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November 12, 2013

Liberty Global Set to Accelerate Growth in 2014

Liberty Global (LBTYK) reported results that matched Wall Street expectations with rebased revenue and EBITDA growth of 3%. New subscriber growth surprised meaningfully to the upside following last quarter’s disappointing growth. Investors have been worried about the second half of 2013 growth due to tough competition in Netherlands and England and last quarter’s modest slowing in Germany. LBYTK shares moved sharply highly following the report, recovering much of their recent losses.

It appears there is one more tough quarter ahead in Netherlands and England before growth accelerates companywide in 2014. Liberty investors also have to deal with a high level of acquisition rumors that raise concerns about balance sheet leverage and the sustainability of share repurchase activity. History suggests a high level of trust in LBTYK management is warranted and patience with the shares recent consolidation will be well rewarded. Free cash flow per share north of $12 in 2017 is not a stretch and if that target is evident as we move through 2014 the shares should trade toward $100, providing 30% upside.

German, Switzerland, Belgium, and Chile drove growth for LBTYK in the latest quarter with revenue and EBITDA rising high single digits in all three markets. These markets also led the way in subscriber growth. Virgin Media grew very low single digits in England although this was better than feared given the highly competitive environment there due to aggressive sports promotions from BT. Virgin faces tough comp in the fourth quarter but management doubled merger synergies which should begin to accelerate growth in early 2014. Netherlands was the gig drag in the quarter with EBITDA falling 10%. Netherlands did see better than expected subscriber metrics, a sign that the bottom may be set in 2H13. KPN, the local telco has been very aggressive with uneconomic promotions and now that the company is going to remain independent rather than selling to Mexican telco behemoth America Movil, there is some hope that competitive intensity eases in 2014.

On the acquisition front, the latest rumors concern a bid for the portion of Dutch cable company Ziggo, of which LBTYK already owns more than 25%. A merger between the two largest cable companies in Netherlands would offer significant synergies and economies of scale.

LBTYK is widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake’s regulatory filings can be found at www.sec.gov. LBTYK is a net long position in the Entermedia Funds. Entermedia is a long/short equity hedge fund focused on media, entertainment, leisure, consumer retail, communications, and related technologies. Steve is portfolio manager of Entermedia, owns a controlling stake in Entermedia’s investment management company, and has personal monies invested in the funds.

Posted by Steve Birenberg at November 12, 2013 10:17 AM in LBTYK