Liberty Global looks to fixed-mobile convergence and local IPOs

Liberty Global is set to benefit significantly from its realisation of fixed-mobile convergence in the UK and Switzerland and is likely to continue to build out fibre in the UK under Project Lightning after Virgin Media’s merger with O2, possibly with a spun-off infrastructure company, according to CFO Charlie Bracken.

Speaking at the UBS Global TMT conference, Bracken also said that Liberty would weigh the benefits of floating its operating entities in different markets, a model the company increasingly regards as attractive. He said that a flotation of the newly combined Swiss business in a few years’ time was likely.

Bracken said the combination of Virgin Media with O2 in the UK and the now completed acquisition of Sunrise in Switzerland reflected the value of fixed mobile convergence and that he was “very optimistic” about both transactions. He said that VodafoneZiggo had shown both revenue and cash flow growth from FMC.

Bracken said that Virgin Media was still relatively underpenetrated regarding FMC compared with other European countries.

Bracken admitted that Project Lightning’s penetration growth had been hit by the pandemic but noted that Virgin Media was increasing penetration in its own footprint.

Bracken said that Virgin Media’s penetration could be lower than fibre players and it could still make money from investing in fibre expansion close to its existing network.

He said that “the Lightning build is a good return on capital and one we intend to continue” despite the fact that it “distorted” the company’s free cashflow figures to some extent.

Bracken said Telefónica would be “supportive” of the company’s plans to continue to build out to an additional seven million homes provided the cost of infrastructure investment and penetration levels remained positive.

He said that the merger and the creation of a separate “infrastructure company” that deconsolidated the business and placed it off the balance sheet was still possible after the O2 merger.

Bracken said that “very fast speeds” were still possible with DOCSIS on the company’s own network. He said that the cable infrastructure was “modular” and noted that it was very costly to build a fibre network from scratch, which was not necessary with cable.

He said that Virgin Media had seen a reduction in ARPU as contracts came to an end, but that the company had seen low churn during the pandemic. Regarding falling ARPU, he said that this reflected new regulations requiring companies to inform customers about best available deals as their contracts ended. “It’s all about best tariff and end of contract life notification and that is the same across the whole industry”.

Bracken said that EBITDA would be “broadly flat” going forwards as the company incurred integration costs from the merger with O2 and invested in its network.

Bracken said that the industry was looking to raise prices to help fund the rollout of high-speed infrastructure.

He said that fibre overbuilders were not really relevant because they lacked scale and the real battle over next-generation networks would be between Virgin Media and BT.

“By and large our business has been very resilient,” he said. Where revenue had been lost, it was mostly in low margin activities and the company’s performance showed that its model was resilient.

Bracken said that there was a “flight to premium” broadband as a result of the pandemic that had benefited Liberty because of the strength of its networks.

Regarding the Swiss merger, he said the Dutch and Belgian model provided a template for FMC. He said there was strong B2B opportunity in Switzerland and noted that while both companies had progressed with digitisation, there was a strong opportunity for the combined company to further reduce its cost base.

Bracken said that the Swiss market had become more price-competitive thanks to the efforts of Sunrise and Salt, and UPC Switzerland had been hit, particularly in relation to its legacy analogue TV base. However, he said there were “some very encouraging underlying trends”.

He said that UPC Switzerland was now starting to grow broadband share on its footprint despite the increased price competition. The said that the additional “clout” that the Sunrise merger gave the company in the market would improve its position.

Turning his attention to Belgium, Bracken said that “Telenet is a very powerful retail brand” in Flanders and started with a “strong hand” in any talks about fibre joint ventures.

The importance of TV “varies from market to market” he said.

In the UK, TV was less of a priority while in Belgium and the Netherlands, where the company had some sports assets, TV would play a more prominent role.

“The core of our value is in the broadband networks,” he said. “That should give us a strong foundation on which to build.”

“As we go into next year we feel in very good shape,” he said. The creation of “FMC champions” was a positive development and the company would look to create similar models in Ireland and Poland, and ultimately remained open to acquisitions or disposals to achieve its goals.

Liberty Global was “very lucky” to have a lot of cash on its balance sheet from its German disposal, said Bracken.

Bracken said that the company would have excess capital as a result of its transactions. In terms of deploying the capital, he said that the company could look to buy back stock. Regarding acquisitions, he said he didn’t see “any strategic holes” in our portfolio.

As the company was now focusing on free cash-flow rather than EBITDA, local listed champions could be an interesting model for the company going forwards, said Bracken.

He said Liberty remained disappointed in Telenet’s pricing and the company seemed to have “a very cheap stock”. In the Netherlands, it is “too early” to say whether an IPO is in the works, but a listed company would be in a good position to compete against KPN.