We downgrade our recommendation on Liberty Global Inc. (LBTYA) to Neutral based on its current valuation, which has soared nearly 64% last year. We believe that the long-term potential of Liberty Global is much visible now after its decision to acquire the third largest cable operator in Germany, Kabel Baden. 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.
Liberty Global purchased the second largest German cable MSO, UnityMedia in 2010. The enlarged company is expected to takeover the market leadership position from the incumbent Kabel Deutschland. However, we believe the current valuation is already reflecting these positives. Furthermore, the regulatory clearance of Kabel Baden may become the biggest hurdle for Liberty Global.
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 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.
Moreover, double play customer base penetration increased to 4.7% in the previous quarter. The company is aggressively buying back its shares to increase its shareholders’ wealth. The board of directors of Liberty Global has authorized $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. Management has devised a plan to deploy EuroDOCSIS 3.0 in the range of 80%-90% in all UPC broadband divisions in Western, Central, and Eastern Europe. The company is also conducting wideband trial runs at VTR in Chile and at Telenet in Belgium. Libert Global’s closest rivals are BT Group plc. (BT), Eutelsat Communications, SES S.A. and CATV Systems.
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