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November 08, 2014

Liberty Global Ready for Liftoff

Liberty Global (LBTYK) had an eventful week. The company closed on its acquisition of Ziggo, giving it nationwide coverage in the Netherlands for its broadband and cable network, reported third quarter earnings, and restarted its share repurchase program. Each item is positive and complements the other which should set the stage for strong performance from LBTYK shares.

Earnings were in line with Wall Street expectations and the company reaffirmed all of its growth guidance for 2014. Revenues grew 3% and operating cash flow growth gained 5%. The best performances were in Germany and the United Kingdom. After a slow start for LBTYK’s acquisition of Virgin Media in the U.K., growth has accelerated with revised promotions and bundles and cost synergies that are running ahead of expectations. Wall Street did not like the Virgin Media acquisition so this should relieve some pressure on the shares.

Ziggo had been the larger cable company in the Netherlands with Liberty as #2. There was no geographic overlap. Netherlands has been a tough market for LBTYK for the past year with negative growth in revenue and cash flow as the national telco, KPN, has been very aggressive with pricing and promotions. The Ziggo acquisitions should yield unusually large synergies and put Liberty on better competitive footing in the Netherlands. Hopefully, in 2015 this should return this important country to growth.

Ziggo was pending before European regulatory authorities for about six months. During this time, LBTYK was unable to repurchase any of its own shares. LBTYK is a prodigious buyer of its own shares, having repurchases $13 billion since 2005. With Ziggo closed, LBTYK has restarted its repurchase program and promised a catch up for the lost six months. This will lead to $2.6 billion in repurchases by year end 2015, representing over 7% of the current shares outstanding.

LBTYK shares had lagged the market’s gains significantly this year until recently. Much of the news just discussed was expected so as closing of the Ziggo deal approached the stock began to firm up. Since earnings were reported the shares have continued to rise and are not up 7% this year. With merger synergies and solid organic growth driving slightly accelerated operating cash flow growth, stable capital spending, and a large share repurchase in place, free cash flow per share is set to explode higher through 2017. I think this can drive LBTYK shares north of $70 in next 18 months making it a very attractive investment.

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. Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.

Posted by Steve Birenberg at November 8, 2014 02:38 PM in LBTYK