We upgrade our recommendation on Liberty Global Inc. (LBTYA) to Neutral following the company’s decision to acquire the third largest cable operator in Germany, Kabel Baden. This will consolidate the company’s foothold in the core European markets.
The deal is expected to be closed in the second half of 2011. The acquisition of Kabel Baden followed Liberty Global’s January 2010 acquisition of UnityMedia GmbH, the second largest cable operator of Germany.
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.
In the coming years, we believe, Liberty Global’s revenue will continue to benefit from a ‘triple play’ of video, broadband, and telephone, as it signs up more “bundled” customers in Europe and Latin America. The triple play customer base spiked 38.2% year over year in the fourth quarter of 2010.
The company is also concentrating on double play products — Internet and telephony — which have the potential to expand. Double play customer base penetration increased to 9.3% in the previous quarter. The company is aggressively buying back its shares to increase the shareholders’ wealth. The board of directors of Liberty Global has authorized another $1 billion of share buy-back program for 2011.
Deployment of high-speed DOCSIS 3.0 network has helped the company to differentiate its offerings in the industry. With DOCSIS 3.0, the company can now offer speed compared with other large European cable operators, such as, Virgin Media Inc. (VMED) and BT Group plc. (BT).
Management has devised a plan to deploy EuroDOCSIS 3.0 in the range of 80%-90% of all UPC broadband divisions in Western, Central, and Eastern Europe. The company is also conducting DOCSIS 3.0 trial runs in Belgium.
Meanwhile, Liberty Global is currently trading at the high end of its 52-week price range. The stock price has moved up by nearly 80% last year. At present, the stock is trading at significantly higher multiples compared with both the industry average and the S&P 500 average with respect to several valuation metrics. We believe this high level of current valuation may restrict above market gain any time soon.
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