Liberty Global (LBTYK) remains a very frustrating investment for Northlake.  1Q18 results were typical.  The company claimed growth in line with estimates with earnings and EBITDA up nearly 5%.  However, the results were boosted by a one-time catch up payment in Germany.  Excluding the payments, growth was around 3.5%.  This type of messaging has occurred over and over for LBTYK at the same time that the core growth rate for the business has been ratcheted down from high single digits to mid single digits to “around 5%.”  With cable and wireless growth rates throughout Europe declining amid increased competition, it is not surprising that LBTYK has lost the confidence of investors.

We have stuck with LBTYK because of our long history of success with the management team, even preceding the creation of Northlake in 2004.  We also think some of the criticism for the one-off items is unwarranted.  For example, when the catch up payments in Germany were withheld over the past year, Liberty was not adjusting its numbers upward, so it is arguably fair to include them now. Most significantly, we have stuck with LBTYK due to valuation.  The valuation argument is stronger today than ever following the announcement that LBTYK is selling operations in Germany, Romania, Hungary, and the Czech Republic to Vodafone for 11X EBITDA.  LBTYK is trading at 8X EBITDA making the sale highly accretive.  If you applied the proceeds of the sale to share buybacks (management said on its conference call that if they had the money today they would be buying back as much stock as they possibly could), the stub LBTYK is trading at just 6.5X EBITDA.  Growth may be slowing but that is a lower multiple than many European telcos that are lucky to grow even 1-2%.

The bottom line is we still see reasons to hang onto LBTYK with the shares trading at the bottom of the recent range.  Approval for the VOD sale could take a year but taking steps through the regulatory process could provide trading catalysts.  LBTYK is likely to close its prior sale of its Austrian business at an accretive multiple soon.  Growth in the all-important UK market has picked up the last few quarters and post the German sale it is the dominant business at the company.  A transaction in Switzerland to better position the company’s cable-only operations seems likely this year.  These catalysts plus the prospect for a cleaner quarter of growth near the 5% level make LBTYK worth holding.  If everything comes together at LBTYK we see the shares in upper $30s over the next 12 months.

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.