Recently, Berkshire Hathaway initiated a purchase of Liberty Global (LBTYA 2.25%) class A shares. According to the 13F filing, Warren Buffett and his investment team have acquired nearly 2.95 million class A shares in Liberty Global, with a total investment value of more than $262 million. Warren Buffett seems to like John Malone, the man behind Liberty Global, as Berkshire Hathaway also holds a $775 million stake in Malone's other company, Liberty Media (FWONA) Let's take a closer look at whether or not we should invest in Liberty Global now.
The leading European cable company
Liberty Global leads Europe in the cable industry as it serves 24.5 million customers in 14 countries. Under John Malone's leadership, Liberty Global has continued to expand its footprint in the European cable industry. On June 2013, it acquired Virgin Media in a stock and cash deal worth $16 billion. Liberty Global has also agreed to buy Ziggo N.V., the largest cable operator in the Netherlands, for around $13.7 billion. Liberty Global also owns Unitymedia in Germany and Telenet in Belgium. With the acquisition of Ziggo, Liberty Global expects to reach more than 90% of Dutch homes, leverage the strong Ziggo brand, and deliver as much as €160 million in synergies.
A growing operating performance and a juicy cash return
In 2013, Liberty Global experienced revenue growth of 4%, mainly driven by Chile, Belgium, and Germany. Liberty Global's operating cash flow also jumped by 4% to $7.87 billion, driven by Chile and the Western Europe region. The combined adjusted free cash flow rose by 16% to $1.8 billion. Liberty Global expects its Virgin Media and Ziggo acquisitions to provide capital intensity that will drive the business forward to deliver adjusted free cash flow of $2 billion in 2014.
What might attract Berkshire Hathaway's investment team is Liberty Global's cash returns to shareholders via consistent share buybacks. Since 2005, the company has bought back more than $10 billion worth of equity. In the fourth quarter of 2013, the company returned $280 million to shareholders. It estimates that it will buy back an additional $3.5 billion of its shares by the end of 2015. With a current market capitalization of $25 billion, the $3.5 billion in upcoming share repurchases represents a juicy 14% cash return to Liberty Global's remaining shareholders.
Liberty Media also remains cheap
John Malone's other company, Liberty Media, also holds a diversified portfolio of great businesses that includes Sirius XM, Live Nation, and Charter Communications. Liberty Media has a 52% stake in Sirius XM worth around $10.9 billion, a 25% stake in Live Nation worth more than $1.16 billion, and a 27% ownership in Charter Communications with a value of $3.65 billion. Liberty Media has a total market capitalization of around $14.65 billion, so its current investments are worth more than its own market valuation. Moreover, Liberty Media has presently authorized $327 million in share buybacks and it might enhance shareholder value by repurchasing more shares.
Liberty Global seems to be a good choice for long-term investors with its upcoming European cable industry consolidation. Its current $25 billion market valuation represents only 12.5 times its 2014 adjusted free cash flow. The company is clearly shareholder friendly as evidenced by the healthy share buyback program and focus on generating solid returns for its owners - including Warren Buffett.