Home Finance Liberty Global: Special Situation Bargain? – Seeking Alpha

Liberty Global: Special Situation Bargain? – Seeking Alpha

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Liberty Global: Special Situation Bargain? – Seeking Alpha

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Liberty Global (LBTYA) is a European Telecom provider of fixed broadband and mobile connectivity. The company has operations in the UK, Belgium, Netherlands, Switzerland, Ireland and Poland. The company is extremely active in mergers & acquisitions, divestments, and other strategic partnerships, which makes the story extremely complicated and the financials messy.
For the purposes of this article, we will focus on the 2020 acquisition of Swiss telecom player “Sunrise”, the merger of its “Virgin Media” entity with Telefonica’s “O2” business in the UK, and the announced sale of its Polish business to Iliad. Then dive into how the forecasted Pro-Forma financials will drive the equity valuation. We will look at each operating segment independently, and then aggregate the results to the Parent/HoldCo level later on.
On June 1st 2021, Liberty Global’s Virgin Media business was merged into a 50-50 Joint Venture (JV) with Telefonica’s O2. The combined company, VM02, is now the 2nd largest Telco in the U.K. behind BT. On a combined basis through Q3 2021 the company added 117k broadband subscribers and 108k mobile subscribers. About 50% of those adds came in Q3, which is an encouraging indication as to the potential competitive position of the new company, and its ability to cross-sell.
On an annualized basis, VM02 should be tracking towards $14.1B of revenue at a 35.7% Adj. EBITDA margin, which implies $5.0B of FY2021 Adj. EBITDA. VM02 will most likely spend at least $2.6B on capex and $0.9B on interest, leaving $1.5B of Free Cash Flow. Please note that depending on how aggressive VM02 will become on expanding Project Lightning, that Capex figure could grow considerably.
However, moving to 2023 and beyond, VM02 should be able to achieve significant synergies in operations as SG&A and PP&E are consolidated. Assuming the company can increase its adjusted EBITDA margins to 40% from 35.6% post-consolidation, VM02 should have EBITDA of $5.6B and FCF of $2.0B. Since Liberty Global owns 50% of the VM02 business, it would be “entitled” to 50% of the cash flow, or ~$1.0B.
VodafoneZiggo is a Dutch joint-venture between Vodafone (VOD) and Liberty Global that was formed December 31st 2016. On an annualized basis, VodafoneZiggo should do $4.9B of revenue at a 47% EBITDA margin, which implies $2.3B of EBITDA. VodafoneZiggo will spend $0.9B on capex and $0.6B on interest, leaving FCF of $800M. Since Liberty Global owns 50% of VodafoneZiggo, it can be expected that the parent will receive cash distributions of $400M annually.
Telenet is a publicly-listed Telco, of which Liberty Global owns 60.7%. The company recently announced a somewhat complicated transaction to create a NetCo with local utility company Fluvius. However, final terms for the deal have not been agreed to, which prevents us from analyzing how accretive that transaction may be. At the same time, Telenet’s long-time hopes of acquiring Wallonian Telco provider, VOO, were dashed as it was announced that VOO had entered into exclusive acquisition negotiations with Orange (ORAN).
Putting those recent developments aside, Telenet should do $3.1B of revenue at a 49% EBITDA margin, which implies $1.5B of Adj. EBITDA. Telenet will spend $0.6B on Capex and $0.3B on interest, leaving $500M in FCF. Telenet will pay a 2.75 euro dividend at a minimum, which equates to ~$3.14/share in US dollars. Since Liberty Global owns roughly $66.3M shares, it will receive annual cash distributions of $208M.
Liberty Global’s Swiss telecom business, Sunrise UPC, is the #2 player behind the state-owned Swisscom. After failing to sell UPC Switzerland to its Swiss competitor “Sunrise” in 2019, Liberty Global reversed course and decided to acquire Sunrise itself. The deal closed in late 2020, leaving only three main telecom players: Swisscom, Sunrise UPC, and a sub-scale Salt.
As the merger synergies are brought to fruition in the next two years, Sunrise UPC should be able to boost sales as well as Adj. EBITDA margin above its current margin of 36%. On an annualized basis, I would expect the Sunrise UPC entity to do $3.3B of revenue at a 40% EBITDA margin, which implies $1.2B of Adj. EBITDA. Sunrise UPC will spend $0.6B on capex and $0.3B on interest, leaving $0.4B of FCF. Since Liberty Global owns 100% of Sunrise UPC, all of that cash will be available to the parent.
UPC Poland generates about $450M of revenue and $200M of Adj. EBITDA per year. Liberty Global owns 100% of the entity and recently agreed to sell the business to Iliad at an EV/EBITDA multiple of 9x. After debt and taxes, this will net the Liberty Global Parent net proceeds of $600M.
Similarly, Liberty Global owns 100% of VM Ireland, which generates $540M of revenue and $200M of Adj. EBITDA per year. After capex of $100M and Interest of $20M, the business generates $80M of FCF. Liberty Global is reported to be shopping the business for sale, but due to the current competitive situation in Ireland, a buyer will be hard to come by at a premium price. Conversely, similar to the situation in Ireland, Liberty Global was once looking to be a strategic buyer in Ireland and build scale, but it couldn’t find a willing seller.

Liberty Global PF Estimates
Author

In aggregate, Liberty Global is a highly levered entity. In fact, the business is intentionally levered at 4x-5x EBITDA, in what management calls a “levered equity strategy”. In this model, all the consolidated and non-consolidated debt is held at the individual operating telecom units, which means the parent company has no debt that it is directly liable for. Currently, Liberty Global consolidated entities have $14.6B of debt, while VodafoneZiggo has $12.4B, and VM02 has $24B, for a total of $51.1B.
As shown in the table below, Liberty Global’s Telcos can borrow at relatively cheap rates. So long as that condition persists, the company can fund new Capex Projects and mergers with relatively little equity contributions, which increases the Return on Equity (ROE) of those projects.

Liberty Global Credit Stats
Liberty Global Q3 Investor Presentation

At the HoldCo level, Liberty Global currently has $3.4B of cash and short-term investments (and another $600M on the way assuming the UPC Poland deal closes). In addition, the company also has another $2.3B of fair-value investments that are classified as “Long-term”, but are not directly related to the operating businesses. For example, the company has a $90M investment in Lions Gate Entertainment, a $572M investment in the British network “ITV”, a $250M stake in Univision, and a $94M stake in Formula E. While some of these investments lack immediate liquidity, they do represent monetizable assets, which the company could use to invest into the core business or return to shareholders.
All told, if we were to pretend all of its core businesses were consolidated operating subs with 100% ownership, Liberty Global would have total debt of $51.1B (excluding lease liabilities), cash and short-term investments of $3.4B for a total net debt of $47.8B. The business would generate $10.5B of Adj. EBITDA, giving it a 4.5x Adj. EBITDA leverage profile. That ratio would be significantly more than most peers, as demonstrated in the table below.

Liberty Global Leverage Comps
Author/Finbox

Post-sale of UPC Poland and achievement of synergies in UK and Switzerland, Liberty Global should be on pace to do $6.2B of “Owner’s EBITDA”. Essentially, this is calculated by taking the total EBITDA of each Liberty Global business, then multiplying by its ownership percentage. For example, I expect Telenet to achieve $1,508M of Adj. EBITDA in FY2022, which at a 60.7% ownership would equate to $920M of “Owners” EBITDA. I then subtracted $200M of Central/Corporate costs.
I assume a valuation of 8x Adj. EBITDA, which would be in-line with European peer Vodafone. After subtracting the “owner’s” net debt and adding back in the value of its long-term fair-value investments, I derive an equity value of $24.3B for Liberty Global at year-end 2022. Assuming the company buys back 10% of its shares outstanding per prior guidance, and assuming 1% dilution from Share-based compensation, Liberty Global should end the year with approximately 493.2M shares outstanding, which would equate to a share price of $49.30.
Liberty Global PF Estimates
Author
The table below demonstrates a scenario where Liberty Global buys back 10% of its shares outstanding per year, at a Market Capitalization of $16B. In this scenario, the company would essentially be utilizing 100% of its FCF for buybacks, which would grow FCF/share by 9.9% per year, even with no assumed growth in the core businesses. Given the current value gap that exists at the current share price, I believe these buybacks would create substantial value for shareholders.

Liberty Global Pro-Forma Valuation
Author

Liberty Global’s recent M&A activity will result in significant synergies to the top and bottom line and remove marginal competitive pressure in the UK & Switzerland. The share repurchase plan will significantly cut shares outstanding, and should grow FCF/share by nearly 10% per annum at the current valuation.
While Liberty Global lacks the organic growth opportunities of less mature markets and the oligopolistic profits of less competitive markets, the company appears to have hit an inflection point in its core businesses, which has not been fully reflected in the share price.
On top of all this, I expect Liberty Global to announce some smaller value creation events in 2022, such as the sale or merger of its VM Ireland business, tower monetization in the UK, Holland and Belgium, a public listing of a Telecom unit, and a large expansion of Project Lightning in the UK.
This article was written by
Disclosure: I/we have a beneficial long position in the shares of LBTYK, LBTYB either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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