Liberty Global: A Risky Bet Amid Subscriber Decline

Investment Thesis

Liberty Global plc (LBTYK)(NASDAQ:LBTYB) is an overleveraged business that is struggling to modernize and stop its paying subscriber base from shrinking.

The bull case points to its continued effort to repurchase shares. But what I see is a business that offers investors a poor risk reward. I recommend that investors avoid this investment.

Why Liberty Global plc?

Liberty Global is a telecommunications and television company operating in multiple countries, primarily Europe and Latin America. It provides cable television services to millions of subscribers in various markets, via a wide selection of channels, on-demand content, and premium packages.

The advantage of the business to its end customers is that it offers a full bundle of services, including cable television, broadband, and mobile service, as well as many high margin value-adds, for example, telephone service features and customer support to enhance the overall customer experience.

It's a John Malone company, and as such, is one that investors often recognize as a very well-operated and strong free cash flow generating company. However, with time, the business has struggled to modernize, and some of its biggest supporters decided that it was time to call it a day on the business.

Case in point, Berkshire Hathaway (BRK.A) decided in Q2 2021 that enough is enough, and sought to start disposing of its stake in the business.

So What Now?

Close followers of my work will know that I always look toward customer adoption curves as an indication of the company's viability.

The table above shows the progress the company is making in growing its customer base.

There's no need for any explanation, these figures speak for themselves. Paying customers no longer value this business the way they once did. And the only tool that Liberty Global has left is to increase its prices in an effort to stabilize its revenues. And that will work for a while, but at some point, customers will question their value proposition and exit the company's service, in their own respective market.

Moving on, as noted already, this is a John Malone company. And as customary for the media mogul, it's a business that is significantly levered. And these highly leveraged businesses can have a lot of appeal when the business is flourishing. But when the business stops growing at some point, investors start to question its balance sheet.

Whilst it's true that Liberty Global has no debt maturities for another 4 years, starting 2027, management will either have to renegotiate its debt or start to pay back some of its debt.

And given that its market cap is approximately $8 billion, while its debt runs at approximately twice that figure, at approximately $15 billion, this echoes investors' overall skepticism of the strength of the underlying business.

For their part, Liberty Global's management continues to articulate the bull case that they are repurchasing their total number of shares outstanding at a rapid rate.

However, as I've already remarked, given its leverage, at some point soon, management will no longer be able to repurchase its shares as aggressively, as the bulk of its cash flows will need to start to make a significant dent on its outstanding debt.

After all, not only are interest rates very high right now but also, creditors will be asking onerous terms to refinance their debt. So, as cash gets diverted to tackle its balance sheet rather than repurchase its debt, that will fully erode what's left of its bull case.

The Bottom Line

Liberty Global plc appears to be facing significant challenges, leading to doubts about its investment prospects. The company is grappling with high levels of debt and struggles to adapt to modern market dynamics, as evidenced by a shrinking paying subscriber base. While some see potential in its share repurchase efforts, it's hard to ignore the overall unfavorable risk-reward profile.

With substantial debt looming in the coming years, Liberty Global's ability to sustain its share buybacks is in question, casting doubts on the bullish case for the stock.

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