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Morningstar | If Liberty Global Completes Planned Asset Sales, Management's Use of the Proceeds Will Be Key

If Liberty Global successfully closes its planned divestitures, the firm will consist of four major assets: U.K. cable company Virgin Media; a 60% stake in Telenet, the largest cable company in Belgium; a 50% stake in Vodafone Ziggo, the largest cable company in the Netherlands; and around $15 billion in cash proceeds, nearly equal to the firm’s total market cap. We don’t expect cash will sit in Liberty’s coffers for long, making capital allocation a particularly important consideration. We expect management will accelerate share repurchases, which we believe will add value if the stock price remains near current levels. We’d also like to see the firm repay debt, taking leverage to a level more appropriate for a firm with limited growth potential, before considering major strategic moves like adding wireless capabilities in the U.K. Virgin Media is the only major cable company in the U.K., connecting about 15 million homes and business or a bit less than 60% of the country. The U.K. telecom market is unique thanks to the presence of Sky and an aggressive regulatory wholesale regime that provides access to the network of BT, the legacy phone company. Sky’s roots as a satellite television provider with a large stable of proprietary content have given it relationships with nearly half of U.K. households, a position it has combined with BT’s network to become the second-largest Internet access provider in the country, behind BT itself. Virgin has struggled to gain share comparable to that seen among cable companies in the U.S. and elsewhere in Europe, despite holding the same network advantages those peers enjoy. Virgin is aggressively expanding the reach of its networks, but revenue growth has been disappointing.Among the assets Liberty is selling, its German operation Unitymedia is by far the biggest. Unitymedia is the largest cable company in the country based on homes passed, but it dramatically lags in the Internet access market and lacks a wireless presence. Selling the business to Vodafone was a wise move, in our view, creating a firm with the combined wireless and fixed-line assets needed to take on Deutsche Telekom.