LiLAC Group
(LILA/LILAB/LILAK)
Betting on industry’s best
operators rolling up the highly fragmented Latin American cable assets
January 6, 2016
***Cable & Wireless (CWC) + consolidated "NewCo" valuation in progress....will provide updates***
***Cable & Wireless (CWC) + consolidated "NewCo" valuation in progress....will provide updates***
About LiLAC:
LiLAC is a “tracking stock”
created June 24, 2015 to provide investors a more pure-play capability on the
Liberty Latin America and Caribbean cable assets, which were historically
consolidated under the Liberty Global company. As the Latin American and
Caribbean assets were such a small component of overall Liberty Global, as well
as investors were generally less familiar with these assets, they received
little focus and attention from investors. Management at Liberty believed the
creation of a tracking stock was appropriate to ‘show’ investors that these
assets were valuable as well as give investors a pure-play opportunity in the
expected consolidation of Latin American and Caribbean cable and telecom assets
in the next 5-10 years.
LiLAC is not a separate
entity, and shareholders of LILA/LILAB/LILAK are ultimately shareholders of
Liberty Global Plc.
There is an additional “forced selling”
investment opportunity as the LiLAC tracking stock is given to current Liberty
Global shareholders at a ratio of 1 LiLAC share for every 20 Liberty Global
shares owned. For most investors, the LiLAC ownership would likely be too small
in relation to their portfolio, and thus these shares would be discarded
without much analysis or investment rationale.
As of current, LiLAC consists
of 100% ownership of VTR (Chile cable operator) and 60% of Liberty Cablevision
Puerto Rico (40% owned by Searchlight Capital).
What makes Latin America
attractive:
·
Highly fragmented
in Latin America and Caribbean landscape, ripe for consolidation
·
Liberty already
has presence – Puerto Rico & Chile – thus not new to the region,
understands the risks
·
Low broadband and
Pay-TV penetration represents strong growth opportunity, almost similar to
where Europe was 10-15 years ago
·
Improving
soci-economic backdrop leads to strong underlying demand and growth
·
Foreign exchange
headwinds and market volatility creates opportunity for strategic acquirer
(similar to Liberty’s announcement of CWC)
·
Across certain markets,
large market share by satellite companies (DISH and DirecTV), which provides
opportunity to take market share as Liberty can offer broadband and comparable
TV product (similar to cable companies in the United States in 2015 to current)
Mike Fries (Q3/2015): “..As we rolled out our Lat Am tracker, we did
mention that in our opinion, this region is underpenetrated in broadband and
pay-TV and is likely to experience above-average growth, just look at our own
assets, and is ripe for consolidation, particularly by experienced and
well-capitalized operators…”
Mergers & Acquisition strategy:
Liberty has stated multiple
times they will not start from an asset-level viewpoint, but rather will look
at the markets in Latin America and where they could potentially be the #1 or
#2 cable operator. Otherwise, they will not enter the market, as they desire
scale advantages (customer service, advertising, size, programming, capital
expenditures).
In summarization:
1.
Start at
country-by-country basis
2.
Can, through
M&A, Liberty become the #1 or #2 cable operator
3.
If yes, look to
enter market and start evaluating the assets in the market
4.
Be an
advantageous acquirer
5.
Build scale
through combination of customer growth, more RGUs, increase penetration, etc.
6.
Use
parent-company Liberty Global as a mature corporation to obtain funding for the
deals (can use LILA stock, LBTYA stock, add to LBTYA debt or company level
debt)
7.
Use Liberty’s
M&A experience to be opportunistic in entering markets and increasing scale
Mike Fries (Dec. 2015 UBS): (paraphrased) “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.”
Mike Fries (2012 commenting on OneLink acquisition): “Consistent
with our strategy of consolidating markets within our footprint, this
transaction will make us the leading provider of cable services in Puerto Rico,
passing approximately 70 percent of the cable homes on the island and adding substantial scale to our existing
operation.”
Chile: "VTR"
Background:
Liberty Global owned 80% of
VTR until March 2014 when they acquired the remaining 20% from “Corp Group” for
approx. $422 million (using 10.1 million shares at $41.80 per share of LBTYK
stock).
VTR is the largest cable
television provider based on subscribers with 1,026,200 video subscribers at
the end of Q3 2015. At the end of 2014, there were 2.8 million total video
subscribers in Chile. VTR had a 35.9% market share, Telefonica (Movistar) was
at 21.1% market share, and Claro Chile (subsidiary of America Movil) and
DirecTV were even at 16.4% market share.
Television:
The Pay-TV market in Chile
has expanded at a 11.5% CAGR from 2008 to 2014, going from 1.46m subscribers to
2.81m subscribers, as well as increasing the penetration in the country from
34.7% in 2009 to 48.6% in 2014. Despite the robust market growth of 11.5%, VTR
was essentially a non-participant, only growing 2.1% from 2008 to 2014.
VTR is only available to
about 60-65% of the Chilean television market, and in that footprint they have
a strong ~57% market share compared to the closest competitor, Movistar
(Telefonica) having about 19% market share.
In my conversations with
Liberty, the likely reason for the divergence in growth of the Pay-TV market
and VTR’s subscriber growth is that VTR caters to the higher end market and
does not offer a low-cost option similar to Claro and DirecTV. With the
exception of DirecTV, who owns some soccer programming rights in Latin America,
there is no differentiation in TV offerings across the providers. Additionally,
piracy was very high in Chile until about a couple of years, and it is logical
that the people that pirated television would mostly migrate to a low-cost
option where VTR does not have a viable product.
Broadband:
There are approx. 5 internet
providers in Chile – Movistar, VTR, Grupo Calro, Grupo GTD, and Grupo ENTEL.
However, the market is essentially a duopoly, with Movistar commanding a 39.0%
market share at the end of 2014 and VTR having a 37.2% share; combined, these
two companies control over ¾ of the internet subscribers in Chile. While they
seem comparable from a market share standpoint, their broadband products are
night and day. VTR offers 40 mbps for ~ $70/month versus Movistar offering only
15 mbps as a DSL provider.
The subscriber growth in
broadband was 11.4% CAGR from 2006 to 2014 to about 2.5 million subscribers.
VTR has attained a similar growth rate at 10.5% over that time period.
Opportunities:
- Newbuild: Currently VTR is expands homes passed by about 50,000 – 60,000 due to just market growth; however, VTR will likely expand homes passed at a pace faster than traditional. A decent rule of thumb for thinking about the capital needed to expand could be to start with Liberty in U.K. which costs about $600 - $620 per newbuild home. In Chile, it is much cheaper, maybe half of that. The HFC costs are the same but the labor costs are much lower and the infrastructure in Latin America is easier to access because it is above-ground (utility poles) whereas Europe is mostly underground.
- Continued market growth: broadband penetration is estimated to be 51% in 2015, up from 44% in 2014, and expected to be 59% in 2017. Pay-TV penetration is expected to be 79% by 2017, up from an estimated 69% in 2015 and 54% in 2013.
- Mobile opportunity: Currently VTR has only ~1% market share in Chile through their MVNO relationship. The top mobile operators are Claro, Movistar and Entel PCS and five that use the MVNO model.
- Next generation Set-top Box: Began rolling it out in late 2015, could get 10-15% bump in ARPU once fully deployed.
- Churn: offering a quad-play (TV + internet + telephony + mobile) should really lower churn, accelerate growth. In the UK churn was about 14%, with the introduction of the quad-play, churn is said to be about 5%. VTR has a MVNO relationship with Telefonica to offer the mobile service.
- Margin improvement: lower churn, improved mobile growth (higher margin, low capex due to MVNO relationship) and scale improvements
Risks:
- Chilean Peso (CLP) currency headwinds
- Chilean economy reliance on exporting commodities – copper specifically
- Lower than expected mobile growth
- Lower than expected future penetration rates, thus growth slowing combined with no pricing power
- lower multiple due to FX headwinds, some countries tied to commodities
- Declining population
Other notes:
- Lack of pricing power: due to inflation of >4% in Chile, almost everyone in the market raises prices by the CPI, but not above it. Twice a year that take price increases, at CPI levels only.
- Programming costs mixed USD/CLP: About 45%-55% of VTR’s programming is US content and in USD, which behaves similarly to the U.S. Pay-TV headwinds in programming cost growth. The remaining 45-55% is local content and not very inflationary.
- VTR is thought as being the highest quality asset in Latin America by Liberty. There are no capacity issues, its true HFC cables, could easily get 120 mbps speeds right now. Once DOCSIS 3.1 gets introduced, VTR could get to over 1 gbps in speed for very little additional capital expenditure, roughly an additional $20 per home to upgrade from 3.0 to 3.1.
- Capital Expenditures – est. 2015 to be between 17-19%
- Some margin improvement in VTR from 2014 to 2015 was the reduction of more than 400 employees in November 2014 through January 2016
Puerto Rico: “Liberty Cablevision of Puerto Rico (LCPR)”
Background:
LiLAC became the largest
cable operator in Puerto Rico mostly through mergers and acquisitions of the #1
and #3 operators (Liberty Cablevision “LCPR” was #2). What was originally
Liberty Cablevision of Puerto Rico LLC, a cable operator and subsidiary of the
Liberty Global company, they acquired “OneLink Communications” in 2012 with
Searchlight Capital Partners LP and “Choice Cable TV” in the summer of 2015.
With the acquisition of “OneLink”
in 2012, Liberty contributed their assets in Liberty Cablevision and
Searchlight Capital put up the cash, resulting in a cable company that would be
60% owned by Liberty and 40% by Searchlight. The newly formed entity would be
the largest cable operator in Puerto Rico with about 700,000 homes passed and
RGUs approaching 500,000 (one source had it at 480,000 RGUs). While terms were
not announced, Liberty Global had said the transaction values OneLink (before
transaction costs) at about $585 million.
In December of 2014 Liberty
announced the acquisition of “Choice Cable TV” in a deal valued at
approximately $272.5 million, an estimate of 6.1 times Choice’s projected 2015
operating cash flow, after adjusting for synergies and integration. The
acquisition was funded through incremental debt borrowings.
Overview of the financials:
Liberty Puerto Rico has
generated revenues of ~$350m over the last year, with a most recent OIBDA
margin of 44.4%, a large improvement from the pre-OneLink and pre-Choice days
of high-20%. Prior to the Choice acquisition, there were about 2.1 RGU’s per
customer relationship. Since Choice was mostly a broadband provider, the RGU
per customer relationship is now 1.93 at the end of Q3/2015. ARPU as of the
last quarter was $78.66, down from $85 in prior quarters, due to the
acquisition of Choice and most Choice subscribers were broadband-only subs.
Despite the decline
sequentially in ARPU, margins should improve due to scale and improved
efficiency of the infrastructure (more bundled packages across all assets –
Liberty, OneLink, and Choice)
Overview of the market:
Puerto Rico could be viewed
as a much simpler competitive environment versus Liberty’s other assets. In
Puerto Rico, there are only 2 cable operators on the island – Liberty and Claro
– and Liberty is viewed as far superior as Claro’s footprint is 85% DSL-based
infrastructure. Of the remaining 15% non-DSL, about half of that is actual
fiber based (thus faster speeds). Due to the fact there are only 2 internet
providers, Liberty has a strong market share of ~53% versus Claro’s ~47%.
Liberty’s primary competition
for video services are DISH Network and DirecTV.
Broadband:
- Only 2 providers: Claro (~47% share) and Liberty (~53% share)
- Claro (Puerto Rico telecom) has 85% of footprint as DSL-infrastructure, a far inferior product to Liberty’s fiber deep hybrid-fiber-coaxial cables
- Liberty’s base package offers 20 mbps vs. 5 mbps (English package)/ 3 mbps (Spanish package) for Claro
Subscriber Statistics:
As of the end of Q3/2015,
Liberty provided a total of 769,300 RGUs across the cable footprint of
1,068,200 homes passed in Puerto Rico. The growth in RGU’s has largely come
from acquisition; for example, the Choice acquisition in 2015 added an
additional 355,300 homes passed (about 50% increase in footprint prior to deal)
and 155,900 RGUs (from about 580,000 prior to acquisition).
“Choice” acquisition - 2015
The “Choice” acquisition was
advantageous for Liberty as “Choice” had a sizable footprint in Puerto Rico but
was predominantly a broadband provider (91,400 subs) over being a Pay-TV
provider (48,600 subs). Since they were focused mostly on broadband, this
acquisition gives Liberty the ability to offer bundles to legacy-Choice
subscribers, which would increase ARPU, optimize the infrastructure, and
decrease churn for that subscriber base. Additionally, they now have an
island-wide footprint, which opens up B2B business opportunities. For example,
if a business – a retailer, bank, etc. – has operations across the island and
are looking at TV, internet, and telephone, Liberty can offer them that
opportunity, whereas prior to the Choice acquisition they were unable to have
this scale advantage. Lastly, as they are now island-wide, they can advertise
and market across the island, whereas they couldn’t prior to the Choice
acquisition.
Opportunities:
- Newbuild – but less so, as they already cover over 80% of the island. Given some demographics and the economics surrounding those demographics, a portion of the homes in Puerto Rico won’t be built to. Expect small scale newbuild over time.
- Bundle packages/Decrease Churn – with acquisition of Choice in 2015, should be able to offer more comprehensive bundles to the legacy Choice subscribers
- B2B opportunities – Liberty has island-wide footprint, giving them the ability to offer services to business that operate island-wide (Q3 2015 B2B business (including SOHO) grew over 20% on rebased basis Y/Y)
- Pricing power – in Q2/2015 raised prices in broadband by 8% and TV by 3% (pricing power in real terms different than Chile market/VTR)
- Increase market share & penetration – Liberty has one competitor in Puerto Rico (Claro) which is a DSL product. Liberty has internet speeds 4-7x faster than Claro, with the opportunity to go to 120 mbps.
Risks:
- English package includes a lot of US programming, thus the cost is about 50% higher than the Spanish speaking package, may be unaffordable to people, they would stick to broadband only
- Geographical – hurricane or tropical storm damaging cable assets as most are above ground
- Claro builds out the non-DSL footprint and increase fiber infrastructure. Would compete better versus Liberty as Claro already has monopoly on telephone, could be easier to cross-sell
- Country debt problems could cripple the consumer as potential increases in taxes decreases disposable income
- population decline
Searchlight Capital – the 40% owner of Puerto Rico
assets
Searchlight is a private
investment firm founded in 2010 by senior partners formerly with industry
leading investment management firms. Searchlight Capital Partners currently
manages over $860 million, invests in a wide range of industries in North
America and Europe, and has offices in New York, London and Toronto. For more
information, please visit www.searchlightcap.com.
Sources:
12/10/2014 – Liberty Global
buys “Choice Cable TV” http://www.bizjournals.com/denver/news/2014/12/10/liberty-global-buys-cable-tv-business-in-puerto.html
11/9/2012 – Liberty Global
buys OneLink Communications http://www.bizjournals.com/denver/news/2012/11/09/liberty-global-partner-buy-puerto.html
Press Release - OneLink
acquisition http://www.libertyglobal.com/pdf/press-release/11-09-press-release-final-puerto-rico.pdf
Press Release – Choice https://www.libertyglobal.com/pdf/press-release/12-10-Acquisition-of-Choice-FINAL.pdf
Liberty Puerto Rico – website
https://www.libertypr.com/offers.aspx
Liberty LiLAC June 2015
presentation http://www.libertyglobal.com/pdf/presentations/LiLAC-Group-Presentation-June-2015-FINAL.pdf
Liberty acquires 20% of VTR http://www.libertyglobal.com/pdf/press-release/03-14-VTR-FINAL.pdf
May 27, 2015 8-K http://www.sec.gov/Archives/edgar/data/1570585/000157058515000101/exhibit991-trackerxq42014r.htm
Additional Notes:
Programming costs for Chile =
~$80m annualized, with 48%- 53% denominated in US Dollars
Corporate Expenses shared by
Liberty Global (LBTYA)
Choice Acquisition:
Disclosure:
I own shares of LiLAC through "LILA" shares
Disclosure:
I own shares of LiLAC through "LILA" shares
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