LIBERTY GLOBAL PLC LILAC GRP LILAK
February 02, 2017 - 11:15am EST by
goirish
2017 2018
Price: 21.96 EPS NM NM
Shares Out. (in M): 174 P/E NM NM
Market Cap (in $M): 3,825 P/FCF 28 17
Net Debt (in $M): 4,759 EBIT 780 868
TEV ($): 8,584 TEV/EBIT 11 10

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Description

I’m sure there is a decent amount of Liberty fatigue among several members, but I thought I could add some value on LILAC following the big stock decline in 2016.  There are a fair number of moving pieces here, but I will try to produce a simplified report and simply respond to specific questions on this complicated name.  I will skip the original LILAC background as this is available in alum88, rate123 and bdad’s write-ups, and some of the background to the CWC merger was also covered in my Liberty Global (LGI) write-up.  I also did not include historical CWC/LILAC financials.

 

To quickly summarize, LILAC has been crushed.  Liberty Global upset shareholders by using LGI stock for LILAC’s acquisition of Cable & Wireless (CWC), LGI paid a high multiple and early CWC results have been poor.  The optics of the deal were awful as LGI unsuccessfully bid for Columbus Telecommunications (Columbus) back in 2014, but then paid a hefty multiple (12.3x) to acquire CWC when John Malone was on both sides of the transaction.  CWC has undergone two large transactions in the past 2 years and, as noted, LILAC has botched the initial integration.  While the original LILAC was clearly subscale and very exposed to the Chilean Peso, LGI might have been better served waiting for a more favorable entry point to expand its operations.  LILAC lost substantial credibility with investors in the back half of 2016 for the delay in giving merger synergy guidance, for failing to quickly articulate the differences between GAAP and EU-IFRS[1] accounting and for initially giving CWC guidance following stock declines (Q2) and then revising this guidance downwards the following quarter.  This credibility gap likely explains a large portion of the nearly 30 percent single day decline in November 2016 following a roughly 8 percent decline in Q4 guidance.  But, with a nearly 50 percent decline in stock price since the start of 2016, LILAC appears to offer an interesting investment opportunity to those who can dispassionately evaluate the name. 

 

Challenges in Bahamas…Panama Potential

 

Most of the negative developments at LILAC have centered around the recently acquired CWC operations.  While there are multiple CWC markets, Panama, Bahamas, Jamaica, Barbados and Trinidad/Tobago represent roughly 70 percent of CWC’s revenue base, and therefore this write-up will quickly update these markets as well as the credit deterioration in CWC’s primary competitor, Digicel. 

 

Accounting for roughly 14 percent of total revenue, CWC’s 49%[2] stake in The Bahamas Telecommunications Company (BTC) is probably the most challenged CWC market.  CWC purchased its stake in the incumbent telecom company (BTC) back in 2011, providing CWC with a limited monopoly position for a set period before additional telecom licenses would be granted.  BTC was a highly inefficient operator and CWC raised EBITDA from approximately $80 million in 2010 to nearly $128 million for the year ended March 31, 2014 despite revenue growth of only $10 million over the same time period.  From 2014-2016, revenue and EBITDA declined roughly $25 million and $8 million to $329 million and $121 million respectively as BTC prepared for pending competition.  The competition has arrived as the cable license was awarded to Cable Bahamas, which has vowed to take 40% of the mobile market.  Cable Bahamas claims these gains would simply follow the track record of newcomers to liberalized Caribbean and Latin American mobile markets.   It is possible most LILAC investors were completely unaware of the competitive situation in the Bahamas at the time of the CWC deal.     

 

CWC acknowledges the risk but claims this is factored into overall guidance.  CWC also believes there is a substantial opportunity to further reduce expenses and suggested that 40 percent margins are doable even with added competition.  Furthermore, there is a growth story as BTC only has Fiber to the Home (FTTH) in roughly 10% of the total passings.  But, even assuming improvement in broadband and video (Columbus’ expertise will help), mobile still accounts for over 70% of total revenue and double-digit mobile declines over the next 3-4 years are very possible and could act as a meaningful headwind for CWC.   In fact, Phil Bentley’s (former CEO of CWC) previous predictions of mid-single -igit to high-single-digit CWC growth looked completely unrealistic if one took a more conservative view of BTC.  A large portion of the projected topline sluggishness stems from assumed BTC weakness, and therefore there is upside should BTC operations prove more resilient. 

 

Panama is CWC’s largest geographic market and perhaps the one with the most potential.  Former CWC CEO Tony Rice (prior to Phil Bentley) claimed that Panama was the most attractive market in Central America.  The mobile business is brutally competitive as four different companies offer mobile services.  CWC, however, is the largest of the mobile operators and has generally been able to keep mobile revenue flat as faster growing data revenue has offset declining voice and SMS text revenue.  Post Columbus, however, CWC has been rolling out fiber across the country (roughly 110,000 passings), and CWC seems optimistic that a quad-play offering will distinguish it from Cable Onda.  In the 2016 third quarter, mobile revenue was up 1% year-to-date, but total revenue declined, due in large part to the unrepeated managed services project revenue in Panama during the September 2015 quarter which is discussed later. 

 

Subsea Assets:  B2B Growth/Useful for Future Deals

 

A fair bit has been written on Columbus’ subsea assets, but a couple of points are worth discussing.  While there are competing subsea networks in the region, few would dispute that the combined Columbus/CWC company probably owns the most extensive intra-Caribbean network, with these connections particularly valuable to governments and businesses given the intra-regional connects and redundant capacity available on the networks.  The subsea assets should allow CWC to benefit from continued data growth outside the core Caribbean region, as non-Caribbean Latin American businesses and governments demand IT and data services within the Caribbean.  LILAC/LGI have extensively discussed the value of the subsea assets as the Latin American market consolidates in the years ahead.  LGI has said that the primary reason it bid for Columbus was the subsea capabilities, noting its experience with Virgin’s subsea assets which proved beneficial outside of Virgin’s UK market.   

 

The revenue associated with the assets are directly or indirectly attributed to two pieces:  Wholesale (8% total revenue) and Managed Services (17% of total revenue).  The wholesale piece is mostly backhaul capacity and will likely grow a very low single-digit rate as data increases will probably be offset by price cuts.  The Wholesale business, however, does produce very high margins (60-65%).  The Business Service piece is split roughly 60/40 between IT Solutions/Complex Connectivity revenue and project work.  The former is probably a consistent double digit revenue grower while the latter is lumpier and might grow closer to GDP-type levels.  In CWC’s fixed income filings, the company noted that IT Solutions/Complex Connectivity revenue grew “strongly” during the 2016 September and YTD periods.   CWC also discussed increased contract wins with government and private business customers, noting these wins should support growth going forward.  If one strips out the lumpier project work (a chunk of which occurred in Panama) and adjusts for the cash/accrual accounting treatment for two large B2B customers, the underlying managed services business appears to have grown at roughly 9% during LILAC’s third quarter.    CWC’s B2B revenue needs to grow strongly if there is any chance the company achieves is targeted 7-9% EBITDA growth.  The below projections assume Managed Service growth of roughly 7% going forward driven by double digit growth in IT Solutions/Complex Connectivity. 

 

Duopoly Markets but Digicel has Balance Sheet Problems 

 

Founded by Irish billionaire Denis O’Brien, Digicel is a mobile phone network provider that has expanded rapidly and now spans across 32 markets in the Caribbean, Central America and Asia Pacific.   Digicel does have monopoly positions in Papua New Guinea and Haiti, two markets where CWC does not compete, and it has consistently posted EBITDA margins north of 40 percent.  That said, EBITDA growth has been rather pedestrian for the past several years, as the company has struggled with declining voice revenue across its primarily mobile revenue base in addition to foreign exchange headwinds. 

 

Digicel complained loudly when CWC bought Columbus Communications.  After complaining, the heavily leveraged company rolled out FTTH in three of Columbus’ key markets – Trinidad, Barbados and Jamaica which accounted for roughly 30% of CWC’s overall revenue and were strong historical growers.  Barbados and Trinidad/Tobago were severely impacted by the rollout, with rebased revenue declines of -10.5% and -2.4%, respectively during LILAC’s third quarter.  By contrast, Jamaica performed well despite competition/negative economic headwinds with rebased revenue growth of nearly 10%.

 

One of the key assumptions for LILAC’s story is that the Caribbean markets are large enough for 2 competitors over time assuming rational pricing.  By buying Columbus, CWC established the company as the preeminent quad-play operator in the region with the number 1 or 2 mobile/cable asset in nearly all markets.  The deal was not cheap, but the strategic logic was sound and the synergies were ultimately greater than anticipated.  LILAC admits that Digicel’s FTTH rollout did negatively impact CWC results, with distractions from the merger possibly exasperating the difficulties.  But, importantly LILAC has noted that Digicel has not priced irrationally.      

 

Digicel paid its shareholders special dividends of $650 million and $300 million in 2014 and 2012, respectively.  The dividends were primary factors in driving total leverage to over 5x.  Digicel planned an IPO in the fall of 2015 and use proceeds to deleverage, but the company pulled the deal following China jitters.  At the midpoint of the valuation, Digicel would be valued at ~8x, despite flat/negative EBITDA growth (negatively impacted by F/X headwinds) and mobile revenue accounting for approximately 85-90% of total revenue.  Since the pulled IPO, Digicel’s debt expanded (partially to complete the aforementioned FTTH rollout) and EBITDA has contracted.  According to various press reports, Digicel recent results have been sluggish, including a reported 14% decline in EBITDA which took leverage to over 6x.  Digicel has substantial naked F/X exposure as nearly all of the debt is denominated in dollars yet ~50% of its revenue is in non-US dollar peg currencies, including over 40% in Papua New Guinean Kina, Hattian Gourdes and Jamaican Dollars.  Each of these three currencies have depreciated at least 50% over the past five years.

 

Digicel claims there are no issues, noting most of its maturities are between 2020-2023, but CreditSights issued a negative report in December of last year calling Digicel’s debt levels “unsustainably high.”  Additionally, Digicel has retained McKinsey and Goetzpartners to slash operating expenses, and Digicel has reportedly promised its investors that Digicel will reduce leverage ratios towards 4x over the next several years. 

 

Obviously, a credit event at Digicel could be a big positive for CWC.  LILAC has leverage of roughly 3.9x but relatively inexpensive debt and longer-term maturities.  LILAC’s fully swapped borrowing cost is 6.5% with an average tenor of 5.5 years and less than 10% of debt due prior to 2021. If there is a global recession/exogenous shock, Digicel goes to hell first.  But, even if Digicel muddles through its balance sheet issues, CWC could still benefit as Digicel is forced to price rationally.  Digicel has already announced pricing increases in Barbados, Antigua, St. Kitts, Nevis.  CWC hiked prices in Jamaica, Barbados and Trinidad following the rollout of its Premier League offering in the third quarter of last year.          

 

Synergies:  Greater Than Anticipated and Flowing to 100 Percent Owned Columbus.

 

CWC was widely criticized for not providing updated synergy estimates during its Q2 call in August of last year.  The number ($150 million split evenly between operating expenses and capital expenditures) was finally released with Q3 earnings, but, while the number was higher than anticipated, it was completely overshadowed by the reduced CWC guidance.  The headline multiple (12.3x) for CWC  was incredibly high but moved slightly downward (10.7x) once the remaining Columbus synergies were considered.  If one adds the remaining $100 million synergies (these will take 2-3 years to be realized) to the reduced 2016E CWC EBITDA, the acquisition price now amounts to roughly 9.3x.  Even this price could prove too expensive unless CWC growth increases. 

 

That said, it is quite possible that $150 million is not the final synergy number.  Liberty Global can be criticized on many fronts, but the company has consistently hit and exceeded merger synergy targets.  CWC was far from the most efficient operator, and therefore there is reason to believe synergy targets can be raised again.  LILAC has every incentive to ensure that synergies are realized at the Columbus level, and this should provide a tailwind to owned EBITDA growth. 

 

Chile:  Best Asset...Puerto Rico:  Resiliency of Cable

 

As previously noted, LILAC’s issues overwhelmingly stem from the shaky initial results at CWC.  Prior write-ups have described LILAC’s Chile and Puerto Rican operations and therefore this write-up will only make a couple of quick points on the two markets. 

 

LIALC’s VTR brand is the dominant broadband/video player in the Chilean market, and the company sells  a wireless offering via its mobile virtual network operator (MVNO) with America Movil.  The Internet Telecommunications Union’s latest Measuring the Information Society Report put fixed broadband per 100 customers at under 20, suggesting substantial room for additional growth.    In its 2015 investor presentation, Liberty estimated Chile’s broadband share in its market was close to 60%.  Within VTR’s current footprint, there were still roughly 500,000 passings that were not capable of receiving two-way services.  While not all of these passings will be upgradeable, some will be and VTR will also have further passings from further household growth.  In the first nine months of 2016, VTR has increased passings/2-way passings by 137,000 and 144,000, respectively, helping to drive total RGU gains of over 60,000 in the first nine months of this year.    

 

VTR has a modern cable network and offers a core package (including 100Mbps speeds in its core triple player offering) similar to that offered in multiple European territories.  Chile’s bundling ratios (42.5% triple play bundling for the first nine months of 2016) compare favorably with many European markets, and continued RGU gains are expected as the overall market expands and VTR organically grows its current base of customers. 

 

In order for LILAC to hit its 7-9% 2015-2018 EBITDA growth targets, Chile has to perform.   The below projections assume EBITDA growth of roughly 7-8% annually over the next four years, driven by internet RGUs additions.  The actual growth will depend on how aggressively VTR expands its overall home passings.  Two-way passings will slow from the 6% expansion in 2016, but will likely remain robust.  The below projections assume flat F/X rates versus current spot rates, but dollar strength could pressure results through higher programming costs and negative dollar translation.

 

Liberty Puerto Rico is the largest cable operator in the country, expanded through two deals (OneLink and Choice) purchased at 6-7x post synergies or an estimated 7-8x pre-synergies.  This write-up will not review all the gloomy macro headlines from Puerto Rico but simply concede the negative economic backdrop is certainly a headwind.  That said, LGI’s Puerto Rico’s historical results demonstrate the resiliency of the cable model. 

 

The majority of Puerto Rico’s EBITDA gains over the past couple of years have generally been achieved via acquisition synergies, but the Puerto Rican operations do have room to pick off Claro’s DSL subscribers and increase LILAC’s overall bundling ratios, even if the overall pie is shrinking.   During the first 9 months of this year, Liberty Puerto Rico reported rebased EBITDA growth of roughly 7 percent (versus a reported 11% advance) after stripping out roughly a $5 million accrual reversal.  Expanding B2B revenue in a less developed market would also be an opportunity for gains as this business only accounted for 4 percent of total revenue but grew nearly 80% during the first nine months of 2016.  LILAC has also discussed the possibility of new passings. 

 

The projections at the end of the write-up assume EBITDA growth of roughly 3.5-4% over the following 4 years, with RGU additions of roughly 8,000-10,000 annually.   If this outlook proves accurate and LILAC chooses against additional passings, capex margins will decline from the current low 22 percent rate.  While its $80-$85 ARPUs are lower than US markets, they are still meaningfully higher than other LILAC markets.  Some have speculated that LILAC could sell its Puerto Rican assets to one of the larger US cable firms given the enormous programming synergy potential.  Such a deal is possible but would require a structure to minimize tax leakage and it is less clear one of the US cable companies would be willing to issue stock in such a transaction. 

 

Linear Thinking on Growth or New Normal?

 

LILAC was envisioned to be a faster growing consolidation vehicle with a multiple to reflect this opportunity.  Following the recent struggles in CWC markets, many sell-side models have extrapolated recent weakness for the next several years, implying limited growth in most Caribbean markets.  This change has occurred despite far lower pay TV penetration rates and bundling ratios versus developed markets.  CWC’s triple play bundling ratios (~10%) are roughly 30 percentage points lower than those in Chile and 50 percentage points lower than those in the UK.  Additionally, CWC will be one of two quad- play operators in most markets.  In short, the Caribbean opportunity is not meaningfully different than it was versus 6 months ago, but investors’ perceptions of the markets have rapidly deteriorated.  LILAC does face new competition in several Columbus strongholds, but this was not unexpected.  And while Digicel’s FTTH has negatively impacted CWC shorter-term, Digicel, at worst, has a strong incentive to price rationally in the years ahead.  At best, CWC’s primary competitor faces more serious credit issues. 

 

But, it is certainly possible that CWC’s markets/LILAC’s multiple remain depressed for longer than anticipated and this is the scenario modeled below.  LILAC has adjusted some of the homes passed/RGU metrics for historical CWC markets without providing a multi-year reconciliation.  For this reason, it is tougher to model CWC’s five major markets in the same manner as Chile/Puerto Rico.   Assuming faster managed service growth, flat to declining mobile growth and the full bear case in The Bahamas, the below model assumes CWC top-line grows only 1% annually for the next several years but also assumes that CWC manages to keep margins flat prior to synergies.  The below outline assumes LILAC hits the full $75mm of operating synergies with 90% of the benefit accruing to Columbus.  As previously mentioned, 7-8% growth is assumed in Chile, with roughly 60,000-100,000 annual RGU additions (primarily internet) while Puerto Rico’s 3-4% EBITDA growth would assume roughly 10,000 RGU additions almost exclusively on the internet side and some margin expansion in both countries.

 

LILAC will receive some benefit from a new vendor financing program in the coming years, and the below cash flow numbers assume the program ramps to roughly 20% of capital spending by 2020 (LGI operates at roughly 40%), but the size of the program depends on whether LILAC stays on LGI’s platform post the hard spin.  CWC experienced a negative working capital outflow of ($213) million in the six months ended 09/30/16, and this drag will not fully reverse in the final quarter and drive negative free cash flow for the year.  CWC has historically operated with little working capital outflows and therefore the 2016 drag will likely not continue in future years.

 

LILAC’s capex margins should shrink especially if growth does not improve.  LILAC likely faces lower capital expenditure needs at legacy CWC operations.  Most of CWC’s $1 billion legacy Marlin investment was front-loaded in the first two years prior to the LILAC merger, and the merger with Columbus lessened the need for other investments.  CWC’s prior management team believed that capex margins would return to roughly 14%, but LILAC has not confirmed this number.  LILAC would prefer to invest more in existing CWC markets, particularly Panama, but these investments will be determined by the market’s health.  As previously noted, Puerto Rico’s capex margins can decline if LILAC decides against additional passings. 

 

And then there are the taxes and minority payouts, which have been highlighted in previous discussions.  The below numbers assume tax rates of 30%/35%/25% in Puerto Rico, Chile and CWC respectively and do not allow interest deductions in Chile and the Caribbean.  While individual country Board of Directors have large amounts of leeway in setting dividends, the payout is assumed to rise with CWC’s net income.  On the tax front, sell-side estimates are essentially random number generators and some appear blatantly incorrect.  The estimates at the end of the report skew towards the high side and could overstate the total liability.  Most of the minority payout has historically come from Panama and this will likely continue, especially given the new Bahamas’ competition. 

 

While most investors discuss Millicom, Televisa’s cable assets or Entel as the most common acquisition possibilities, a buyout of the Panama minority interest could be another option.  First, there is a big opportunity to lay FTTH, and LILAC would likely want to own the entire business before investing.  Additionally, a purchase would significantly reduce CWC minority payments as Panama’s distribution accounted for the bulk of CWC dividends.  Finally, Panama might be the one CWC market that could conceivably allow larger amounts of debt at the subsidiary level and therefore provide a tax offset.  The Panama government has previously expressed an interest in selling its stake, but clearly there is no assurance this will happen. 

 

6x Mobile or 8x Cable?

 

So, the big question becomes where should LILAC trade – something closer to the 6x multiple of LATAM telecom companies or closer to 8x multiple of other cable names?  On a private market basis, there seems to be little doubt that the assets are worth at least 8x.  LGI’s European assets were acquired at multiples of 7-12x and Puerto Rico was acquired at 6-7x (7-8x before synergies).  Following the split of CWC’s Caribbean and British assets, CWC exited 21 markets between 2010-2013 and received a blended average EBITDA multiple of approximately 8x.  Digicel would probably be the closest comp to CWC and despite its heavier mobile mix (roughly 85 percent of total revenue), heavier leverage and naked F/X exposure, the midpoint of its proposed IPO range implied a value of approximately 8x.  In hindsight, this multiple was too high, but it probably shows the love/hate relationship investors will have with emerging market stories.  Should CWC show improvement in its core markets, it is not hard to envision its multiple jumping to the 8x multiple assumed here. 

 

Some will note that mobile accounts for roughly 40 percent of CWC’s total revenue and therefore LILAC deserves a multiple closer to mobile players versus a cable company.  But, roughly 60 percent of this mobile revenue is from Panama/BTC and therefore on an owned basis (factoring in Jamaica), total “owned” mobile revenue is closer to 25 percent of total revenue. 

 

A final way to think about the multiple is to value Chile and Puerto Rico separately and look at the implied value of CWC excluding Columbus.  Assume Chile, the best asset within the LILAC portfolio, is worth 9x EBITDA and the slower growing but monopolistic Puerto Rico assets are worth roughly the pre-synergy multiple paid for OneLink and Choice.  One can argue with either assumption, but it is certainly possible that Chile could command a double-digit multiple today given the growth potential and VTR’s competitive position.  Assuming another party with a lower rate card was interested in Puerto Rico, it is not hard to envision a multiple of above 8x given the programming synergies. 

 

CWC’s acquisition of Columbus valued the company at a roughly $3 billion enterprise value.  For a division that generated $296 million in EBITDA LTM 09/30/16, this would imply a valuation of 10.2x LTM EBITDA and roughly 7.8x giving credit for the $100 million of remaining cost savings.  Obviously, $75 million of those synergies were unavailable at the time of the Columbus deal, but given the strategic value of the sub-sea assets and the greater than anticipated Columbus synergies, it does not appear that the $3 billion Columbus purchase price was excessive.  The residual non-CWC enterprise value would assumes a whopping 3-4x multiple for legacy CWC, with the multiple shrinking even at no growth, assuming the above numbers are directionally correct on Chile/Puerto Rico trajectory.  CWC has challenges in several markets, but these are still duopoly markets and therefore difficult to believe they are worth such low multiples. 

 

 

 

 

 

 

 

 

Implied Value Non-Columbus CWC[3]

   

Chile Multiple

 

2.1x

8.0x

8.5x

9.0x

9.5x

10.0x

 

6.0x

4.7x

4.3x

3.8x

3.4x

2.9x

 

6.5x

4.6x

4.1x

3.7x

3.2x

2.8x

Puerto Rico Multiple

7.0x

4.4x

4.0x

3.5x

3.1x

2.6x

 

7.5x

4.3x

3.9x

3.4x

2.9x

2.5x

 

8.0x

4.2x

3.7x

3.3x

2.8x

2.3x

 

                                               

 

As seen from the enclosed valuation, LILAC could still conceivably generate attractive IRRs even in a lower growth scenario.  The below numbers do assume some incremental debt issuance in 2019/2020 but total proportional leverage (including vendor financing) does not exceed 4x.  Buybacks are assumed at prices roughly tracking IRRs, but LILAC could probably take all the shares it wants right now and not meaningfully increase prices. 

 

Certainly, one can criticize the implied 20x+ free cash flow implied by the 8x multiple, and this criticism is not completely unreasonable.  The below analysis assumes 1% top-line growth at CWC plus synergy benefits so one would hope there is room for upside here.  It is possible that the below tax estimates are too high or that LILAC finds ways to minimize future payouts.  It is also possible that LILAC will repurchase shares at lower prices, as the below numbers assume buybacks near the assumed IRR.  That said, this type of multiple expansion might only occur if investors believed EBITDA growth would return to high-single-digit levels or if investors anticipated further deals.  For this reason, there is a certain circular feedback loop baked into LILAC’s valuation.  But, as seen by Digicel’s proposed IPO valuation, investors view of the emerging markets can widely fluctuate.  It is not unthinkable to envision a scenario where a couple of strong quarters cause the sell-side community to ramp up out-year CWC EBITDA estimates to levels closer to where they were prior to November of last year.  Another implication of this analysis is that if CWC’s growth rates do not improve, then LILAC could be worth more dead than alive.  Liberty’s team has long discussed the relative valuation game when it comes to mergers.  Given the fragmentation in the Latin American market, there is little doubt that further consolidation will occur.  If LILAC’s growth rate does not improve, the hunter could become the hunted, especially as LILAC could conceivably separate its Puerto Rican and Chilean assets. 

 

Conversely, it is possible that LILAC’s multiple could shrink further should CWC’s results worsen from current levels or in the case of a global recession/investors fleeing emerging markets.  If this contraction occurred within the next 2 years and if combined with further weakening of the Chilean Peso, this could cause real downside (30 percent) shorter-term.  Of course, such a decline could allow highly accretive share repurchases assuming private market cable values hold.  Only 35 percent of LILAC’s revenue is denominated in non-dollar pegged currencies (primarily Chile and Jamaica).  While it is possible that a severe crisis could cause a run on one of these Caribbean pegs, these US tourism economies would appear to be less vulnerable.  Investors may lump LILAC in with other emerging market names even with lower absolute F/X exposure.  Over time, however, US investors might also favor LILAC (assuming CWC improves) given this reduced F/X profile.

 

As has been noted, LILAC’s management team views the shares as too cheap.  Following the stock slide in November of last year, Liberty Global’s Board reversed an earlier stance that it would not repurchase LILAC shares and instead announced a $300 million buyback on a Sunday night (November 6).  Furthermore, four different Liberty insiders (including CEO Mike Fries) purchased over 130,000 shares of LILAC during the week following the decline.  Some have dismissed these actions as insignificant, noting the 3-year time frame on the buyback.  Others have argued that $1 million means little to Fries given his past compensation levels.  Both interpretations appear overly cynical.  LILAC did not envision repurchasing shares but instead changed its opinion given the plunge in share price.  The insider purchases were done by four different executives, and Fries’ $1 million purchase is still real money considering the vast bulk of his net worth is tied up in LGI/LILAC.  

 

In concluding, 2016 was a brutal year for LILAC.  Despite this, the company has leading market positions in growing economies, appears too cheap on a private market basis, and has given clear signals that it views the current share price as too low.  A small change in investor sentiment could send LILAC shares materially higher. 

 

 

 

2017E

2018E

2019E

2020E

CWC

 

$953

$1,002

$1,027

$1,042

Chile

 

$372

$402

$429

$457

PR

 

$195

$202

$209

$216

Corporate

 

($9)

($10)

($11)

($12)

EBITDA

 

$1,510

$1,595

$1,654

$1,703

Multiple

 

8.0x

8.0x

8.0x

8.0x

Enterprise Value

 

$12,083

$12,763

$13,234

$13,628

Owned EBITDA

 

$1,211

$1,288

$1,341

$1,384

Less Net Debt

 

($5,365)

($5,378)

($5,551)

($5,728)

 

 

 

 

 

 

Equity Value

 

$6,718

$7,386

$7,682

$7,900

Less 40% PR Equity Value

 

($249)

($271)

($295)

($318)

Less C&W Minority Stake

 

($1,655)

($1,690)

($1,713)

($1,733)

LILAK Equity Value

 

$4,813

$5,425

$5,675

$5,849

 

 

 

 

 

 

Growth Total EBITDA

 

5.6%

5.6%

3.7%

3.0%

Growth Owned EBITDA

 

6.4%

6.4%

4.1%

3.2%

 

 

 

 

 

 

Shares Outstanding

 

172

166

158

147

Value Per Share

 

$28.00

$32.59

$35.96

$39.77

 

 

 

 

 

 

Free Cash Flow Per Share

 

$1.36

$1.93

$2.28

$2.78

Owned Free Cash Flow Per Share

 

$0.79

$1.28

$1.54

$1.94

Total Cash Taxes

 

($195)

($218)

($238)

($253)

Total Minority Payouts

 

($99)

($109)

($117)

($124)

 

 

 

 

 

 

Implied Multiple of Free Cash Flow

 

20.6x

16.9x

15.8x

14.3x

Multiple of Owned Free Cash Flow

 

35.6x

25.5x

23.3x

20.5x

 

 

 

 

 

 

IRR

 

23%

20%

17%

15%

 

 

 

 

 

 

 

 

 

Risks: 

 

·         Sluggish CWC Results

 

·         Digicel competitive pressure

 

·         F/X weakness Chile/Jamaica or Caribbean peg break

 

·         Unforeseen government regulation or unfavorable tax structure change

 

 

 



[1] Most of the GAAP/EU-IFRS differences stem from the treatment of integration expenses (GAAP includes, EU-IFRS excludes) which will disappear in future quarters.

[2] CWC minority partners (governments and small charity stakes) own 51% of Panama, 51% of The Bahamas, 18% of Jamaica, 19% of Barbados and 20-30% of other subsidiaries. CWC treats Panama/Bahamas as subsidiaries as it controls a majority of The Board of Directors.   In total, the minority interests represent approximately 23% of CWC. 

[3] Assumes $3 billion Columbus enterprise value, the same value as CWC’s 2015 purchase.  

 

I do not hold a position with the issuer such as employment, directorship, or consultancy.
I and/or others I advise hold a material investment in the issuer's securities.

Catalyst

·         Acceleration in CWC growth

·         Accretive acquisition

·         Credit event at Digicel

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