Virgin Media reported solid third quarter results as management continues to execute very well at the operating level and take advantage of VMED’s superior broadband network in the United Kingdom. Overall growth in revenue and EBITDA remains modest, rising mid to upper single digits. Free cash flow is growing double digits as capital spending intensity continues to wane. Free cash flow is key to the VMED as the company’s balance sheet remains highly leveraged following a series of acquisitions and network upgrades by the prior management team. VMED stock benefits directly as excess cash is used to pay down debt and repurchase shares, effectively transferring the corporations value from bondholders to shareholders.
I expect this value transfer thesis to remain in place through 2011 and can see the stock reaching the low $30s. there are a couple of risks to the story, one which was partially evident in 3Q results and the other which may emerge in the next few months. During 3Q, VMED subscriber growth in cable TV fell a little short of expectations. Pay TV in the UK is extremely competitive and Sky Broadcasting’s satellite is the clear market share leader. Sky was unusually promotional during the third quarter and on the conference call VMED management said its October market share improved. Nevertheless, weak subscriber growth is a risk to VMED.
Closely related to the subscriber growth competition is the UK economic situation. The UK government is undertaking extreme austerity measures including massive layoffs of government workers. Austerity could lead to slower economic growth and higher unemployment and impact demand for all competitors in the UK’s multichannel TV, high speed internet, and wireline and wireless telephony industries. VMED is major player in all of these industries. Thus far, the austerity measures have had no noticeable impact on demand for communications services but it is early.
Disclosure: VMED is widely held by clients of Northlake Capital Management, LLC including in Steve Birenberg’s personal accounts. Steve s sole proprietor of Northlake, an SEC-registered investment advisor. VMEd is a net long position in the Entermedia Funds. Steve is co-portfolio of the Entermedia hedge funds, owns a stake in the Funds investment management company, and has personal monies invested in the Funds.