John Malone is one of my favorite investors, so I keep a close eye on his business empire. I am always on the lookout for a potential opportunity to take advantage of Mr. Market's erratic nature and buy into one of Malone's businesses at an attractive price.
I've recently stumbled across the interesting situation going on at Liberty Global PLC (LBTYA, Financial) (LBTYK, Financial). By recently, I mean I have recently become interested in this situation as the stock traded down to a multiyear low at the beginning of 2019. This is a special situation which by no means has a definitive outcome, but could result in a possible 100% or more upside for investors in the best case.
The Liberty story
First, a bit of background. Liberty Global is a leading European cable company assembled by chairman Malone and CEO John Fries. It is currently a collection of assets spread across Europe.
The business has a presence in the U.K., Belgium, Switzerland, Ireland, Poland, Slovakia, Germany, Austria, Romania, Hungary and the Czech Republic. It used to own operations in Latin America as well, but these were spun off in December 2017 to form LiLAC Group. The company also announced the sale of its Austrian cable subsidiary in December 2017.
The company's latest deal is it's most significant. It is trying to sell its operations in Germany, Hungary, Romania and the Czech Republic to U.K.-based telecommunications giant Vodafone (LSE:VOD) for 19 billion euros ($22.7 billion).
When completed, this deal will completely transform Liberty Global, freeing up billions of dollars in cash to pay down debt and return capital to investors. The deal is expected to deliver 10.6 billion euros in cash proceeds, half of the company's current market capitalization.
Still needs approval
This deal is not signed and sealed just yet, though. It has been agreed in principle, but at the beginning of December, the European Competition Commission decided to open a full-scale competition probe into the merger.
Regulators are worried the merger will lead to reduced competition in the Czech Republic market and across Germany. So they are not opposing all of the deal, just some parts of it. The Commission announced it will be reporting its findings on May 2, and Vodafone believes the deal will complete by the end of 2019 at the latest.
I believe that whatever happens with regulators, Vodafone and Liberty Global will exchange some assets, giving Liberty a cash infusion.
Management has already told investors what it is planning to do with any cash it receives from a dea. On the company's first-quarter 2018 earnings call, Fries said:
"We’ve already bought back half this company in the last 10 years. And at today’s price, where it is right now, if this is where the stock was in a year, we’d probably use every penny of it to buy the stock back, that’s what I’ll tell you."
Fries reiterated this stance in September of last year when speaking at the Goldman Sachs Communacopia Conference. In addition to remarks regarding cash returns, he also provided a quick analysis of the company's valuation at the time:
"If we’re trading where we’re trading today -- and the way I look at the math, we traded about 5.5x, because you’ve got $14, $15 of cash, you got these other assets in Telenet in Holland, let’s say, that might add up to say, $8, something like that, which means Virgin and all the other EBITDA trades at about $6 and that’s about, in our book, about 5.5x. We’re probably going to lean into our stock at that point because I don’t know that we’re going to find a better deal than the one sitting in front of us, especially as we start to improve free cash flow and operating free cash flow combined and we look at returns on that basis."
Undervalued
Comments like these get me excited because they show management knows what it is doing, and is working to unlock value for investors.
At the time of these comments, the stock was trading between $26 to $28. Today, it's down at $24.40, a discount of $4.6 per share, or 19%, to Fries' estimate of intrinsic value. Other telecom assets are trading close to 10 times enterprise value to earnings before interest, taxes, depreciation and amortization, which implies a possible best-case price for the remaining business of around $28 to $30 per share, excluding cash.
The best investment analyses are simple, and I think this is a straightforward opportunity.
Whatever happens, I believe there will be a deal between Liberty Global and Vodafone. When there is, Liberty will use its newfound wealth to aggressively return capital to investors. The upside potential in this scenario could be significant.
Disclosure: The author owns no stocks mentioned.
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