Business and history
Liberty Global (LBTYA, Financial) is a holding company. Through its subsidiaries, the company owns cable networks in 10 European countries. These networks pass roughly 45 million homes and provide roughly 18 million of them with video and high-speed data connections. The company is managed by Mike Fries and John Malone and was formed in 2005 by the merger of the international arm of Liberty Media and UnitedGlobalCom. Seth Klarman, Warren Buffett and Bill Gates own shares of Liberty Global.
Value and price
First, let's asses the fair market value of the assets of Liberty Global based on publicly available market prices. There are public bids for three of Liberty Global’s subsidiaries. From these bids, we can draw some conclusions:
- Along with the value of the cash and stocks held at the holding level, the bids for these subsidiaries alone, add up to a per-share value of $26.
- The bids imply Liberty Global's networks are worth roughly 10x operating cash flow (OCF). That’s including debt.
In 2018, Liberty Global completed the sale of its Austrian subsidiary to Deutsche Telecom for $2 billion (including debt). This too represented roughly 10x OCF.
In short, multiple buyers have affirmed a fair market value of 10x OCF for Liberty Global's subsidiaries.
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.
Financial strength
There is no debt at the holding level and $2 billion worth of cash and stocks. Though management has saddled the subsidiaries with a significant amount of debt, the holding is not going bankrupt anytime soon.
At the subsidiary level, it is worth pointing out that the bonds of all subsidiaries currently sell at reasonable yields (5%). The bond market is not worried about the ability of Liberty Global’s subsidiaries to service their debt.
There is an inconsistency in the market in that the bonds of the subsidiaries trade at par but the stock of the holding is trading at 50 cents on the dollar.
Management
For decades, Liberty Global founder John Malone has been buying and selling media assets. Unlike many other business moguls, he has never built a permanent empire. He buys when he believes the assets are cheap and is willing to sell to strategic buyers when there is some perceived synergy with existing operations. In the meantime, he attracts highly effective managers to streamline the operations of the acquired businesses. Importantly, Malone has consistently generated satisfactory returns for minority shareholders in the process.
In this case, Malone has attracted Mike Fries to head Liberty Global as CEO. Here are some examples of how Fries has added value for shareholders:
- Liberty Global acquired Unitymedia in 2010 for a total consideration (including debt) of $4 billion. That subsidiary is now being sold to Vodafone for a total consideration of roughly $16 billion.
- In 2005, Liberty Global acquired 7.7 million shares of Belgium’s Telenet for 160 million euros when that company became publicly traded. That works out to a per-share price of 21 euros. Those shares are now worth 40 euros. That doesn’t account for 15 euros per share worth of dividends that Liberty Global collected from Telenet between 2007 and 2012.
In the grand scheme of things, Fries took control of a company generating roughly $5 worth of per-share revenue in 2005. He’s transformed that into a company generating roughly $5 worth of per-share excess cash flow (owner earnings). Incidentally, $5 of per-share owner earnings is another indication that shares are worth more than their current $26 price.
It is fair to say that with Malone and Fries at the helm, a company gets worth more over time. In their decades-long track record, there are no examples of either of these men destroying shareholders' capital.
Outlook
There is some worry whether there will be regulatory approval of the sale of Liberty Global’s German subsidiary. This is perceived to be a binary event that may “unlock” the value that most market participants will concede is embedded within the shares. Perhaps this uncertainty and the market risk associated with it is what causes the shares to trade at 5x free cash flow. That’s a 20% yield.
At that rate, management can and almost certainly will repurchase between 100 and 200 million shares annually. Something will have to give or I will be on the board of the company as the only remaining shareholder by 2025 (along with Fries). If and when some of the acquisitions are approved, this will serve only to accelerate the stock buybacks.
Also, management has the option of listing Ziggo and Virgin Media just like Telenet today. This would in effect reduce the current holding to a closed-end fund of various publicly traded European cable companies.
Specific risk
Market risk: Should European regulators disallow a merger of the assets of Vodafone and Liberty Global, this would probably cause shares to become cheaper than they are now.
Interest rate risk: Higher interest rates would cause much higher interest payments by the company, reducing excess cash for shareholders. Higher interest rates are of course associated with inflation, and it is hard to imagine inflation without higher prices for data/internet connections. Almost all of Liberty Global’s subscribers are on short-term plans. While the debt and the interest rates are fixed for two to three years, the price of the cable connection can be and often is changed on a moment’s notice. Higher interest rates are a real risk, but there is also a reasonable scenario where the company is able to raise prices before the higher rates on its debt kick in.
Currency risk: Liberty Global generates a significant fraction of its revenue in the UK. Volatility of the British Pound could cause earnings volatility.
Disclusure
This is not a recommendation to buy or sell anything. This is an expression of my views about Liberty Global with the intent of engaging in intelligent discussion about the company and its stock. At the time of writing, I owned shares of Liberty Global and none of the other stocks mentioned.
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