that the U.K. joint venture's value is currently (slightly) greater than Liberty's market price, and that all other businesses (Telenet (XBRU:TNET), the Dutch JV with Vodafone, UPC and the remaining European assets) plus $12 of cash can practically be acquired for free.
While I won't argue on the huge U.K. deal potential, I prefer to calculate Liberty's current value as if both the U.K. and the Swiss deals would not be consummated. I used the same approach of the above-mentioned article for the appraisal of the single businesses, which values them at 10 times operating cash flow minus outstanding debt (I took the 2019 values for the single businesses).
Referring to the Belgian asset, Telenet, Liberty owns 60% of the company and it is publicly traded, so I simply calculated the value starting from capitalization. For the remaining European assets, the value was calculated with the equity method and reported in first-quarter filings with the Securities and Exchange Commission. Of course, cash divided by outstanding shares was added on the top.
The total per-share value amounts to $49.94 per share, which implies a huge undervaluation for the stock and consequently a more than comfortable margin of safety.
The following picture summarizes the value attributed to the single components:
The per-share value has dramatically improved recently because of Liberty's aggressive repurchasing activity.
Conclusion
Liberty Global´s management has recently tried to highlight the huge undervaluation of its stock. As always, the question is why the market is not buying it. I think there's a simple answer: a lack of catalysts.
If the company would split into more pieces or spinoff some businesses, that value could be unlocked, but at the moment there are no catalysts in sight. I think most investors are simply not comfortable owning a stock that pays no dividends and for which there is no possibility to know when that value will be distributed.
That is not the case for Seth Klarman (Trades, Portfolio), who has held the stock for a long time. Currently, Liberty Global's presence in Klarman's portfolio is a meaningful 15%.
Nobody knows when the market will decide to fully appreciate Liberty's value, but the only way to participate is to stay invested.
Disclosure: The author owns shares of Liberty Global.
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