« 2013 Outlooks Bullish for CBS and Discovery Communications | Main | Model Volatility Continues with Small Cap and Value Now Favored »

February 20, 2013

Liberty Global Growth Overshadowed by Acquisition of Virgin Media

Liberty Global (LBTYK) reported another excellent quarter with continued rapid growth in cable, broadband, and telephone subscriptions and accelerating growth in financial metrics. This news was expected. What was not expected was the company’s acquisition of Virgin Media (VMED). LBTYK is a very acquisitive company but expectations for the next big merger were focused on the fast growing German market. Instead, LBTYK bought VMED, the dominant cable company in the United Kingdom. The deal is nicely accretive to earnings an free cash for the next few years but could dilute the company’s growth rate as fast growing Germany is a smaller portion of revenues and moderately growing United Kingdom becomes one of LBTYK’s largest markets.

The growth dilution and the fact that LBTYK is partially paying with its own shares has led to an 8% pullback in its shares. I think this will prove to be temporary. Partially, my opinion is based on trust in LBTK’s excellent management. They have executed flawlessly and been excellent stewards of shareholder capital. I think they deserve the benefit of the doubt on this deal. In addition, I have long followed VMED (Northlake clients use to own it), and I think its outlook is better than many on Walll Street expect.

After digesting VMED in 2013, LBTYK will return to its aggressive share buyback program which combined with mid to upper single digit revenue and EBITDA growth will drive free cash flow share up by about 20% per year. As free cash flow approaches $10 in a few years, I think the shares can trade to $90-100, up dramatcailly form current levels around $60. The VMED acquisition may put a temporary headwind on LBTYK shares but the payoff could be huge and is worth sticking around for.

Both LBTYK and VMED reported good fourth quarter results highlighted by continued higher than expected subscriber gains. In a networked, subscriber-based business, net additions ultimately drive accelerated financial results. LBTYK is already seeing the benefits of its prior subscriber gains with the latest quarter showing 6% gains in revenue EBITDA. Both figures are up from 4-5% earlier in 2012. I see more of the same in 2013 for LBYTK. Investors are likely to come around to my bullish view as these numbers are reported and VMED continues to grow even as the UK economy faces challenges.

Liberty Global is widely held by clients of Northlake Capital Management, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Filings can be found at www.sec.gov. Liberty Global and Virgin Media are net long positions in the Entermedia Funds. Steve is the portfolio manager of the Entermedia Funds, owns a majority stake in the Funds investment management company, and has personal monies invested in the Funds.

Posted by Steve Birenberg at February 20, 2013 01:06 PM in LBTYK