Following John Malone Into Liberty Global

Anh is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

There are normally two ways for a corporation to return cash to shareholders: dividend and share repurchase. The dividend is more straightforward as the corporation just paid out a portion of the cash to shareholders, the cash will be in the shareholders' accounts right away, but they will get taxed on the dividends they received.  In share repurchase, the number of shares outstanding will be reduced, so each shareholder will have a bigger percentage ownership of the firm. Thus, the announcement of dividend payment or share repurchase program always excites investors. 

Share Purchase and Different Share Classes

Recently, Liberty Global (NASDAQ: LBTYA) just announced that the board has authorized a new $1 billion stock buyback program during the next year. The company has had a consistent history of repurchasing its shares via open market transaction or via private negotiations. From the beginning of the year to the middle of December, it has bought back around $925 million. The total share repurchase since its establishment in 2005 is already more than $9 billion. It said that this program was mainly to acquire Series A and Series C common shares.

In the capital structure of Liberty Global, there are three classes of common stocks: Series A, Series B and Series C. Series B has the most voting power, with 10 votes per share, whereas Series A entitles holders to one vote per share, and Series C carries no voting rights at all. It is normally the structure that John Malone, Chairman of the Board, has been applying to most of his company for him to control the company. In the most recent proxy filing, it was reported that John Malone owned 85.9% of Series B, and had 36% voting power in the company. Bill Gates, BlackRock, and Tiger Global Management, owned significant voting power through Series A and Series C, of 4.4%, 3.8% and 3.8%, respectively.

John Malone Is famous for corporate action activities

John Malone has been quite famous with his frequent spin offs and other corporate actions, which open investors to many investment opportunities. In the third quarter this year, his Liberty Interactive Corp (NASDAQ: LINTA) split its shares into two tracking stocks, Liberty Interactive and Liberty Ventures. Liberty Interactive would include its interest in QVC, the home shopping services and HSN, whereas Liberty Ventures, which focuses mainly in investment, comprise of interests in several corporations such as Expedia, Time Warner, AOL, etc. In addition, John Malone, via Liberty Media (NASDAQ: STRZA) has made a fortune by giving Sirius XM Radio (NASDAQ: SIRI) a $530 million loan to get it out of bankruptcy with high interest, of 15% and then converted it into a majority stake in the company. The recent decision to pay out a special dividend and share buyback program of Sirius will bring a lot of value to John Malone as well.

Penetration into European and Chilean Broadband Communications

Owning Liberty Global shares gives investors exposure to the operation of broadband internet, telephony service industry and direct-to-home satellite in 13 countries in Europe and Chile, serving around 19.5 million customers. In 2011, the majority of its revenue came from the Broadband Division, with $6.14 billion out of a total $9.5 billion in revenue. The main concentration in the Broadband Division is in three Western countries including Germany, The Netherlands and Switzerland. The second highest revenue contribution is Telenet in Belgium, with more than $1.9 billion in revenue in 2011. Compared to 2010, Liberty Global experienced an organic increase in every single segment, with a total increase of 4.6%, whereas the increase (including acquisitions) was 13.7%. 

With the operation mainly overseas, the currency fluctuation poses risk to the company. Indeed, in the last 2 years, it has recorded $237 million and $572 million in losses in 2010 and 2011 respectively due to foreign currency transaction losses. Over the last 3 years, Liberty Global had consistently positive operating income, but it consistently had losses in net income. The majority of the losses were due to the company’s high interest expense.

As expected in the broadband communication and cable television services with the growing acquisition strategy, Liberty Global had high goodwill, and high long-term debt, which resulted in high interest expense. As of September 2012, Liberty Global had more than $26 billion in long-term debt and capital lease obligations, and nearly $16 billion in goodwill and intangibles, whereas the total stockholders equity was only $2.85 billion. Currently, Liberty Global is trading at $60.31 per share, with an enterprise value/EBITDA of nearly 9x.

Bottom Line

For the record, investors might not go wrong following John Malone into the company he is controlling. The share buyback in 2013 would represent a significant benefit to shareholders, and John Malone as well as he owns the controlling stake of the company. It is a really win-win situation. 

hoangquocanh has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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