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February 17, 2014

Liberty Global Growth Set to Accelerate

Liberty Global (LBTYK) reported its slowest quarterly growth of 2013 in the December quarter, with low single digit gains in revenue and operating income. The numbers were not a surprise as a difficult competitive environment in the UK and Netherlands and initial dis-synergies form the acquisition of Virgin Media in the UK held back results. With synergies at Virgin Media starting to kick in, Netherlands beginning to stabilize, and German, Belgium and Switzerland continuing to perform well, LBTYK appears poised for accelerating growth in 2014. In fact, management forecast exactly this on its quarterly conference call. This should set the stage for continued good performance for LBTYK (up 43.5% in 2013).

Free cash flow is the key measure for LBYTK and the company appears on track for rapid growth over the next three to five years as capital spending declines as a percent of revenue while core operations grow in the 5-7% range. LBTYK runs a levered equity capitalization strategy with debt at 5X operating cash flow (smart balance sheet management has cost of debt under 7% and 85% of debt due in 2017 and beyond). As long as the numbers come through, this works to the great advantage of shareholders. Excellent management, a long history of success, and basic stability of the cable TV and broadband business provide investors with great confidence in LBTYK. Free cash flow per show should surge over $10 in the next few years, easily enough to justify the shares comfortably over $100 as time goes by.

Beyond operational and financial risk, the biggest issue for investors in LBYTK is the company’s aggressive acquisition strategy. Management clearly sees the low interest environment as an ideal time to build scale and reinforce its competitive person throughout Western Europe. This has led to purchase of Virgin Media and the buying control of Ziggo, LBTYK’s larger cable peers in the Netherlands. Given difficult conditions in these two markets, I believe the acquisitions have added some caution into the LBTYK investment story. This strikes me as a buying opportunity but it will be important for 2014 to show improved results in both countries.

One other thing to keep an eye on is the possible spin-off or sale of LBTYK’s operations in Chile and Puerto Rico. Management has announced a spin-off is under consideration and has taken concrete steps in that direction. This type of transaction could create some hidden value for LBTYK shareholders, especially as Chile is now growing rapidly following a period of intense investment in its mobile operations.

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 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, communications, leisure, and related technologies. Steve Birenberg is the portfolio manager of Entermedia, has personal monies invested in the funds, and controls Entermedia’s General Partners.

Posted by Steve Birenberg at February 17, 2014 11:39 AM in LBTYK