Liberty Global: Great Positioning, Widening Moat, Big Upside

Liberty Global (LBTY) is a European cable provider that operates as one of the largest cable companies in the world with ~24.5 million customers and ~49 million subscribers as of March 31, 2014. Roughly 80% of its EBITDA is generated from its five core markets - the UK, Germany, Belgium, Switzerland and the Netherlands. The Company is spearheaded by John Malone and is the result of a significant amount of M&A.

LBTY offers an investor many of the characteristics that mark a successful company and investment:

*Strong and resilient subscription franchise model
*Superior product quality and value proposition versus competitors
*Exposure to secular growth (demand from broadband/faster speeds and growth in TV penetration)
*Malone and management team are terrific capital allocators and operators

Exposure to Broadband
*LBTY is a great way to play the theme that broadband access and speeds are going to become more and more important in the future. The desire for faster speeds is increasing at a rapid rate, predominantly driven by online downloads, OTT offerings, and more devices in the households.

*LBTY is well positioned to take advantage of growth in broadband because it has a superior product versus its competitors, the telcos. LBTY can easily offer download 150 mbps speeds in its markets, while in many cases its copper competitors are utilziing a VDSL strategy that limits download speeds to 80 mpbs (in many cases this is more theoretical than practical).

*Overall, LBTY's broadband penetration rate (subs/homes passed) is 31% compared to US cable operators that are closer to 40%. Given that LBTY is taking the vast majority of net adds, this penetration rate will continue to increase.

Better Competitive Positioning than US Operators
*Because pay-TV is a much more nascent business in Europe than in the US, LBTY does not have the same content cost pressure as US operators.

*OTT is not nearly as much of a risk and could very well be a positive. LBTY TV ARPUs are low to begin with and Netflix entering markets such as Germany should further bolster the demand for LBTY's broadband offerings.

*Overall broadband penetration and televeision rates are lower, providing a long runway for LBTY to grow.

Great Company, but Why a Great Investment?
*Based on 2015 estimates, LBTY is offering a 10-11% levered FCF yield. FCF has been growing in the mid-teens, driven by LBTY's levered equity approach (~4-5x EBITDA) and declining capital intensity. EBITDA should continue to grow in the MSD range, driven by increased bundling rates and growth in ARPU per customer. CapEx intensity will continue to decline, resulting in higher FCF growth. As a result, you are easily talking about a 20% IRR.

*Management is very focused on increasing equity value. Management has committed to buying back $3.1B of stock from now until the end of 2015, representing ~10% of the market cap.

*The runway for growth in the markets is very long. In particular, Germany is an amazing market that has been growing EBITDA in the DD range and LBTY's broadband penetration rate in the market is only ~20%.

*The UK market has been a turnaround story and VMED will continue to capitalize on its broadband offering and EBITDA will grow in the MSD, in part driven by synergies of LBTY's acquisition of VMED in that closed in 2013.

*Netherlands has been a tough market as the telco has been under financial pressure and has rolled out fiber and been very promotional. LBTY's pending acquisition of Ziggo (the largest Netherlands cable operator) will improve its positioning in the country.

Valuation
*On a fully-taxed basis, LBTY should be able to deliver $3.30 - $3.50 in levered FCF per share in 2015.

*Applying a 13x-14x multiple and including the net benefit of ~$7-8 in NOLs, LBTY should trade at $50-$55

*At current levels, buying LBTY shares generates an attractive ~20% IRR assuming no multiple re-rating (~10-11% yield + MSD EBITDA growth + declining capital intensity)

*As a side note, I also recommend buying the K shares. The A's have votes and the K's don't, but given that John Malone has supervotes it doesn't make sense to pay the current market premium for A shares.

Pathway to Value
*Continued execution, buybacks, VTR spin, closing of Ziggo deal, potential to acquire remaining stake in Telenet (Belgium)

*Sale to wireless operator. Would make a lot of sense given that LBTY is becoming more aggressive in its MVNO strategy and rolling out WiFi hotspots