Liberty Global plc — Q3 2020 Form 10-Q
Business context and period. Unaudited results for the three and nine months ended September 30, 2020. Continuing operations provide broadband, video, fixed-line and mobile services in the U.K. and Ireland, Belgium, Switzerland, Poland and Slovakia; Liberty Global also holds a 50% interest in the VodafoneZiggo joint venture in the Netherlands. The U.K. businesses were classified as held for sale from May 7, 2020, but remain in reported operating results. Prior-year results include discontinued operations and a large disposal gain, limiting headline comparisons.
Key financial metrics
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Revenue | $2,954.5m | $2,840.9m | $8,553.2m | $8,559.3m |
| Operating income | $662.1m | $208.8m | $1,469.5m | $463.0m |
| Adjusted EBITDA (non-GAAP) | $1,209.2m | $1,211.7m | $3,548.0m | $3,585.7m |
| Adjusted EBITDA margin (calculated) | 40.9% | 42.7% | 41.5% | 41.9% |
| Net income (loss) from continuing operations | $(973.6)m | $587.2m | $(459.7)m | $(59.3)m |
| Net income (loss) attributable to Liberty Global shareholders | $(1,023.1)m | $12,847.9m | $(597.5)m | $12,907.9m |
| Cash from continuing operating activities | Not stated separately | Not stated separately | $2,692.3m | $2,220.2m |
| Adjusted free cash flow (non-GAAP) | Not stated | Not stated | $541.7m | $(143.4)m |
Cash flow, debt and liquidity. Nine-month capital expenditures, net, were $960.5m versus $900.1m. Investing activities used $4,172.5m, mainly reflecting investment purchases; financing activities provided $348.2m. Cash and cash equivalents at September 30 were $3,777.2m, compared with $8,142.4m at year-end 2019. Cash and restricted cash totaled $7,069.1m, including $3,284.9m of restricted cash classified within assets held for sale. Corporate-level liquidity included $3,375.7m of cash at Liberty Global and unrestricted subsidiaries and $2,988.5m of investments held under separately managed accounts; access to subsidiary funds may be restricted.
Debt and finance lease obligations on the balance sheet totaled $11,998.7m, including $1,832.7m current and $10,166.0m long-term; this excludes U.K. JV entity debt classified as held for sale. That held-for-sale classification included $18,734.6m of debt (current and long-term). Management reported borrowing-group covenant compliance and said 79% of debt was not due until 2026 or later, while noting refinancing will be needed as maturities approach. Reported interest expense was $279.8m for Q3 and $874.8m for nine months.
Material changes versus comparable periods
- Q3 revenue rose 4.0% as reported, but declined 1.3% organically; nine-month reported revenue was nearly flat, while organic revenue fell 1.8%. Currency translation contributed to the reported Q3 increase.
- Q3 Adjusted EBITDA was nearly unchanged as reported, but down 5.4% organically; nine-month Adjusted EBITDA fell 1.1% as reported and 3.3% organically. Segment margins weakened in the U.K./Ireland, Switzerland and Central and Eastern Europe in Q3.
- Continuing-operations earnings turned to a loss in Q3, largely reflecting volatile non-operating items: $755.7m of foreign-currency transaction losses and $717.8m of derivative losses. Nine-month results also included $842.0m of currency losses, $399.0m of fair-value losses on investments and debt, and $220.4m of debt-extinguishment losses.
- 2019 shareholder earnings included a $12.2bn gain on the sale of the Vodafone Disposal Group, plus results and disposal gains from businesses presented as discontinued operations. This makes total net earnings comparisons especially misleading.
- Depreciation and amortization declined substantially, partly because U.K. JV assets were classified as held for sale and ceased to be depreciated or amortized. Q3 impairment, restructuring and other operating items were a net gain of $15.8m, including a $43.8m gain on a Belgian content-asset disposal; nine-month expense was $47.4m.
Outlook, transactions, risks and unusual items
- U.K. joint venture: Liberty Global and Telefónica agreed to combine Virgin Media’s U.K. operations with Telefónica’s U.K. mobile business in a 50:50 venture, subject to regulatory and other conditions. Liberty Global expected to receive approximately £1.4bn ($1.8bn) in total after transaction financing and an estimated £2.5bn ($3.2bn) equalization payment. The venture was expected to be accounted for using the equity method after closing.
- Sunrise acquisition: The proposed CHF 5.0bn ($5.4bn) cash acquisition was expected to close in Q4 2020. After quarter-end, Liberty Global reported that 96.6% of Sunrise’s fully diluted share capital had been tendered; it intended to pursue a squeeze-out for remaining shares.
- Management commentary: Management said COVID-19 had not materially adversely affected results to date. Higher broadband demand and lower churn helped; handset sales, roaming/interconnect, broadcasting and some content revenue were pressured. It warned a prolonged economic disruption could harm future results, collections and liquidity. Networks continued to perform well despite increased traffic.
- Capital allocation and financing: The company repurchased $979.2m of its shares in the first nine months and authorized a further $1.0bn buyback in November. The Sunrise financing facilities were undrawn at quarter-end and available only if the acquisition closed. Borrowing groups undertook refinancing transactions, with $220.4m of nine-month extinguishment losses, primarily redemption premiums and write-offs.
- Other risks and contingencies: Risks include competition, currency and interest-rate volatility, regulation, Brexit uncertainty, COVID-19 and potential impairment of goodwill. Belgian wholesale-network access rules may pressure Telenet; a Belgian court appeal was unsuccessful. Tax and other legal matters remain, including asserted UPC Austria sale claims of approximately €91.1m, for which no loss was accrued because loss was not considered probable. A database accessed without permission contained information relating to approximately 900,000 individuals; the company did not expect a material financial impact. The filing also describes other tax indemnities and legal contingencies for which outcomes or potential losses are uncertain.
- Guidance: The supplied filing text does not provide a specific revenue, earnings or cash-flow forecast. Management said it believed resources were sufficient for foreseeable liquidity needs over the next 12 months, while acknowledging refinancing and market risks.
Important facts for investors to verify
- Whether and when the U.K. joint venture and Sunrise acquisition close, and the final consideration, financing, debt allocation and cash proceeds.
- Underlying organic performance, subscriber trends and segment margins, separated from foreign exchange, acquisitions, held-for-sale accounting and COVID-19 effects.
- Liquidity available to the parent versus cash trapped or restricted in borrowing groups, and the distinction between reported debt and debt classified as held for sale.
- The sustainability and calculation of Adjusted EBITDA and adjusted free cash flow, particularly substantial vendor/intermediary financing and related repayments.
- Exposure to non-cash fair-value and foreign-exchange volatility, future debt refinancing requirements, and developments in regulatory, tax, litigation and data-security matters.