Liberty Global PLC (LBTYA) – Woodbridge Capital Management

Introduction

Liberty Global (LBTYA) is the largest telecom company outside the US. It has operations primarily in the UK & Ireland, Belgium, the Netherlands, Switzerland, Poland and Slovakia.
LBTYA is a holding company and most of its debt lies at the subsidiary level and is non-recourse to the parent or other subsidiaries. This is critical because the equity value of each of their investments can not be less than zero.
LBTYA had been growing primarily through acquisitions, until the last few years, since which it has reversed course and begun to monetize its assets and reduce debt via dispositions and JVs.
The market has not responded positively to this shift in strategy. As the company has shrunk over the last 5 years the stock has declined ~29% (5/1/16 – 5/1/21).
GAAP losses, messy financial statements, currency risk and lack of a dividend (very unusual for a telecom company) have prevented shares from reaching fair value.
This thesis will value LBTYA as a sum of its parts, using conservative assumptions.

All numbers are in millions unless otherwise specified. All figures and exchange rates are as of close 5/17.

Background

In December 2017 LBTYA announced it would sell its operations in Austria to T-Mobile for 11x adjusted EBITDA (AEBITDA).
In May of 2018 they announced they would sell their operations in Germany, Hungary, Romania and the Czech Republic for 11.5x AEBITDA.
Both of these sales involved operations that were more heavily weighted toward the declining services of cable and telephone, compared to LBTYA’s current business mix, which is weighted more toward internet and mobile service:

Valuation

Cash

The parent company holds cash of 650.4USD, 1961.2USD in corporate and government bonds.
Parent is expected to receive 1400.0GBP from recapitalizations in connection with the VMO2 JV deal, bringing total holding company liquid assets to 4558.9USD.

Telenet

LBTYA owns a 60.7% stake in Telenet, a leading Belgian TelCo.
Telenet is publicly traded, with 113.8 shares outstanding. At 33.90EUR per share LBTYA’s Telnet stake has a market value of 2845.2USD.
Telnet had AEBITDA of 1378.0EUR for FY20 and net debt of 5335.9EUR.
@8x AEBITDA their Telenet stake would be worth 4195.0USD.

VodafoneZiggo JV

LBTYA’s JV with Vodafone is a leading TelCo in the Netherlands.
LBTYA accounts for the VZ JV under the equity method, whereby its investment is recorded at cost, adjusted for LBTYA’s share of earnings/losses. Currently the VZ JV sits on the balance sheet at 2924.8USD.
The VZ JV had AEBITDA in FY20 of 1752.2EUR and net debt of 10481.7EUR.
@8x AEBITDA LBTYA’s 50% share of the VZ JV is worth 2148.1USD.

VMO2 JV

In May of 2020 LBTYA announced that they were merging their U.K. operations (Virgin Media) with Telefonica’s (O2). Ireland is not included in this deal.
The two entities combined had 3703.0GBP AEBITDA in FY19. Upon consummation of the deal, the VMO2 JV is expected to be capitalized with 18000GBP of debt.
At 8x AEBITDA, LBTYA’s 50% share of the VMO2 JV is worth 8196.1USD

UPC

The remainder of LBTYA’s operations fall under UPC (I am also lumping Ireland and corporate expenses into this category).
UPC Switzerland generated 693.8USD AEBITDA in FY20 and Sunrise generated 668.0CHF.
Poland and Slovakia generated 215.0USD, while corporate expenses were 171.1USD.
LBTYA does not give AEBITDA numbers for Ireland by itself, but an estimate is not difficult to derive. With a FY20 AEBITDA margin of 40.6% for the U.K./Ireland and Ireland’s 511.7USD FY20 revenue, AEBITDA for Ireland can be estimated at 207.6USD.
This gives total AEBITDA for LBTYA’s remaining operations of 1686.5USD.
UPC has 380.2USD million vendor financing, a 4710.0USD bank facility, 1,339.5USD SPE Notes and 1,233.2USD senior notes, for total net debt of 7662.9USD.
@8x AEBITDA UPC’s equity portion is worth 5829.1USD.

Misc

LBTYA also has 2500.2USD in miscellaneous investments such as ITV, Skillz Inc. and All3Media, valued under the equity method.
With the 138.4USD remaining under the ITV collar loan, 157.6USD other debt, and 526.5USD of finance leases obligations not included in debt, this leaves a net value for the miscellaneous assets of 1816.1USD.

Adding it All Up

Cash: 4558.9USD
Telenet: 2845.2USD
VodafoneZiggo: 2148.1USD
VMO2: 8196.1USD
UPC: 5829.1USD
Misc: 1816.1USD
Total value: 25393.5USD
With a market cap of 16427.9USD, this represents ~55% upside.
This figure values all assets at the lower of market or 8x AEBITDA and does not take into consideration any potential synergies from the VMO2 or Sunrise deals, or the fact that Telenet may be undervalued.

Conclusion

By summing the parts, LBTYA’s stock is clearly undervalued. It is also undervalued relative to peers, trading at just 6.4x AEBITDA. Verizon, for example, trades at 8.3x 2020 AEBITDA (and is arguably cheap as well). LBTYA also trades at a discount to the multiples realized on asset sales, which have been in the range of 10-12x AEBITDA.
While we typically focus more on companies with higher absolute yields, in the case of LBTYA the comparables are clear and we believe that there exists a very large margin of safety.
This large margin of safety likely explains why LBTYA is Seth Klarman’s second largest position.
LBTYA has been putting all of their free cash flow into repurchases, rather than paying a dividend. This is very unusual for a large telecom company and is evidence that management believes the stock is undervalued.
Media mogul John Malone is chairman of the board and owns 5.3% of the outstanding shares for a total value of $873 million, so the company should be expected to continue to be shareholder friendly.