Liberty Global’s big restructure

Source: Liberty Global

Liberty Global made a raft of big announcements today that could radically reshape the company. All have one goal ultimately in mind – to close what the company’s management sees as a massive gap between its real value and that reflected in the price of its stock.

There were four major announcements.

The first is the spin-off of 100% of Switzerland’s Sunrise to its shareholders, with plans for a Swiss listing later this year.

The second was the decision to create a separate infrastructure ‘NetCo’ in the UK comprising Virgin Media O2’s cable and fibre assets.

Number three is the creation of Liberty Global Benelux, a new holding company that will house Belgium’s Telenet and Liberty’s 50% stake in Dutch JV VodafoneZiggo.

The fourth announcement, something of a footnote to the others, is the long-awaited sale of production outfit All3Media, jointly owned with Warner Bros. Discovery, to Jeff Zucker and Gerry Cardinale’s Abu Dhabi-backed RedBird IMI.

Sunrise spin-off

Mike Fries (Source: Liberty Global)

Speaking about the announcements in a strategy update following Liberty’s announcement of its full-year results, Liberty CEO Mike Fries said “each in their own way reinforce our commitment to delivering value to shareholders”.

On the Swiss plan, Fries said “it should be clear that Sunrise is best positioned today to pursue an equity capital markets transaction and not surprisingly that’s why we’re announcing the spin-off”.

He said the Swiss market was “highly rational and Sunrise is fully converged and nearly done with synergies [from its merger with UPC Switzerland] while the transition to 5G is complete, and we have access to nationwide HFC and fibre”.

Liberty is putting in US$1.7 billion in investment to reduce debt ahead of a listing, and Fries emphasised that no third-party investment or financing would be necessary to achieve the listing.

The UK NetCo

The UK infrastructure entity, meanwhile, will be a fully consolidated subsidiary of Virgin Media O2 and will comprise of the operator’s cable and fibre network assets covering 16.2 million premises across the UK, with all to be upgraded to full fibre in the coming years.

(The latter point is probably important to note. NetCo splits have tended to work best when the network in question has a competitive advantage. In the case of HFC networks, that advantage is diminished where they are in direct competition with FTTH. Cable is seen as a less future-proof technology. Apart from the fact that the upgrade path to fibre is competitive with DOCSIS upgrades, NetCo splits are more likely to deliver value if the network is an FTTH one.)

Through a wholesale agreement, the new Virgin Media O2 NetCo will connect VMO2’s fixed customer base, providing revenue and attractive cash flow from day one of operation.

Virgin Media O2’s mobile assets will not form part of the NetCo, and nexfibre, the independent fibre joint venture between Liberty Global, Telefónica and Infravia, will continue to operate separately, focusing on fibre network expansion into greenfield areas.

Once all planned fibre build is completed, the separate NetCo and nexfibre networks will reach a combined total of up to 23 million homes, reaching around 75% of the country. Collectively, Virgin Media O2 and nexfibre have a full fibre footprint of more than four million premises today.

Fries described the NetCo as “one of the most important announcements we’re making today”.

He said that the creation of the NetCo should provide “greater focus on the pace and efficiency of the upgrade” as well as an opportunity to generate wholesale revenue. He also suggested that both the new NetCo and the existing (separate) nexfibre could be vehicles for consolidation of the UK alternative network market.

Liberty Global Benelux

The third major initiative outlined was the creation of a new holding company for Telenet and Liberty’s 50% share of VodafoneZiggo.

Fries said that “these two operations will create one of the largest fixed-mobile convergence platforms in Europe” with US$7 billion of pro forma combined revenue and US$3 billion of EBITDA, equivalent in size and scope to KPN in the Netherlands.

The Benelux move is intriguing. Unlike the Sunrise spin-off, it does not create shareholder value in its own right. Fries and CFO Charlie Bracken spoke on the call about potential synergies and “a single operational focus” to drive “best practice”, along with future possible moves around infrastructure assets, without being very specific. (Regarding synergies, he added the caveat that “if we discover synergies between the entities, they would have to be synergies that are realised without a consolidation of the two entities.”)

Liberty Global Benelux could be subject to its own separate listing at some point. (Fries spoke on the call about creating “an ideal candidate for equity capital markets transactions when the time is right”.)

The creation of the holding company does however also open up the question of what ultimately will happen to the Dutch JV. Fries skirted questions alluding to this on the call, but he did drop tantalising hints that could lead some listeners to infer that Liberty is mulling options that include either buying out Vodafone or getting buy-in from it to the new venture. He said that the new organisation could provide “a vehicle to be opportunistic as we explore market consolidation”. (He also said that “who knows, maybe we’ll have things to discuss with Vodafone” later in the year.)

All3Media sale

Fries also used the call to announce the sale of production company All3Media, in which Liberty shares ownership with Warner Bros. Discovery, to RedBird IMI for £1.15 billion, a multiple of about 12 times EBITDA.

This, he said, “represents a premium for what we believe is one of the best independent producers in Europe”. Closing is expected in the second or third quarter, netting Liberty Global about £400 million including repayment of debt. The proceeds will be used to part-fulfill Liberty’s commitment to invest in Sunrise ahead of the latter’s listing.

(“I have to say it’s a bittersweet moment for us at Liberty as Jane Turton and her team have done an outstanding job building one of the most important content platforms today and we know that she’s going to continue to be a driving force in this industry – we’re super proud of everything they’ve accomplished,” said Fries.)

The raft of announcements is, according to the Liberty Global CEO, underpinned by his ambition to improve returns to shareholders.

(“We’re committed to value creation for shareholders. All the steps we’ve taken – exiting markets at a premium, our buyback programme and our announcements today – demonstrate that we are not empire builders; we’re value creators,” he said.)

That all means closing that gap between perceived (the market price of its shares) and actual (Liberty’s own estimation based on peer group comparisons) value in favour of the latter. In the meantime, Liberty will also ‘deliver value’ by continuing to buy back its supposedly bargain-priced shares (the buyback programme to be funded in part this year by the spin-off of Sunrise).

The announcements provide analysts with plenty of food for thought. Liberty Global’s complex structure has in the past appeared to make investors ill at ease, and only time will tell whether its efforts to paint a more coherent picture will be enough to convince them to give it the higher valuation Fries craves.