Liberty Global Brings European Playbook to Latin America, Eyes More Acquisitions

Mike Fries - 2016 UJA Federation of New York's Leadership Awards - Getty - H 2017
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John Malone's international cable operator during the second quarter saw faster financial growth in its Latin American unit, which it is spinning off by year's end.

While some are simply enjoying a holiday in the Caribbean or Latin America, John Malone's international cable operator Liberty Global continues to be all business in the region. 

With the planned spinoff of its Latin American and Caribbean cable systems, known as LiLac Group, by the end of the year, the company recently highlighted that their financial growth in the second quarter outperformed that of its bigger European operation.

Quarterly revenue increased 2 percent, edging out the 1.6 percent improvement to $3.6 billion recorded for the European unit, to $941 million, and operating cash flow jumped 10 percent, compared to 6 percent in Europe, to $368 million (versus $1.7 billion in Europe).

Liberty Global is looking for more financial, and subscriber, growth at its Latin America unit, which has been putting to use the company's European playbook.

Liberty Global had made more than €74.8 billion ($87.6 billion) in acquisitions since 2005 as of last year, most of them in the cable space and most of them in Europe. Latin American deal opportunities, however, have come very much into focus for management amid a growing middle class in the region with an appetite for pay TV, a multitude of pay TV providers that could benefit from being part of a bigger company, a more mature market in Europe where fewer M&A options are left and the planned spinoff of Liberty Global's Latin American business, which will give it its own stock that can be used for takeovers.

Investors have so far been able to track LiLac's performance in the form of a tracking stock, created in 2015, but the May 2016 takeover, for nearly $7 billion, of Cable & Wireless Communications boosted the size of the business, which is now active in such territories as Chile, Puerto Rico, Panama, Jamaica, Trinidad, Barbados and the Bahamas. 

Analysts expect more deals in the coming years to boost the number of subscribers the company has in Latin America. As of the end of June, Liberty Global's European arm had nearly 45.4 million total subscriptions, including more than 18.5 million pay TV subscriptions, compared to the more than 5.2 million subscriptions in Latin America, including more than 1.7 million in pay TV.

“The spinoff will benefit LiLac shareholders by creating a stand-alone, asset-backed equity, while enhancing its potential attractiveness as an acquisition currency for consolidation opportunities in the highly fragmented Latin American and Caribbean telecommunications markets," Liberty Global CEO Mike Fries said during the earnings announcement in early August.

On the earnings call, he summarized the Latin American business' key strategies, highlighting that they were in line with what Liberty Global has done in other markets. 

"It begins with organic growth, which means capturing market share, growing average revenue per user with better and faster products and, of course, driving margins, supported in part by $150 million of synergies," he said. "The second driver is perhaps even more important in this region than in Europe, and that is smart capital structure management. It begins with putting in place a sensible balance sheet hedging strategy, in particular, outside of the U.S. dollar or pegged markets, which represents about half of our revenue. And we've done that wherever possible, including in markets like Jamaica. So that piece of the puzzle I feel great about."

One key focus for Liberty Global in Latin America has been to bring executives and know how from Europe where the company has grown via acquisitions and improved operations. "We are starting to see the benefits of scale as we leverage the know how and expertise in Europe as well as our deep talent pool," Fries said earlier this month about the business momentum in Latin America. "We have added over 10 new executives to the LiLac and Cable & Wireless teams from Europe in the last nine months, including CFO, chief commercial officer and general counsel of Cable & Wireless, and the support from our treasury and M&A teams in London, alongside the global technology group, has been invaluable."

But don't forget the deal opportunities, which will bring more growth opportunities, Fries reminded analysts and investors. "Last but not least, the region is ripe for consolidation, and we are in a great position to take advantage of opportunities as and when they arise," he said. "We announced a few weeks ago that we are acquiring the 20 percent of the Cable & Wireless Barbados asset that we did not own and that we think is a great multiple."

What could be on tap beyond that in terms of deals? "We're carefully evaluating a large pipeline of deal flow," Fries said, without mentioning specific companies. "And our approach here you can expect to be very deliberate and focused on relative values and accretive opportunity."

Bankers and analysts have mentioned Stockholm-listed Millicom, whose CEO Mauricio Ramos is a former Liberty Global Latin America executive, as a potential takeover target for Liberty Global's Latin American business. It has a market value of close to $6.35 billion.

"Acquisitions will definitely be part of the growth strategy, and the playbook will be similar to what we have seen at Liberty Global" in Europe, Macquarie Securities analyst Amy Yong recently told THR.

While the company looks to acquire more in Latin America, Wall Street expects Liberty Global could look to sell some of its European businesses.

"Most of the markets, if not all of them, at some point, will have two — maybe three — fixed mobile players in them. We think we should be one of them. We think we can be one of them," Fries explained when asked about that possibility on the earnings call. "But in markets where we're a bit sub-scale or where we think perhaps the growth profile or the mobile entry opportunity in the long run isn't quite as attractive, we might look at exiting a market here or there."

He added: "I'm certain that the private market value of the assets we might choose to exit will be materially higher than the implied public market value of our stock. ... We're always going to be looking at value creation. And certainly, one of the main elements of value creation for us is smart and appropriate M&A activity. And that should normally include exiting as well as buying in markets where we think we don't have a shot at being a scale player."

But in Latin America, the deal opportunities are more numerous these days as the developing industry will make players look for scale and its financial and strategic benefits, Fries said.

"It's a big pipeline today," he said. "We are super busy looking at opportunities — everybody wants to talk. ... The M&A business opportunity here is substantial."

But Liberty Global will remain opportunistic and not overpay for deals, its CEO highlighted. "I will assure you that, as we have been for two decades now, we'll be smart and disciplined about how we go about building the opportunity," Fries said. "And if the opportunities aren't there, then we'll get on the other side of it and consolidate with somebody else. But I do think there's an opportunity here for us to bring the expertise, the capital, the ambition, the strategic approach of value creation that we utilize elsewhere in the world through this region that is highly fragmented and is looking for leadership."

Analysts said they are confident Liberty Global can bring its operating success and deal expertise to Latin America and boost the financials and stock price of its regional business. Wunderlich Securities analyst Matthew Harrigan before the summer recommended the stock in a report, saying: "Buy-rated LiLac Group offers a compelling opportunity at current levels, with likely accelerating growth through 2017."