|Shares Out. (in M):||115||P/E||NA||NA|
|Market Cap (in $M):||4,999||P/FCF||16.1x||14.3x|
|Net Debt (in $M):||3,444||EBIT||850||925|
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EVENT-DRIVEN IDEA: TNET BB
Telenet Group Holding NV (TNET BB) provides television, telephone and Internet services through a network of fiber-optic and coaxial cable, as well as mobile services using an MVNO model. The company is the largest cable service provider in Belgian covering the Northern half (Flanders) of the country. Liberty Global (LBTYA) is the controlling shareholder with just above 58% ownership.
I love investing in cable globally, I love levered equities and – for the most part – betting with John Malone has been very rewarding for shareholders.
This is a pretty straightforward thesis:
I believe that TNET can provide a +25-50% return to shareholders in the next 6-18 months through a combination of buybacks, dividends and earnings growth.
Separately, I believe there is a very high likelihood that controlling shareholder LBTYA bids for the shares they do not currently own in the next 6-9 months. If LBTYA de-levers as I think they will when they buy ZIGGO NV (see my previous writeup), then TNET will be next on the agenda. The Liberty playbook is pretty straightforward.
Note: Press reports indicate LBTYA has revived discussions to acquire Dutch broadband provider Ziggo as Malone prepares to expand his footprint in the region. Ziggo said in an e-mailed release that it is currently in discussions with Liberty Global regarding a potential offer. Liberty’s CFO said that it was still interested in acquiring Ziggo, but only at the right price.
1) Macro/Competitive Environment
Similar to Ziggo, TNET operates in one of Europe’s more attractive cable markets characterized by an oligopolistic structure, high population density, network ubiquity, wealthy population and numerous growth opportunities. In addition to strong industry tailwinds, Telenet benefits from a growing market share, increasing penetration and ARPUs, solid FCF generation, potential opportunities for expansion into wireless as well as an attractive valuation.
2) High Visibility Business Model
The cable business model is one of the most attractive out there – a subscription model with high-visibility and high incremental margins once capex is completed. TNET has fully upgraded its network, and is now competing against a telephony incumbent (Belgacom) with a technological disadvantage. Belgacom has never shown any desire to compete aggressively, and I expect competitive dynamics to remain stable.
3) Capital Returns
TNET has continued its policy of high capital returns to shareholders after announcing a €7.90 dividend (May 2013), or ~20% of market cap at time of announcement. In conjunction with the extraordinary dividend, TNET announced an ordinary buyback of €50mm to purchase shares below €35. Lastly, TNET has publicly stated a policy of returning 100% of FCF and levering up towards 4.5x net debt/EBITDA, implying an annual capital return of at least €500mm (~10% of current market cap) for the next few years.
TNET Shareholder Disbursements
Over the past year, capital returns totaled approximately one-third of TNET’s market cap – mostly from the dividend. However, future returns will likely take the form of buybacks that LBTYA will not participate in. As a result, the €500mm is ~25% of the free float of minorities.
Bottom Line: I believe TNET will likely announce a near-term tender offer upon the expiration of the restricted period (January 18, 2014) at a premium to the current share price.
4) Solid Revenue/Earnings Growth
I estimate TNET will grow revenues and EBITDA in the +7-10% over the next few years as it leverages its 100% fully-digital cable network vs. incumbent telco provider Belgacom (BELG BB). Though a MVNO with Mobistar (MOBB BB), TNET’s entry into mobile has also materially accelerated revenue growth and driven market share gains. Though mobile is a relatively lower margin business, the MVNO allows them to retain customers (reduce churn) at a capex-light cost. I expect EBITDA to increase with penetration increases and lower incremental marketing spend. TNET also continues to see analog-to-digital upgrades and penetration increases in broadband and telephony. Similar to the Netherlands, this is a two-player market with TNET in a stable duopoly with Belgacom. Both players are currently pushing through price increases (see below).
Telenet Price Increases
5) TNET: A Great Portfolio Manager’s Stock
With an investment in Telenet, you’ll get an aggressive return of capital and a potential for tender offers at a premium as LBTYA executes its playbook. The remaining minority shareholders are a committed bunch, and in the stock for the long haul – no matter how brief that may be. As a result of the ‘smart’ investor base, the stock itself exhibits very little volatility relative to stocks in the space or to global stock indices, while maintaining its upside (though a some liquidity sacrifice at €5mm ADV).
6) Other Ways To Win
An increase in competition from Belgacom would disrupt the Belgian market – though they have never shown any such aggressive behavior and their fixed networks business is still growing, while mobile continues to face pricing pressures. There are no other current competitors in the market.
The Belgian Regulator recently published the details of the wholesale pricing for cable access in Belgium. Wholesale access will be priced on “retail-minus” basis of 30% (vs. “cost-plus”) for single-play analog TV, or a combo of analog and digital TV. For dual play, it will be priced at a 23% discount (TV and broadband). Per Bloomberg, TNET will challenge the Belgian regulator's decision in a ruling expected early next year. It is likely that wholesaling the network will only become a commercial reality in late 2014/early 2015. Telenet management is confident about wholesaling cable access given there are high barriers to entry: content, relationships, set top box functionality and interface and a legacy TV base that is happy. Even the initial terms came in about as expected, while timing is now likely pushed out. Regardless, I believe the situation is “de-risked” and it is unlikely a competitor enters and makes an impact in the scope of this investment timeframe.
Expanding on the above “Competition” risk – now that the regulator has shown their cards, the proposed pricing regime does not seem like it will produce enough margin for new entrants to aggressively compete. Also, given TNET’s appeal and the process it entails – it is unlikely we see a re-seller enter the market until late 2014. I won’t even go into the technology issues that need to be overcome.
I’ve been involved with the Euro Cable names for over a decade, and have remain confounded at how conservative analysts are with this name. Make no mistake that LBTYA controls TNET, and will be more aggressive versus peers when needed. What this has translated to for investors vs. expectations: higher dividends, more buybacks and more assertive LBTYA ownership.
TOTAL RETURN PRICE TARGET (6-18 MONTHS): €55 - €66 (+25-50%)
Price Target Components:
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