John Malone's international cable giant Liberty Global will look for further acquisitions in Latin America, putting the classic Malone playbook to use in the region after previously expanding its European business via purchases, according to analysts.
The company is allowing investors to bet on the performance of its Latin America business via its LiLac tracking stock, which it created last year. At the start of last month, it distributed shares of the tracking stock to Liberty Global shareholders.
After closing the $5.3 billion acquisition of Cable & Wireless, which offers pay TV, broadband and telephony services to subscribers mostly in the Caribbean, in May, LiLac now has operations in Colombia, Peru, Chile and more than a dozen other markets. It reported a total of 1.7 million video, 2.0 million broadband and 1.7 million telephony subscriptions as of the end of June.
Wall Street has been discussing Liberty Global's possible next steps in Latin America. "The acquisition of Cable & Wireless represents a watershed moment for our recently created LiLac platform," Liberty Global CEO Mike Fries said at the time the deal was announced. "It will add significant scale and management depth to our fast-growing operations in Latin America and the Caribbean."
A year ago, he had said: "We see the region as holding some really interesting M&A opportunities. It's a fragmented part of the world, and we think we're geared up to take advantage of that consolidation, which is inevitable in several parts of Latin America and the Caribbean." And on the latest earnings call in early August, Fries reiterated: "LiLac is off to a very busy start. The M&A pipeline is filling up, as you might imagine, with some interesting opportunities."
Many on Wall Street say the question is not if more headline-grabbing purchases are in the cards, but when, highlighting that LiLac operates the smaller but emerging Latin American business of the company where M&A can provide upside. And Malone often has touted the benefits of consolidation, such as in the case of Charter Communications, in which Malone's Liberty Broadband owns a big stake and which recently closed its takeover of Time Warner Cable and Bright House Networks.
In Europe, Liberty Global also made a slew of acquisitions, and more deals are possible, but Wall Street has been focusing more time on possible Latin American opportunities.
"I think acquisitions will definitely be part of the growth strategy, and the playbook will be similar to what we have seen at Liberty Global" in Europe, Macquarie Securities analyst Amy Yong tells The Hollywood Reporter. "Consolidation is in its early stages in Latin America, and LiLac is positioned well to roll up assets."
In a recent report, she also told investors: "LatAm is a region ripe for consolidation with wireline and wireless assets spread across multiple players and countries."
"Expect LiLAC to probe regional acquisition opportunities even before it fully assimilates Cable & Wireless," Wunderlich Securities analyst Matthew Harrigan similarly wrote in a recent report. "LiLac markets offer superior product penetration headroom. Certain markets have 30 percent to 50 percent pay TV and broadband penetration gaps relative to the U.S., with many emerging markets consumers prioritizing media/broadband/mobile access."
What companies could be a next target for the Malone powerhouse? "Considerable investor attention is around Stockholm-listed Millicom, whose CEO Mauricio Ramos is a former Liberty Global Latin America executive," said Harrigan. "We would expect any eventual major deal to be largely if not entirely financed by LiLac rather than again bootstrapped by Liberty Global's European biz - especially now that LiLac has full critical mass and with Liberty Global stock likely undervalued following the Brexit sell-off."
Yong also mentions Millicom, which had more than 5.46 million cable revenue generating units as of the end of June. Revenue generating units count each service subscription separately, meaning a customer who gets pay TV and broadband services from the company counts for two units.
Millicom, whose stock is listed on the Stockholm stock exchange, has a market value of close to $5.8 billion and has not said whether it would consider selling. But Yong expects Liberty Global could end up "buying assets from Millicom."
Meanwhile, market chatter earlier this year said that AT&T could decide to sell some or all of its Latin American pay TV operations. Its increased presence in the region stems from the acquisition of DirecTV, which has subscribers in Brazil, Argentina, Colombia, Venezuela and other markets. Management has said it could be open for deals, but also signaled it was in no rush given subscriber growth and the fact that the Latin America business is self-sustaining in terms of cash flow. Liberty Global has been mentioned as a possible suitor for some of the assets, according to analysts, even though it's not clear what parts of a mostly satellite TV-focused business the cable giant could be interested in.
Future deal options for LiLac could also include a proper spinoff to separate it from Liberty Global's European business and "to eliminate the tracking stock discount," according to Yong. And she sees a possible partnership with Mexican TV giant Televisa. "Liberty Global's CEO Fries and Discovery's CEO [David] Zaslav both sit on Televisa's board, making the opportunity even more tangible," Yong posited.
A Liberty Global spokesman declined to comment on possible future acquisition or other plans. An AT&T spokesman also declined to comment.
Meanwhile, Wall Street has been reworking its estimates for Liberty Global's Latin American unit after Liberty Global's latest earnings report.
Harrigan cut his price target on LiLac by $16 to $43.L, citing "more realistic" estimates for Cable & Wireless. He wrote: "We had erroneously assumed that C&W would contribute near $1.09 billion in 2016 earnings before interest, taxes, depreciation and amortization ahead of the $1.04 billion Bloomberg consensus."
After a lower second-quarter figure, Harrigan is now eyeing a result below $850 million. "This reflects Liberty's more conservative business and accounting practices, as well as a $80 million-plus annual effect from the move to U.S. generally accepted accounting principals," he explained.