Liberty Global (LBTYK) reported a mixed quarter to end 2017.  Rebased revenue grew 3%, a nice acceleration, albeit to a still low level of growth.  Rebased operating cash flow grew just shy of 5%, basically meeting guidance for “around 5%.”  Northlake has been waiting a couple of years for LBTYK to show growth acceleration on the back of its strategy to add wireless to its cable triple play bundles and to build out millions of new homes to which it could offer service.  Unfortunately, at one time we expected revenue growth to accelerate to mid single digits and operating cash flow growth to ramp to high single digits.  Our view was based on management guidance and our analysis of the company’s historical growth rates and prospects.

What went wrong?  First, competition of cable TV, broadband, wireline phone, and wireless phone in the company’s European markets was tougher than we expected.  Second, management executed poorly, especially on its new build project in the UK.  Finally, the strategic rationale of a broad European footprint expansion and focus on the quad play may have been mistaken, at least relative to the option of having a little less debt and buying back a lot more stock.  Of course, there is no denying that this is all easy to say with the benefit of hindsight.

If you have read this far, you are probably expecting the punch line to be that Northlake is selling all shares of LBTYK.  We plan on it, but not quite yet.  Two catalysts exist that we think can get the stock to work materially higher over the next six months.  First, while at a lower rate than we ever expected, expectations for 2018 operating cash flow growth should finally be reset to a level the company can meet or slightly exceed.  Improved execution on the UK new build project, tight cost controls, and the synergies from the wireless acquisition in Belgium should provide a good base to meet growth expectations.  Second, and more importantly, on again, off again M&A discussions between LBTYK and Vodafone are back underway.  It appears that Vodafone may purchase assets from LBTYK in German and Eastern Europe.  Based on recent transaction multiples for similar assets, these sales would be at prices accretive to the valuation the market currently places on LBTYK.  We think a deal will happen this time and that should pop LBTYK shares higher.  An even better scenario would be if the two companies would complete a full blown merger or an asset swap, either of which would be even more accretive for LBTYK shareholders.

LBTYK has been a disappointing investment over the last few years.  One way or another the end is sight.  We want to get our exit right rather than give up at a discounted valuation when potential catalysts are in reach.  So, for now, Northlake remains long LBTYK.

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.