Liberty Global Break-Up Value

Posted on 02/06/2011


I’ve written previously on the investment attractions of Liberty Global Inc (here and here), but in this post I’ve decided to tackle the issue of valuation from a slightly different angle by attempting to calculate what the individual parts of the business would be worth in the event it was broken up.  The table below shows my sum-of-parts calculation (all the numbers shown are in USD).

  • Telenet Group Holding NV is a provider of cable television, high-speed broadband internet and both fixed and mobile telecommunications services in the Flanders region of Belgium.  The company is publicly-listed on the Euronext exchange and currently has a market-capitalisation of €4.3bn.  Therefore, we can say with some certainty that LGI’s 50.2% stake is worth $3.1bn at current exchange rates.  Given that the controlling stake held by LGI should be worth a premium to the minority stake held by the public, I would describe this as a minimum valuation.
  • Austar United Commications Ltd is a provider of satellite television services in Australia.  The company is publicly-listed on the Australian Stock Exchange and currently has a market capitalisation of A$1.7bn.  This would value LGI’s 54.2% stake at US$1bn; however, as with Telenet, I would ascribe a control premium to LGI’s stake vs the current market value of the publicly-held minority.   The company is currently subject to a takeover bid from Foxtel which values the company at A$2.5bn (and LGI’s equity stake at $1.1bn), so there could be upside of 12% to the value stated here.
  • Kabel BW is a provider of cable television, high-speed broadband internet and fixed-line telecommunications services and operates in the Baden-Württemberg region of south-western Germany.  The takeover of Kabel BW by LGI is still pending, but given the deal was only agreed in March 2011 and the price was the result of a competitive bidding process that included a number of potential private equity buyers, I think we should feel relatively confident about the robustness of the $1.3bn equity valuation.  The business has been performing well too, with 1Q11 EBITDA of +16% vs 1Q10.
  • Unity Media is a direct comparable to Kabel BW, though does not compete as the companies operate in different regions of Germany.  In addition, there is a third player in the market, Kabel Deutschland, which has publicly-listed shares on the Deutsche Börse under the ticker KD8.  The only difference between the companies is the regions of Germany in which they operate.  All three are showing exceptionally strong operating and financial performance at present.  With an enterprise value of €7.2bn, KDG trades at an EV/LQA EBITDA ratio of 9.2x.  Applying a 9x EBITDA ratio to Unity Media, we get an enterprise value of $7.5bn and an equity value of $3.9bn after deducting net debt.  Unity Media also reported strong performance in 1Q11, growing EBITDA by 18% vs 1Q10.
  • Aster is a broadband communications provider in Poland.  LGI agreed to acquire the company on 4th December 2010 and the transaction is yet to close.  The valuation shown here is the purchase price.
  • UPC Holding is a provider of cable television, high-speed broadband internet and fixed-line telecommunications services in The Netherlands, Switzerland, Ireland, Hungary, Austria, Poland, Romania, Czech Republic, Slovakia and Chile.  The company is 100%-owned by LGI, though the investment in VTR of Chile is only 80%.  I have valued UPC Holding by comparing it to the valuation ascribed by the stock market to publicly-listed Virgin Media.  Virgin Media operates in the United Kingdom, a country with a weak consumer environment at present and also competes at BSkyB, possibly the most formidable competitor in the global subscription television business, but still has an EV/EBITDA ratio of 7.8x.  In addition, Virgin Media earns ARPUs that are 70% higher than UPC, meaning that UPC has much more potential for growth, particularly as the bulk of earnings come from relatively wealthy Western European countries.  I believe that UPC deserves a valuation at least as high as Virgin Media.  Using the same multiple values LGI’s stake in UPC Holding at $9bn.
  • Cash.  LGI also holds $1bn of cash at the parent company level, in addition to that already used in the enterprise value calculations for the subsidiary companies and excluding that about to be paid-out to convertible bond holders.
Adding all these components together we arrive at an equity valuation of $19.6bn, which compares to the current market capitalisation of $12.7bn, giving investors expected upside of 55%.  Even applying a conglomerate discount, I feel that this valuation gap is far too high.  My view is that continuing positive operational performance (this trend has been ongoing for some time and doesn’t look like changing) and increasing share buy-backs will lead to this valuation gap being closed during the next twelve months.
Disclosure: I have have long position in LGI shares.
Posted in: Investment Ideas