Tuesday, December 05, 2006

Liberty Series 2

Part II - Liberty Soup

Liberty Global (LBTYA, LBTYB)

In part one
of this series about John Malone's empire we referred to his spaghetti of interconnected companies and tickers. Now we're ready for the soup.

Liberty Global spun off from the rest of the group in June 2004 but, as we indictated last time, it is under a great degree of common management and ownership still. It operates cable, broadband and programming business in seventeen countries, principally in Europe but also in far flung Japan, Chile and elsewhere. It is a so called triple play supplier but has so far avoided mobile - the potential next move?

In terms of capital allocation it is aces. Organic customer additions are fairly strong (10% year-on-year in the most recent quarter), it is buying back stock in a self-tender and buying and selling small pieces where it makes sense.

What about the financials? Gene Marcial points out in this interesting piece
that Liberty Global trades at a far lower multiple than its American facing peer Comcast (CMCSA). But which multiple? Ay, there's the rub for Gene, in common with most analysts and the company itself, uses price to EBITDA, which Liberty calls OCF. Annualised this is c.$2.4bn, compared to the enterprise value of c.$21 billion. But is that good or bad in absolute terms, Comcast notwithstanding.

It's bad. As any starter accountant would tell you EBITDA, without an eye to interest payable and capital expenditure is meaningless. Now by using enterprise value you are already taking care of the interest payable part. But capex here is huge - $372m in the most recent quarter and over $1bn in the three quarters to date. Free cash flow is currently negative!

This does not kill Liberty Global as an investment idea but, for our money, severely limits its appeal at a time when there are so many telecom/new media properties available at fairly low price to true (i.e. free) cash flow. So we'll park this one in the negatives for the time being.

Disclaimer: We have positions in nearly all stocks mentioned in this series of posts.

Stocks mentioned: LBTYA, LBTYB, CMCSA


Tim said...

I think you'd be well served by trying to explain the reason why Malone runs his companies to not be GAAP income positive. The fact that it is so widely misunderstood is probably the number one reason why the stock of Liberty companies is routinely favored by value investors and shunned by everyone else. It all boils down to how corporate income tax distorts the optimum ratio between debt and equity in a company by reducing the cost of debt.

Cal said...

You don't have a contact form on your site. How would you like to do a link exchange? thanks let me know.

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