Cable and media magnate John Malone made another big move March 21 when Liberty Global (Nasdaq:LBTYA) acquired Germany's third largest cable operator, Kabel Baden-Wuerttemberg, for $4.5 billion. Liberty will combine Kabel BW with Unitymedia, Germany's second largest cable company, which it acquired in November 2009 for $3 billion. If you can get past the company's unbelievable debt load, here are four reasons why you should own its stock.
TUTORIAL: How To Read Financial Tables
Liberty Global is the world's largest cable company operating outside the United States with operations in 14 countries including Germany, Switzerland, Chile and Australia. Its services - television, telephone and internet - are used by 31.2 million homes worldwide generating $9 billion in annual revenue. It's big and getting bigger.
Europe accounts for more than 80% of its revenue and the Kabel BW deal increases this predominance. Its biggest difficulty is going to be Deutsche Telkom AG (NYSE:DB), whose $39 billion sale of T-Mobile to AT&T (NYSE:T) provides it with plenty of cash to expand its broadband offerings in Europe. The competition is healthy.
The linchpin of Liberty Global's expansion is cable technology itself. Many see cable as a better choice than DSL for providing triple play (television/internet/telephone) bundles to subscribers. The penetration rate of cable in Europe and in most parts of the world is much less than DSL and gives Liberty a real opportunity to get out in front of the market.
In 2010, the number of triple-play subscribers grew by 38% to 3.7 million. At the end of 2010, the average customer used 1.57 products. In a perfect world, I'm sure CEO Mike Fries would like that average to be closer to two, if not higher. The acquisition of Kabel BW will help move the needle.
In June 2004, Liberty Media (Nasdaq:LINTA) spun-off its international division. Less than a year later Liberty Media International acquired the remaining interest in UnitedGlobalCom that it didn't already own for $3.5 billion, creating Liberty Global. In its first year as a merged entity, its operating margin was 4.9%. Five years later, it's 16.6%. Yet its market capitalization is $11.25 billion, $400 million less than in 2005 and that is after its stock doubled the last two years.
For those who believe its stock is now expensive, consider this: Rogers Communications (NYSE:RCI) revenues in 2006 were about the same as Liberty's today yet its operating margins were 200 basis points less. At the time, Roger's stock traded at 1.56 times sales compared to Liberty's 1.10 ratio.
The Colorado billionaire owns 39.3% of its voting shares and is firmly in control. When he's not plotting acquisitions, he's busy buying land. So much so, he's now the largest individual landowner in the United States with 2.2 million acres in Wyoming, New Mexico, Colorado, New Hampshire and Maine.
What does this have to do with cable you ask? Time. Owning cable operations and land require similar patience and nurturing and he clearly has both. You might not like his blunt honesty but his vision goes well beyond the next few quarters - a must for successful management.
The Bottom Line
Liberty's debt is shrinking while its operating income is rising. It may not be at the pace I'd like but it's headed in the right direction. While it's hard to do, I think I can look past its failings to a bright future in Europe and other parts of the world. Patience will pay dividends soon enough. (For additional reading, see Biggest Merger and Acquisition Disasters.)
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!