We upgrade our recommendation on Liberty Global Inc. (LBTYA) to Outperform backed by the company’s excellent financial results for the first quarter of 2011. Long-term potential of Liberty Global is much visible now after its decision to acquire the third largest cable operator in Germany, Kabel Baden. Liberty Global purchased the second largest German cable MSO, UnityMedia in 2010.
Germany is the fastest growing economy in Europe and its cable TV market is highly lucrative. If Liberty Global gets regulatory approval for Kabel Baden acquisition, then it will become a formidable player in the German cable TV market, offering triple play video, voice and Internet services. The enlarged Liberty Global will manage around 7 million subscribers coming second to Kabel Deutschland GmbH, which manages about 9 million subscribers. However, with respect to both revenue and profit, Liberty Global may now surpass Kabel Deutschland.
Western Europe became an extremely lucrative segment for the cable operators. These markets witnessed growing demand for pay-TV services coupled with triple-play bundled services that combines video, Internet, and telephony. The triple play customer base increased 15.4% year over year in the first quarter of 2011. The company is also concentrating on double play product, Internet and telephony, which have the potential to expand. Double play customer base penetration increased to 4.7% in the previous quarter.
During the first quarter of 2011, Liberty Global achieved significant growth in average revenue per user (ARPU). UPC Broadband segment ARPU increased 2.4% year over year. Excluding Germany, ARPU growth would have been 6.1% year over year. Further, VTR Chile and Telenet Belgium witnessed even better ARPU growth of 7.2% and 6.6%, respectively.
Deployment of high-speed DOCSIS 3.0 network has helped Liberty Global to differentiate its offerings in the industry. With DOCSIS 3.0, the company can now offer faster downloadspeed compared with other large European cable operators, such as Virgin Media Inc. (VMED) and BT Group plc. (BT).
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