Friday, December 11, 2015

Liberty Global (LBTYA/B/K & LILA/LILAK) comments at 43rd UBS Conference (12/09/2015)

43rd Annual Global Media and Communications Conference
Liberty Global (LBTYA/B/K, LILA/LILAK)
Speaker: CEO Mike Fries
Tuesday: 12/9/2015

  • CWC deal rationale for LILA? Transaction in Latin America is a game changer for that part of the world. Not uncommon for deals like this to get announced and people think “ugh, it’s not what I hoped or expected”. Reminder, we think about things in terms of 5 year time frames, creating value over 5 year time frame, and this deal should bring value. We like the region of Latin America which is why we created the tracking stock  - “LILA, LILAK”. 2 great assets down there, which are growing high-single digit to low-double-digit EBITDA (VTR and Liberty Puerto Rico). These 2 current assets are “sub scale”. We are trying to find ways to build a platform that has scale. The CWC deal brings that scale needed. They are the #1 fixed/broadband provider in 7 out of 18 countries. They have a massive sub-sea cable business that feeds those markets as well as our markets. They are heavily invested in mobile. Together, the CWC business with Liberty (LILA/K) gives us the scale and opportunity for growth. Think it will be low double-digit EBITDA growth. We have audited synergies of $125m on top of $145m of one-off capital expenditure synergies. By the way, there are two levels of synergy we can’t talk about. We’d like to but, but that’s how the U.K. works. Think the total synergy story is really attractive.
  • Why finance it this way – use Liberty Global shares and not LILA/K? It was a negotiated transaction. The seller was a UK seller. To get it done of this size they wanted something larger, the LBTYA/K shares. The LILA/K tracking stock doesn’t have a very long trading history, and not a very good one thus far. We didn’t like to use it at that price, either. So used LILA stock minimally for the deal. Will have the CWC company as part of the larger company first, will help get the synergies done this way and much easier. LILA has two great assets in the Latin America region that do $450m of EBITDA and manage them with 4 people. CWC has 250 people and it about twice the size. Think running it as consolidated business, then how to spin it in the future, is the right move. Think it will be very value accretive.
  • Spin-off? Not committed to it yet, once it becomes more stabilized, will look at it then.
  • Have been spending a lot of time on the Liberty 3.0. It has been over a year that has been working on. It is a fundamental change in how we manage the top line as well as operating costs. Today, we are a mid-single digit grower for EBITDA, believe we can be a high-single digit grower over next few years. It won’t be straight line but CAGR. There are: (1) revenue reasons, such as new-build opportunity, 10-12 million homes, 50 million home platform today. Not all in the next 3 years but a good portion of them in next 3 years. On average, newbuild generated about 25-30% of net adds. Believe that number goes to 50-60% while we grow the market share of existing footprint. (2) pricing. Have done a good job historically on pricing, believe much better today, though. Will continue to drive pricing on 27m home platform. (3) B2B and mobile; working on SoHo and mobile, currently underpenetrated in B2B and small business, just getting started in mobile. About 20% of revenue now, will grow. Will eventually grow above the residential business in terms of absolute dollars. Customers, revenue and growth are focuses. About 60% of the upside we see from that mid-single digit to that high-single digit comes from revenue drivers, other 40% have said publicly is about 1 billion Euro synergy/efficiency between today’s op-ex base and three years’ time. That doesn’t mean normal pace goes up a billion less; thus op-ex stays relatively flat over next 3 years. This comes from procurement, centralized IT (just did this across all markets), working on call centers.
  • More color the expansion will be? 4 million of the 10-12 million will be in the U.K. (“Project Lightning”) (3 billion pounds (£) over 5 years), ramping up in 2016. Targeting 46£ of ARPU, getting 46£ of ARPU. Targeted 40% penetration after 3 years; right at 10% after 3 months, 20% after 6 months. On track with those numbers. Newbuild is self-financing, is a huge IRR on levered, because most homes are within 50m. Other markets will not get as specific on. They move and flux. Germany, Poland, every market has some newbuild activity. Just putting more activity over next 3 years.
  • Quad play bundles? Most of you are investors in US markets, wondering when there will be quad-play. In Europe, already a quad-play market, because incumbent telco competitors already have footprint. We are all combining those products to a four-play bundle. Launched mobile in 9 markets already, committed to that. With the acquisition of “BASE” will have 7 million mobile subs. About 10% of revenue coming from mobile. Committed to that product in those markets, mostly through MVNO. This is most efficient way of getting in the mobile business. It drives revenue, it also has 50-70% less churn if they have mobile, broadband and video. Margins are good. Average ARPU is in low 20’s. Seamless connectivity across fixed/Wi-Fi/mobile. Lots of good reasons to have mobile platform.
  • Mobile and 4G offering? A lot of advantages of MVNO: (1) don’t have to build the network, the infrastructure, you just rent the towers (2) you still own the customer, meaning can put together own product, SIM card. Disadvantages are that you have to re-negotiate these deals every two years. Key is margin, sustain reasonable margin and bandwidth. Think in most cases, mostly regulations and relationships, can keep those customers happy for long time. Already launched 4G in 3 countries, working in another 3, on table for 3 more. When one market, Belgium, bought the operator. Had large MVNO relationship, bought the small operator. Had synergies.
  • Vodafone? Can’t say a lot more than what we’ve said publicly. Never talked about a merger, only about asset-swap. Looking at what markets and relative valuation. Didn’t agree on valuation. Liberty believes growth is sound and stable and in a fortunate position. We are not in decline. One company is growing, the other not growing. We know the transactions in the market. Disagreement on valuations for the assets (implying Vodafone asking unreasonable prices, Liberty declined).
  • Content? Pretty clear on strategy – have 25m video subs, 18m broadband subs. All they do is access content. Have to be involved. We spend 2.5 billion already on content, mostly on the linear side – channels, SVOD, premium, etc. Also realize, there are 4 areas where we can be tactical in content investments: (1) free-to-air assets in Europe, (2) SVOD, (3) production companies, (4) sports. Done deals in all 4 areas. Bought 2 broadcast assets – one in Belgium, other in Ireland. Small investment in ITV. Invested heavily in OTT product called “MyPrime”. Sports rights in Holland and Belgium. Formula E. Small stake in LionsGate. How does it make sense? All of the equity in 7-8 deals is about 400 million, not a lot of money. Common theme – tactical, authentive, very high returns, very little capital exposed. Have done a good job of gaining value, I think. Example: bought free-to-air on Belgium, today using marketing with BMW based on the STB data we have, knowledge of consumers, etc. In Holland, launching premium sports channel, 5th highest. Working on cross-promotion and marketing. Have commercial arrangement with LionsGate, helps with SVOD. They are capital light and strategic assets.
  • U.K. – have all the sports, only one, didn’t have to bid on any of it. Germany is the same way. Have access and pricing. Some markets, like Holland, just bought the rights, paid tiny amount. Because we own the sports, worried about not having access, bought it.
  • Financial leverage, buying back stock, hedging FX, etc. what is leverage amount? Starting with balance sheet, right sized, de-risked. 8 year average life, now is 4-5x leverage, at upper end of that. 100% fixed, 100% hedged. Borrowing at credit pools and not parent company. Average cost is about 5%. As long as growing and don’t need to raise capital, we believe we are in good position. Since buyback, committed to it. Bought 13 billion since began, have another 2.5 billion left. Seeing correlation between buying back stock and FCF. Doesn’t mean that’s the only thing to do with FCF. If we have 2.5 billion in FCF and buying back 2.5 billion in stock, still have 2-3 billion of liquidity because we can access capital. Believe that’s a good place to put the capital and that’s what we are doing.
  • Leverage – 5x EBITDA? Can de-lever very quickly if we wanted to. Don’t see the need to – long-term, fixed, hedged. Since our business is growing, it is a great source of levered returns for shareholders. We want to make money for equity holders. We stress test it, could de-lever if wanted to but we are still growing so its right amount of debt at 5x EBITDA.
  • Belgium? Highly political, highly local issue. – the regulation of cable in Belgium. Small country, hadn’t been implemented yet, waiting for details. We fought it. It will be retail  - construction. Currently living in best regulatory environment, they are allowing deals, mobile, net neutrality. Especially as we vertically integrate more.
  • Dutch market, competition, synergies? In 12 countries in Europe. Holland, where we just made acquisition, consolidated nationwide footprint, certainly has had difficult start to merger. Probably rushed the merger. Acquired in November, rollout in April. In reality, focusing on all right things since then – new products (replay TV), customer service, sports channel. Synergies on track. Said 250 million, on track, but work in progress.
  • Pricing? Pricing is one of key drivers of revenue for next three years, but we are smart and tactical about it. To take price increases, its more than just raising prices. You have to invest for costumers, improve quality of service, innovate, better the product. UK everybody raises prices 5-6% no problem, mostly due to sports, SKY added a great EPG, broadband speeds went from 100 mbps to 150 mbps and now to 200 mbps. Its 100% margin – raising prices.
  • Upside opps? Newbuild. To be transparent, we were committed to declining capital intensity. Had this calculus we believed in: revenue growth, OCF growth, FCF growth, and FCF growth is also driven by lower capital intensity in terms of lower percentage of sales on capex, even though we spend fraction of what US spends. On core business, capital intensity was declining. But in UK, the light bulb went off. If you can generate 30% unlevered rates of return and create a self-financing source of customer and cash flow growth for next 5 years by doing newbuild. Thus the % of revenue might be a bit wobbly but we should do it, it’s a great investment. We need to give investors more data. But trust me, this is a massive opportunity for us. As well as CPE coming down. Didn’t exist 1,2, 3 years ago. Partially because we didn’t own Virgin, wasn’t thinking about it then. For shareholders, it will do a lot. This is exciting for us internally.
  • Competitive threat from incumbents? Europe is not a fiber for whole marketplace; maybe Holland has 5% fiber. Switzerland has done fiber. Today, average incumbent is 80 mbps, that plays out 100-150 mbps sweet spot. We are 2-3x faster than incumbent. Consumption is growing 40-50% per year for data. It is a meaningful differentiator. People care about quality of service and the speed of product. Increase in speed is almost directly 1:1 ratio in increase in consumption. Unless the telcos build fiber, they are not a risk to us.
  • Risks? Probably people would say balance sheet, regulators.
  • UK market – competitive environment? The Virgin Media deal may go down as the best deal we’ve ever done. We were lucky to pay a 8 multiple. Synergies were achieved, delivered high-single digit EBITDA growth right now. 50£ ARPU, growing reasonably each year with investments in the business. The newbuild will accelerate the growth. Brand is good, networks are first class, programming is solid, mobile working great. Competitive environment looks fine to me. BT will do mobile, will have quad-play similar to how we have been, will have synergies as well. BT buying EE, a locally regulated decision. EE is Liberty’s MVNO provider. Want to make sure we still have access, which we will. O2 and Three also merging. Regulated by EU. Liberty looking at that deal as well, don’t think it will have meaningful impact.
  • Germany market, comp. landscape, Deutsche Telekom? Germany will remain a growth engine, historically been 8-10%, could be mid-single digit which is normal. Majority of broadband market share comes to Liberty. Market as a whole is big, have EBITDA margins in the 60%, we have no mobile revenue, no B2B revenue – great opportunities going forward in Germany. Deutsche Telekom getting aggressive but still…
  • Altice, etc. ? You fall in to one of three buckets today in Europe: (1) consolidator looking to consolidate in the markets and across markets (Liberty Global, Vodafone, Telekom,  who see great scale with reach and breadth.) (2) those that are retrenching (KPN is clearly retrenching, sold everything except Holland.) (3) everybody in between. Regulators seem to be supportive of cross border consolidation and more so in-market consolidation. Should find it easier to cover the sector going forward, you may lose a few names. No reason to have 120 mobile operators in Europe. 

U.K. Competition:

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