Aug 3, 2013
Executives
Mike Fries - President and Chief Executive Officer Bernard Dvorak - Executive Vice President and Co-Chief Financial Officer Diederik Karsten - Executive Vice President, European Broadband Operations
Analysts
Tim Boddy - Goldman Sachs Jason Bazinet - Citi Investment Research Jeff Wlodarczak - Pivotal Research Group BJ Giant - International Strategy and Investment Group Ben Swinburne - Morgan Stanley Michael Bishop - Barclays Matthew Harrigan - Wunderlich Securities Justin Funnell - Credit Suisse
Operator
Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Liberty Global’s Investor Call.
This call and the associated webcast are the property of Liberty Global and any redistribution, retransmission, or rebroadcast of this call or webcast in any form without the expressed written consent of Liberty Global is strictly prohibited. At this time, all participants are in a listen-only mode.
Today’s formal presentation materials can be found under the Investor Relations session of Liberty Global’s website at www.libertyglobal.com. Following today’s formal presentation, instructions will be given for a question-and-answer session.
As a reminder, this conference call is being recorded on this date, August 2, 2013. I would now like to turn the conference call over to Mr.
Mike Fries, President and CEO of Liberty Global. Please go ahead sir.
Mike Fries - President and Chief Executive Officer
Thank you, operator. Welcome everybody to our second quarter call.
I am joined as usual by Bernie Dvorak and Charlie Bracken, our co-CFOs; Diederik Karsten who runs our European Operations; Bryan Hall our General Counsel. That is four of my five EVPs, Rick Westerman is also on and two or three others we may call on from time to time, we’ve got a good group.
And we are ready to get rolling. So, operator if you could read the Safe Harbor.
Operator
Thank you. Page 2 of the slides details the company’s Safe Harbor statements regarding forward-looking statements.
Today’s presentation may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995, including the company’s expectations with respect to its outlook and future growth prospects and other information and statements that are not historical fact. These forward-looking statements involve certain risks that could cause actual results to differ materially from those expressed or implied by these statements.
These risks include those detailed from time-to-time in Liberty Global’s filings with the Securities and Exchange Commission, including its most recently filed Form 10-K/A and 10-Q. Liberty Global disclaims any obligation to update any of these forward-looking statements to reflect any change in its expectations or in the conditions on which any such statement is based.
I would now like to turn the call back over to Mr. Mike Fries.
Mike Fries - President and Chief Executive Officer
Thank you. As usual we are going to speak from some slides they were little late in getting our today on the website.
So if you don’t have him feel free to grab him. I want to start on slide four which I think is a pretty compelling snap shot of our current cable platform.
If you look at it you will see the pro forma of the Virgin Media transaction which of course closed on June 7. Our broadband networks now reached 47 million homes across 14 countries including 12 contiguous markets in Europe which represents about 9% of our business Europe does.
We currently serve 24.5 million customers who subscribe the 47.5 million video voice and data products and we are currently generating average monthly ARPU of about $46 and then that is rising every quarter. And I’ve said it many time our business drives on scale and that’s never been more true than today.
If you look within markets it’s especially important when you considered the national reach of our Telco, DTH and OTT competitors and that really need to enhance our brand and build an awareness of our services but on a regional basis it’s even equally important. Scale is enhancing our ability to drive operating efficiencies through centralization, best practices, strike better deals with programmers and technology suppliers, stimulate innovation and launch new products, access to capital markets etcetera.
So, we have come a long way from where we were in five or six years ago and we are still reaping the benefits of that scale. Now not just big we think we are really well positioned for steady and continued growth.
Take a look at the break down of our 48 million RGUs on slide five. You’ll see that in addition to our 22 million video customers.
We are now serving 14 million broadband subscribers and 12 million voice subscribers that’s and roughly 45 million two way home that’s about 30%, 25% penetration respectively of course markets like Germany stand at even lower penetration levels. So there is good organic growth remaining.
In addition we still have quite a bit of runway left when it comes to up selling services the graph on the right hand side of the slide five. The breakdown of our 24.5 million customers into single, double and triple play categories.
What you will see there is 55% a roughly 13.5 million of our 25 million customers take bundle from us today and 30% of those have taken a force of a play off there. Now, what we are pleased with that, the green line on that bar is we still have a 11 million or 45% of our customers who subscribed just one service typically video.
That’s a huge up sell or convergent opportunity for us. By comparison I think Comcast has around 22 million customers with only 23% of their customers still on a single play and Virgin is best-in-class with only 15% of its customers on an old package.
So, punch line is we’ve got a lot of growth in front of us in the core business even before we start factoring in b2b mobile another strategic opportunities. So how we track it.
Slide six provides year to-date highlights which I’ll walk through quickly. Pardon me starting with organic growth through June we’ve added 560,000 net new RGUs and over 1.3 million in the last 12 months.
Bernie is going to provide more detail but if we include Virgin Media for the full six month period we generate rebased revenue growth of 4% and OCF growth of 5% which puts us on pace to exceed $17 billion of revenue and $17.5 billion of OCF on an annualized basis. Adjusted free cash flow on a combined basis so again including Virgin for the full six months increased 30% to $760 million.
On the M&A front obviously the main event was closing Virgin Media. We’ll talk more about that opportunity and business in a moment.
I’m sure you’ve also noticed that we recently increased our position in Ziggo for 20.5%. This latest transaction which was really part of the hedging structure on our existing state which happened to allow us to acquire more share in that I don’t have much more to add at this point.
I’m sure you like to hear more we continue to believe and there is great strategic opportunity for cooperation in the Dutch market. We’re just not quite sure how to get there.
On the innovation front we are busy preparing for Horizon TV launches in Germany and Ireland in the coming weeks and when Virgin Media completed wireless has become a more significant part of our business. Interesting to note that annualized mobile revenue now exceeds a billion dollar with quad play penetration at Virgin and Telenet around 15%.
We achieved those types of quad play numbers in our newer mobile markets. We had another 1.5 million subscribers and finally couple of quick comments on the balance sheet.
At the end of June we had total liquidity of $5 billion including over $2 billion at consolidated cash. With 85% of our debt due 2018 and beyond in an average borrowing cost of 6.8% and the rate and currency hedges in place we continue to feel very good about our debt structure.
And lastly is on the closing of Virgin Media we restarted our buyback program and purchased over $300 million in stock during June and July on our way to be announced 3.5 billion over two years of three of the components of our value creation strategy clicking right now solid organic growth and free cash flow generation accretive integration, scale enhancing acquisitions with continued execution of our levered equity capital model. Let’s take another most important element here not our operating growth.
So as we do every quarter slide seven showed our net adds byproduct. And if you just sort of eyeball the graphs on slide seven which show net adds for the first six months of the year going back to 2010.
You will see that why our year to-date results are lower than last year did better than what we typically averaged. 70% of the difference between this first six months in 2013 and last years explained by more moderate but really exceptional growth in Germany and our recent challenges in Holland and I’ll talk about both of those markets in a second.
The top left chart shows broadband additions of 382,000 in the first half of the year with Germany delivering nearly half of those new customers. We continue to push our speed advantage across all of our markets with our average customer today actually getting 40 megabits.
The top right shows our telephone net adds of 373,000 and that basically nears our broadband growth. And video losses are shown in the bottom left and while we strive to hand on to everyone of our 22 million video sets.
The good news is that losses have remained pretty stable even thought we are operating at a much larger video base. And you see our total RGU net add figure 564,000 in the bottom right this includes a loss of 38,000 at Virgin Media for that stub 23-day period otherwise net adds would have been 600,000.
Again net adds are lower than last year but certainly better than our historical average and it’s important to note that we went into this year with a highly focused on customer economics and profitable growth, especially in the market like Germany, Ireland and Central and Eastern Europe. So, we are actually tracking pretty close for our internal budgets.
Now over the last five years we have successfully rebalanced our business in the Europe particularly Western Europe in fact roughly 80% of our revenue and cash flow now comes in just five markets. We call him the big five the lack of a more creative term.
UK, Germany, Belgium, Holland and Switzerland the chart on slide eight and it was a good illustration of why we’ve targeted at these countries simply put they are driving the vast majority of our growth. I’ll talk about each of them briefly but if you see on slide eight revenue in OCF growth are the big five year to-date have been good.
As in prior periods Germany and Belgium continue to be our strongest performers but essentially double-digit revenue and OCF growth for both in both markets year to-date. Switzerland is steady and right down the middle with 5% revenue in OCF growth in the first half.
And as we discussed in our last three calls competition in Dutch market has heated out and our result reflect some increased term for the last six months. Revenue is down 1% OCF is off 3%.
Then I’ll provide more color on the market in a minute but effectively underperformance in Holland has been offset by better than expected performance in Belgium. And finally Virgin Media generated 2% revenue growth and 6% OCF growth in the first six months.
Current results are tracking below the prior management teams 2013 forecast but that’s not so surprising not to us anyway given the distraction of the sales process and the pending transition. And revenue in particularly was impacted by the softness in b2b mobile businesses and the later was mostly affected by lower use in termination rates year-over-year there is good news here however on two fronts.
First of all, Virgin Media’s b2b pipeline is very strong and reflecting less than budgeted performance in the first half. So its built up in the second half and then more importantly we are increasingly more confident that synergies will be materially higher than we estimated at the announcement of the deal in February.
Let me dive into a bit more detail in Virgin Media slide nine. First of all I’m thrilled with the new management structure led by Tom Mockridge former he was with News Corp for 20 plus years.
He started as CEO the day we closed and Tom is at a two very strong Liberty Global executives team and Robert Dunn he was formerly head of our Dutch operations is joined Virgin as CFO and Dana Strong formerly head of our Irish operations has taken over the COO role. And these executives are complemented by key personnel from Virgin Media that are staying on us with including Paul Buttery, Paul Richmond and Marie Staw as well as Virgin Media’s new b2b head Peter Kelly who joined from Vodafone.
Entire group is focused squarely on gliding performance, managing the integration process and creating value. As I just mentioned even though it’s early days we feel there is material upside to our previous synergy estimates of $180 million which included $70 million of CapEx.
Operationally Virgin Media had over 160,000 RGUs in the last 12 months and nearly all grows in the data business and where Virgin’s leadership is super fast broadband continues with a market share 62% that to get it with over 1.7 million TiVo boxes in the field has helped to drive cable ARPUs which were approaching £49 and reduce churn which are declined every quarter for the last seven quarters. We just had the entire board in London last week and I’ll tell you that we are very excited about the UK market and feel very positive about the Virgin business going forward.
Turn to slide ten we’ll talk about Germany quickly whether momentum continues to be very strong. We had 300,000 RGUs during the first half of 2013 driven by our triple play packages which offer broadband speeds generally three times faster than DT.
As I referenced earlier our total net adds versus prior quarters are little lower but we have consistently focused on what profitable growth in Germany. For example, we halved promotional periods to three months this year and we introduced one time activation fees strong gains and that focus on cost of economics help drive ARPUs up 9% year-over-year to over €20 by the way that’s nearly 40% since we entered the market three years ago.
And it had delivered best-in-class revenue and OCF growth and 9% and 10% year to-date. So, we are strongly positioned for continued growth in Germany with a clear speed leader where the incumbent is focused on VDSL now hire at home.
The broadband market remains relatively under penetrated at 75% today and only 27% of our base is triple play. So there is huge upside in the bundling activity.
Of course we are currently preparing for our Horizon launch in early September. Telenet also delivered excellent growth as you’ll see on slide 11 top line growth of 12% year to-date was given primarily by contribution for mobile.
Now as we projected mobile app gets slow down from a 103,000 in Q1 and 50,000 in Q2 but we still had an impressive 400,000 mobile subs in last 12 months bringing the total base to 675,000 in quad play penetration to 14%. At the same time the fixed business continue to perform well and it is benefited from a price increase we took back in February.
Cable RGU net adds and the 46,000 were much better than 2012. On the product front in late June introduced two new bundles with broadband speeds of 60 and 120 meg which are really grabbed the customer attention.
So the balance of the year looks equally strong in Belgium and just at a Northern Holland things have been a bit more challenging and KTN continues to take an aggressive posture in their retail market and consumer services which is driving better subscriber numbers but massive decline in their EBITDA which are down 6% again year to-date and in the consumer residential business. There are bright signs here for us however here.
KPN recently took some price increases across our base perhaps signaling a more rational stance which we think is accurate. And cable continue to win the market share gain in broadband outpacing KTN over the last three quarters for new broadband customers.
Meanwhile well we have made various product and operational changes. We think will be useful and I’ll talk about those in a minute.
We also hired (indiscernible) to run our Dutch operation. He formally ran KPN Dutch business and was head of their consumer divisions for fixed and mobile and had a terrific grasp on the market has already made an impact.
Our improvements to our product portfolio include introducing low end prepaid bundles to combat the KPN’s low end brand. We’ve also introduced a 115, 200 megabit products in April and we are currently trialing 500 megs.
In video we unencrypted the digital package which has really helped us differentiate cable from the two set-top box focused KPN’s packaging. And Horizon is doing well we have got a 185,000 Horizon TV subs representing about 17% of our base and we just launched a new code drop which meaningfully improves the customer service.
And I guess lastly in recent weeks we’ve seen an improvement with positive net adds for the month of June and July actually better than budget and then long-term I think this market which is fine, but you can expect that the rest of the year probably be challenging in terms of revenue and OCF growth. And then lastly I wrap it up with a quick update on Switzerland on slide 13, adding other markets and bundles here stack up well versus the competition.
We offer much faster broadband speeds and greater value. Nearly 50% of our Internet base and had its 75 megabits or more.
Our 150 megabit bundle which includes Horizon, from about CHF108 is by far the best deal in the market. Horizon is doing well of 85,000 Horizon TV subs here, 14% of our digital base.
And that help us achieve good RGU performance and 5% revenue and OCF growth year-to-date. With regard to the low double and triple-play penetration of this market because we just started bundling little later than other markets.
We feel good about continued growth in Switzerland. So before I turn over to Bernie just say we are busy, busy, and busy as you can expect that’s how we like it but we feel really positive, maybe team is focused and energized and look forward to taking your questions.
Bernie over to you.
Bernard Dvorak - Executive Vice President and Co-Chief Financial Officer
Great. Thanks, Mike and hello everyone.
I think to start I’d like to mention that our reported results include Virgin Media for the 23 day period since the acquisition closed on June 7. So if that wasn’t obvious, I just want to point it out.
And to assess our first half performance we think it’s best to first look at Liberty Global’s performance excluding Virgin Media which is I’m on slide 15 right now. Then look at Virgin Media standalone performance and then bringing those subset numbers together to formal work on and combined results.
It’s worth pointing out that when we report our rebased growth on these combined results the rebased calculation adjust to neutral as currency movements as well as conformed pre-acquisition periods for certain accounting policy changes and acquisition accounting impacts as it relates to Virgin Media. So with that as a backdrop I’ll start on page 15 again which lays our rebase growth rates in the manner I just described.
In terms of revenue growth on the left side of the page Liberty Global excluding Virgin Media delivered 6% rebased top-line growth on the back of strong performances in Germany and Belgium. The middle bar highlights Virgin Media’s rebased revenue performance of 2% for the first half which showed solid growth in that core residential cable business and was offset by declines in B2B and mobile revenue streams.
As a result our combined rebased revenue growth was 4% for the first half of the year reflecting a full six-month period of Virgin Media and the combined revenue was $8.7 billion for the first six months of the year. If you move to the right the opposite trends are apparent in terms of rebased OCF growth.
Excluding Virgin Media we generated 4% rebased OCF growth which was lower than our revenue growth as we had OCF margin compression do in part to our results in the Netherlands and Belgium. On the other hand Virgin Media had a solid six months with margin expansion and rebased OCF growth of 6%.
Combining Virgin with Liberty Global for the full period the combined rebased OCF growth would have been 5% for the first half of 2013 and the combined OCF would have been $3.8 billion. If you turn to slide 16 this presents our reported results by geography for the first six months of the year and overall our European distribution operations reported $5.1 billion in revenue and $2.5 billion of OCF for the first six months of 2013 reflecting rebased revenue growth of 6% and OCF growth of 4%.
Our European performance was driven by Western Europe which accounts for roughly 90% of our European revenue. In Western Europe we achieved revenue of $4.4 billion and OCF Of $2.4 billion which equates to rebased growth of 6% for revenue and 5% on OCF for the first six months of 2013 compared to the same period last year.
In terms of our reported results it’s worth-noting that Virgin Media added $401 million of revenue and $175 million of OCF for the 23 days that we consolidated in Q2. Turning to Central and Eastern Europe which collectively represents less than 10% of our overall revenue.
We generated 1% rebased revenue growth together with a 1% decline in OCF due to continued high levels of competition. If you move on to VTR in Chile we reported consolidated revenue of $503 million and OCF of $172 million which equates to rebased growth of approximately 8% for revenue and a 11% for OCF.
And for the first time in Q2 as VTR’s mobile business was not a drag on our OCF growth. The second to last row on this page shows our reported results with the 23-day stub period of Virgin.
And on a reported basis we delivered $5.9 billion of revenue and $2.7 billion of OCF equate to 5% of rebased revenue and 3% OCF growth. Finally, the last row shows six months combined results with revenue of approximately $8.7 billion and OCF of approximately $3.8 million.
And as I previously mentioned, this reflects 4% combined rebased growth on revenue and 5% on OCF. Slide 17 recaps property and equipment additions in cash CapEx performance with Liberty Global and Virgin Media results combined for the full periods presented.
As a percentage of revenue, both metrics fell year-over-year. Combined property and equipment adds for the first half of 2013 were $1.87 billion or 21% of revenue as compared to $1.85 billion or 22% of revenue in the first half of last year.
The year-over-year decline was primarily related to lower spending in Germany, Chile, and Belgium offset in part by higher capital spending in other markets. CPE and scalable infrastructure accounted for roughly 55% of the combined total with an additional 25% attributable to network investment and the balance to support capital.
If you turn to cash CapEx as would be reported in the cash flow statement, the combined cash CapEx for the first half of 2013 was $1.48 billion, or 17$% of revenue versus cash CapEx of $1.58 billion last year or 19% of revenue for six months of 2012. These amounts are lower than our overall adds to property and equipment, primarily as a result of the use of better financing and cap leases and most of our vendor financing arrangements have 360-day payment terms and they represented efficient way of financing a portion of our capital spend as we have discussed in the past.
If you turn to slide 18, this reviews our combined adjusted free cash flow performance and provides an update on our stock repurchase program. As the left bar chart shows combined adjusted free cash flow of $760 million for the first six months of the year which reflects a 30% increase over the combined results in the prior year period.
As you can see from the light purple bar, Virgin Media drove the growth in combined adjusted free cash flow. As we look out for the balance of the year, we expect that our second half adjusted free cash flow will be weighted into Q4 which is normally the case for us.
And on the right side of page, we show the initial progress we have made toward our two-year share repurchase target of $3.5 billion. Shortly after we completed the VirginMedia acquisition, we resumed our stock buybacks in earnest.
And from mid-June through last Friday, we had already repurchased over $300 million of our equity. So, we are off to a good start, little ahead of pace and we expect that we will continue to be active buyers of our stock going forward.
Slide 19 recaps our liquidity and leverage situation. At June 30, our aggregate debt totaled $41.9 billion, an increase from $30.7 billion at the end of Q1 mainly due to the Virgin Media acquisition.
As shown on the bar chart on the left, our leverage was 5.2 times on a gross basis and 5 times net. So, we are at the upper end of our 4 to 5 target range on a fully swapped basis.
In addition to the debt, we now consolidate as a result of the Virgin acquisition. We also raised about $450 million of incremental financing in Germany during Q2 and we fully drew the term loan under the Virgin Media credit facility after the transaction closed raising incremental proceeds.
We remain very comfortable with our maturity schedule and cost of capital. We are largely termed out as about 85% of our debt is now due in 2018 and beyond.
And our fully swapped cost of debt is down to 6.8%, which is 100 basis points improvement from Q2 of last year. On the right side of slide 19 is a pie chart that lays out our liquidity position.
We finished Q2 with total cash of $2.1 billion, including $1.4 billion at the parent level. In addition to cash, we have $3.1 billion of maximum borrowing capacity under our revolving lines at the end of Q2 bringing our consolidated liquidity position to $5.3 billion.
Upon Q2 compliance reporting under our facilities, we would expect to be able to borrow $1.6 billion of that $3.1 billion mentioned previously. In summary, we are very positive about our overall results as we discussed Virgin Media had a good first half despite a somewhat slower second quarter.
The management team at Virgin Media is motivated and confident in their ability to drive growth. We expect to give you more granularity around our synergy targets when we report third quarter results.
Overall, we remain confident that we will deliver our medium-term outlook, which consist of mid single-digit revenue and OCF growth along with declining capital intensity and mid-teens free cash flow growth. Another exciting part of our story is around product innovation.
We remain squarely focused on enriching both the video and the internet experiences of our customers through products like Horizon, TiVo and super-fast broadband. And finally, our levered equity strategy remains a key element of our value creation model.
We have been active purchasers of our stock as we have mentioned a couple of times now in recent weeks and expect to remain the active buyers going forward. This completes our prepared remarks.
And operator, please open it up for questions.
Operator
(Operator Instructions) And we will take our first question from Tim Boddy with Goldman Sachs.
Tim Boddy - Goldman Sachs
Yes, good morning. I wanted to ask about Germany where it sounds like there has been a change of strategy towards slightly lower growth – slightly lower subscriber growth, but at better profitability.
Can you just explain a little more about how you see that playing out and whether we should see this quarter’s net additions as a sort of new-normal trend given your change in strategy? Thank you.
Mike Fries
Well, it’s Mike. I think it is a purposeful change in strategy which I think has as you can see driven double-digit growth in EBITDA and revenue.
So, our goal is not to maximize customers per se, that’s not why we are in business to do. We are in business to generate optimal returns to shareholders and that means driving the most profitable growth we can out of the marketplace in driving revenue and operating cash flow improvements quarter-after-quarter.
So, we assume shareholders are mostly focused on the financial results and that’s the right place to be focused. And the best way to generate those financial results will vary market by market.
In Germany though I will just tell you that the engine is growing, I don’t see much in the way at least in medium term if not longer of anything that will impede continued growth in that marketplace, all of the key drivers, value creation are there. You’ve got a robust broadband market which is under-penetrated and where cable continues to essentially add all the customers in the market and DSL continues to decline its customer base.
So, we have got that very positive broadband dynamic. You’ve got of course continued synergies coming through the merger of our two operations and you’ve also got our Horizon launch driving our business profitably in video.
So, all the pieces of the puzzle in Germany are working and I wouldn’t get too fussed about quarter-to-quarter sub-growth. And really for us we are trying to optimize value creation in that market and that’s really in the operating cash environment.
And also I would just point out that last year at this time we took a slightly different approach, which was really market share driven and we had a “go-for-growth” strategy in that period. So, it’s not a great comparable, but Diederik, do you want to add anything to that?
Diederik Karsten
No, I think you are right. And if you look at the Horizon, introduction no kind of as we speak and planned for rollout early September and you look at continued speed increases, I think we have kept the right activities in place to growth fueling, but like you said there is more strength and there is more – we strengthened our focus in customer economics.
It’s indeed also working out like we had expected the ARPU as we present by ARPU increase. So, I don’t think that we intend to go back to a indeed like you say RGU maximizing strategy.
Tim Boddy - Goldman Sachs
And just a brief – yes, thank you for that. Just a brief follow-up, are you concerned about the Court ruling that’s coming up in a couple weeks potentially disrupting your growth in terms of the KBW acquisition?
Diederik Karsten
No, that won’t have an impact. We don’t do it.
First of all, that will take quite sometime to work its way through the system, where you can expect that we would appeal it as with the government. So, it’s really the government’s case quite frankly not our case.
We are in this instance totally aligned with the German regulator. And I think that will take quite sometime to sort its way out through the system, and ultimately won’t unwind anything we have achieved.
There might be some conversation down the road if it’s appropriate to try to ease the government’s concerns around this, but I don’t think it’s going to have an impact on our business at all.
Tim Boddy - Goldman Sachs
Great, thank you.
Operator
We will take our next question from Jason Bazinet with Citi Investment Research.
Jason Bazinet - Citi Investment Research
Just wanted to confirm one thing, is it fair to say with the VMED acquisition now done that you sort of have unlimited ability to repeat trade cash back to the U.S. for buybacks?
Is that sort of issue behind you now?
Mike Fries
Well, unlimited today is a big word, but I will tell you we had a significant amount of capacity for in relatively long period of time subject to our decision to use that pre-cash in that manner. But certainly absent the Virgin Media transaction and the structure that was incorporated in that transaction we would not be able to say that.
Jason Bazinet - Citi Investment Research
Okay.
Mike Fries
So, as long as you and I around here, Jason the answer is yes.
Jason Bazinet - Citi Investment Research
Okay, very good. Thank you very much.
Operator
We’ll take our next question from Jeff Wlodarczak with Pivotal Research Group.
Jeff Wlodarczak - Pivotal Research Group
Hey, good morning, guys. Mike, I’d like to get your thoughts on this BT Sports data promotion in the UK, how you think it will affect you and if you believe this is a start of a material heightening of the competitive environment in the UK?
Mike Fries
Yeah. So, we spend a lot of time on that issue last week in London as you can imagine, I invited the CEO of BT in to meet the Board and including Jeremy Darroch the CEO of Sky.
So, we had a very open conversation about what’s happening in the marketplace and the approaches that people are taking. I would say BT Sports move is just I would describe a defensive move principally targeting the Sky and the struggle, the challenge that they see between those two platforms not so much us.
It’s going to be we don’t know exactly what kind of channel it will be just yet. I will tell you we will only have about 38 matches, we’ll have about a 116 matches will all of six Sky Sports channels.
So, it’s not going to be as good as Sky but I do think it’s something that consumers will be interested in it, you can get their attention. Their decision to offer it into their broadband package for a period of time I think is a clever one but it won’t be sustainable.
Clearly, at some point I think they have a £15 price point on the product if you want to buy our card. So, at some point you need to start recouping an £0.5 million of expenditure and exactly how they’ll do that is to be determined.
In terms of Virgin, our position with Virgin is always been and we believe in the prior management team strategy as well that you want to provide every thing. So, for example Virgin is the only place you can get all the Sky Sports channels and it was very – and so we are in conversations as you might imagine to find an economical way of providing BT Sports to our customers who want it but I can’t guarantee you that will get to that point.
Thus far we haven’t seen material impact of their offers on our sales, it’s creating noise, but not necessarily churn. And the proof will be in the product and whether or not consumers think it’s valuable enough to switch or take heed of.
I will tell you that Sky doesn’t believe it will be impactful of course. If you look at the sports offering that they is quite substantial.
But I think we’re in the middle and we’re in conversations you can imagine and we’ll see what happens down the road but it’s a big bet on behalf of BT and unclear whether it will pay off for them.
Jeff Wlodarczak - Pivotal Research Group
Thanks. And then one follow-up related to the Netherlands, an obvious way to offset the competitive environment would be a Ziggo deal.
How amenable to a deal do you think Netherlands regulators would be? Thanks.
Mike Fries
I think they would be with – certainly we’ve been in that market a very long time and it’s hard to speculate about what would or wouldn’t be there their position. But I would tell you it’s not Germany in that – in the past when we had meetings or conversations about consolidation in Holland which is being going on for ten years now.
The approach has been I think far more rational and we don’t know – we don’t have anything to talk to them about. They may or may not have that point of view today.
But I would say it’s down the list of challenges in the deal with Ziggo, the most important one would obviously be – it’s very expensive it’s creating a relatively high price. So, hard to rationalize the economics but there is huge obviously there is huge benefit to consolidation in all of our markets, Holland included.
We compete with national Telecos. The bigger scale we have in any market the better we are able to compete.
So, it’s a same philosophical approach we’re taking in every country, no different and nothing special there so we see what unfolds overtime.
Jeff Wlodarczak - Pivotal Research Group
Thank you.
Mike Fries
Yeah.
Operator
We’ll take our next question from BJ Giant with International Strategy and Investment Group.
BJ Giant - International Strategy and Investment Group
Hi, Mike. Couple of questions.
You talk about the change in strategy in Germany a little, can you talk about have you taken any pricing in Germany and where the prospects are actually trying to do that given you have a better value proposition broadly from what I can see? And second, I think John Malone modestly talked about exploring M&A down in Southern Europe.
And can you sort of talk about the opportunities there versus buying your own stock and how you balance that out? Thank you.
Mike Fries
Sure. So, I’ll let Diederik, answer the question on price increases in Germany.
I think that was it, BJ, you kind of cutting in and out. And on the second question, if I heard you correct, you were referencing comments that John made about Southern Europe, not sure where when those comments were made.
You have known us a long time, right? We’re constantly looking at opportunities.
But I think our strategy and our philosophy should be well understood by shareholders. We are interested in building scale but the right time to scale.
And for us to look outside of our core markets today we’d have to be a pretty compelling opportunity one that we could easily explain to you for example and others that it fits within our model here and our model is good solid growth, great free cash flow characteristics and scale. So, I’m not sure what specifically he said or when he said it but he’s accurate in saying that we’re always looking at stuff but I do think you can take comfort in the fact that there is no – there are no must have transactions in this group and we maintain that position for a quite a some time.
The platform we operate today can generate terrific returns for a long period of time for all of us and that’s really where we’re focusing our energy right now. Diederik, you want to talk about price increases in Germany?
Diederik Karsten
Yeah. I think indeed it was a – we did take pricing and we will intend to keep looking at opportunities for example in the second quarter what we did it was combination of bringing down and reducing promotional pressure in terms of periods and in terms of cost also try to move to low cost sales channels.
And I could tell you with the upcoming horizon in production we will go for on a very decent price level again not to maximize RGU growth but to go for profitable growth. So, yes we’re taking pricing.
BJ Giant - International Strategy and Investment Group
Thank you.
Operator
We’ll take our next question from Michael Bishop with Barclays.
Michael Bishop - Barclays
Hi, good morning. Just a quick question on your wireless strategy across (indiscernible) European assets, I mean it seems like Telenet keeps surprising on both the growth and profitability of its mobile ventures, so are you looking at potentially accelerating your wireless strategy in any other key markets such as Germany?
Mike Fries
Well, I think as we said in the past we do have plans to launch wireless in our 67 markets here and to just in future where we’re building a centralized kind of core network infrastructure in IT system that will help us mange it efficiently the launch of an MVNO services across those core markets and we’re sitting today on 4 million mobile sub something like that a 1 million outside of the UK and 3 million in the UK and count that’s a largest there. But we have mobile customers in Germany we’ve got I don’t know couple of hundred thousand I think mobile customers today multi-SIM cards.
So we are preparing ourselves to replicate the – as you point out solid profitability and benefits of our UK and Telenet and Belgium Mobile platform but to do it cost efficiently with a centralized network infrastructure in all of our core markets so in Holland, in Switzerland, in Germany, Poland, Austria, Hungary on top of Belgium and UK we will have and have deals ready to go. So, we have MVNOs in place in all those markets and we have already launched some short service in most of those markets and we think we’re in a good position to take advantage of a quad-play.
I mean the quad-play is debated endlessly by analysts and investors. We’ll simply say that it’s a proving point and if you can get someone to subscribe to your mobile product they’re going to be stickier bottom-line.
The question to be answered is can you get them to subscribe to your product and still make money because churn reducing churn for churn sake doesn’t help you at this if you’re doing it with products and services that are ultimately benefit the bottom-line. So, I feel pretty good about the strategy we are taking you can expect we’re going forward that’s going to be a bigger part of the story.
Operator
We’ll take our next question from Ben Swinburnee with Morgan Stanley.
Ben Swinburne - Morgan Stanley
Thank you. I wanted to come back to the Ziggo transactions.
Mike, I was wondering, I think in the queue it talks about a margin loan facility that allows you to buy up to a maximum of 48 million I think additional shares. I just wanted to understand the details and if I got that right.
What are the rules if you can remind us, in Holland around sort of tendering for all the equity over certain levels just to make sure we’re all kind of up to speed on how that works as we move forward.
Mike Fries
Sure. I’ll let Charlie answer the details of the structure but the rules were pretty simple up to 30% it’s fine at or above 30% there is a mandatory tender offer requirement so to speak so 30% the threshold.
Ben Swinburne - Morgan Stanley
Thanks.
Mike Fries
Charlie, you want to explain the hedge structure? You’re on mute Charlie.
Okay. Well, basically – I’m not sure he want but basically I mean – I think it’s fairly well describing the queue.
But essentially it’s a – our initial instinct was the stock is trading, we should hedge which then it should be surprising to people given that our average cost is and was well below where the stock is trading. But as far to that structure we’re able to secure ownership position beyond where we sat and mostly that was financed through the hedge structure.
So I think it’s clever way of increasing exposure but also reducing downside risk and financing that stake creatively. Bernie, do you want to explain anymore of the queue disclosure there?
Bernie Dvorak
No, I mean I think it’s pretty clear Mike the way it’s in there in terms of margins in it.
Mike Fries
Okay.
Ben Swinburne - Morgan Stanley
Thanks. And just a totally unrelated topic on the open access stuff in Belgium, I remember this happening or this attempt – attempts by the regulators to open up your network for video resale in Holland and ultimately got I think, blocked by the EU.
Why do you think this is a sort of moving the way it’s moving in Belgium? Is there a difference that we’re not picking up on and where do you think this ultimately leads to?
I think they’re looking to unbundled both data and video in that market.
Mike Fries
Couple of differences, it’s a different political environment obviously, number one. Number two, the – Telenet the challenge – the difference here is that the politicians essentially are arguing that Telenet has a substantial position in broadband in Flanders, now it’s true.
Telenet has a significant market share at broadband in Flanders but not necessarily throughout all of Belgium because they don't operate throughout all of Belgium. And I know management team led by John Porter feel relatively the same way about it.
The key in so much what the government or the politicians want to have that happen it’s what actually operators in the market will do unclear to what extent any of them will take advantage of a structure like this if you wanted to prove. So it’s going to take some time to be approved, I don’t think really anything would happen before mid 2014.
And we’ll argue as you did in Holland okay, fine if you want to do that then here is the price in the reference price and that hasn’t been opined on I believe at this point. They reference by seeing the price they would somewhere than after pay to access.
So, honestly we take these things very seriously but I will tell you that in the end your instinct about it like what is that, generally it is same for even operators in the market. So, I’m not too concerned about it at this stage at the end we’ll keep you posted as when hearings and appeals are processed.
Ben Swinburne - Morgan Stanley
Thanks a lot, Mike.
Operator
And we’ll take our next question from Amy Yong with Macquarie Capital.
Unidentified Analyst
Hi, this is Andrew for Amy. Just a quick question on the strategic alternatives to Chello is that considered a core asset to you, and also could you maybe comment on Virgin Media like if you could quantify where do you see the upside in synergies and the tax assets?
Thanks.
Mike Fries
Yeah, we’re not going to quantify the Virgin synergies today just because I think as Bernie pointed out his remarks, we’re still working on that. And we don’t want to give you one estimate and come back and tell you we had that wrong.
So, yeah the management is been on Board for all of them for six weeks or something. So, we’re not in a position at this stage to give you – to quantify that for you.
But I can tell us we think they’re materially as – remember our synergy targets that we put out in February were based on essentially the due diligence we’re able to do in a relatively short period of time and improve much of the way revenue synergies, didn’t necessarily look closely at cost efficiencies on the liberty side of the equation mostly focused on what we could do on the Virgin side of the equation. And once you get inside that end you got formal exposure to the moving pieces.
So you can expect that will give more to granularity on that on our next call and Chello is I think as it’s reported is some – I’ll be probably answer is we’re looking at strategic options there and we don’t have any more of it at this stage there is process on the way and we’ll see how that process unfolds. But as I – as probably been mentioned in the past, it’s a great asset it has terrific potential this is not as strategic for us perhaps as we would want to programming that businesses to be and so we’re looking at perhaps reallocating resources into more tactical and strategic content assets and looking at the Chello opportunity is a one way of possibly doing that if we decide to do that.
Unidentified Analyst
Great. Thanks.
Operator
And we’ll take our next question from Matthew Harrigan with Wunderlich Securities.
Matthew Harrigan - Wunderlich Securities
Thank you. Your Chairman made some fairly gracious remarks about Vodafone and KDG it sounds like you could at least be frenemies.
One of the things I thought was interesting in that context was his thoughts on scale maybe even how it helps the whole tech road map. And some of things Qualcomm is X1000 presentation that they give on the cable small cells and (indiscernible) Wi-Fi, LTE and integration it seems that becomes more and more relevant on these countries like Germany and the Netherlands when you are two players.
I know Ziggo is doing these things with dual SSID and the Netherlands and all that. But is just feels like that is a big bucket of revenue that your engineers have to be looking at least perspectively.
And secondly, this is a really off the wall question but I am curious to ask it. You have been asked a few years ago whether you would go into U.S.
and the answer has always been consistently no. But when you look at everything happening now Time Warner Cable, your size, your liquidity, companies, your cap relativity to some other conduits that John Malone has, would you ever consider hopping back across the Atlantic and getting involved in a big way in U.S.
cable? And I do realize that is an off the wall question but I would still like to get your response.
Mike Fries
Sure. On the second one we’re not really focused on that at this stage and John is I think making his decision independently with us as he should.
If you remember the media John and Greg, so there is really not lot of conversation about that Matt, and we’re just far too busy creating value with the business we have which is pretty substantial. And, nobody ever says never around here, but it’s not currently something that we’re thinking about I can promise you that.
On the KDG question on Vodafone transaction, we think look at there is several things about that deal I like it validates our business model, it indicates that a very large and sophisticated telecommunications operator I think Kabel’s with 11.5 times EBITDA, and that they were benefits to putting fixed and mobile platforms together. So, as all those the things are true we will just work that and there are benefits, but the benefits are realizing and the opportunity to realize those benefits varies market-by-market in operator-to-operator.
I think for KDG and Vodafone it was pretty straightforward there were obvious opportunities to reduce that wholesale payments to Deutsche Telekom opportunities to improve the relative co-broadband offering making and provide to their customers, it provides a fixed management team it fix the network opportunity that they don’t have today. Made a lot sense for them and I think that’s really the way they, the reason that what will they be doing in terms of new technologies and I don’t know we’re rolling out the same E&TA is that Ziggo always would do as IDs and we’ll I'm moving to Hotspot 2.0 at some point and our Wi-Fi activities are pretty robust.
I think there is a lot of, I think one point I’ll make and John made this too is mobile operators clearly realized that more and more of the traffic is consumed in the house, under the roof, and that it’s flowing to Wi-Fi networks within the home so that’s good in that, that’s good because it would takes pressures off their mobile network so is bad because we’re losing revenue and opportunity so that’s a good strategic reasons to see those types of businesses comes together and I'm sure Vodafone will do a great job of exploiting us and they do, we got a lots of conversation with them about cooperation in Germany sent the deals in and out. So I'm encouraged.
Matthew Harrigan - Wunderlich Securities
Great. Thanks Mike.
Mike Fries
Yeah.
Operator
We will take our last question and it will come from Justin Funnell with Credit Suisse.
Justin Funnell - Credit Suisse
Thank you, yes. Couple of questions please.
The experience on the Horizon box obviously in the Netherlands you are playing a little bit of defense but in Switzerland it is an upside opportunity and I guess that gives us bit of a flavor as to how it could play out in Germany. So just wondering if you could give us a bit more color on the lessons learned, how is it selling, what are the appealing features, what is the potential for the product having seen it run in Switzerland for a biz?
Secondly, more mundane just to what are the current status of talks with the private broadcasters in Germany on carriage fees please?
Mike Fries
Yeah I want to deeply talk about Horizon in great detail in Switzerland and Holland today in the conversation to the private broadcasters and public broadcasters of that matter are ongoing in Germany we have very good dialogue with our TO good and lot of pros even those private broadcaster that do think to understand the long-term credits a collaborative approach to working together you know Kabel operators in Germany provide access to Happy Eyeballs and such represent a terrific platform for delivering advanced digital services. So I think I feel good about the conversation we got to talk broadcaster there no specifics offered today, public broadcasters who are taking something like EUR$8 billion out of the consumer’s pockets every year have a some like a rationale approach to this discussion which there is probably no benefit to me highlighting this morning.
Do you want to talk about Horizon either? Nope I don’t most either too.
Justin Funnell - Credit Suisse
I think it’s because the mute button is not working very well on the system…
Mike Fries
Yeah but anyway on Horizon I’ll tell you that like as with any innovative new product in the marketplace, you have bumps in the road but I mentioned briefly on in my remarks was that we just had a new code drop in both Switzerland and Holland that has dramatically improved pretty much every customer complaint now customers complaint about everything it’s normal and new products and someone at casters, someone at green, someone at blue. But most of the feedback we’re getting which we listened to carefully we’ve been able to sort through with this new codrop in terms of faster with whole internet interface working more effectively occur simplifying some of the menu options launching the new remote that has a keyboard and much better look and feel.
So lots of the things that we intended the product to be ultimately are rapidly being introduced. So you can expect that every quarter we’ll be improving our Horizon product and every market where it launches down the road we’ll have a better Horizon product launch, but we’ve got a good number of customers using it and very few people turning off and so that’s why the experience is positive.
Justin Funnell - Credit Suisse
Thank you
Diederik Karsten
Yeah this Diederik I mean and also don’t forget that for the first time now with Ireland coming up and Germany within a year will have this product launched in core markets with incredible improvements it’s not only the thoughts and navigation it’s simply menu structure but both Germany as well as Ireland both launches will be based on – on the learnings from both Switzerland as well as in Netherlands so could even say that on a relative base these launches are expected to be even stronger which is also supported with consumer research. So from that point of view particulars so forth Germany where it had a pay-TV market is still one for us to kind of conquer with the HD.
Mike Fries
We also demoed for the Board last week in London are cloud-based version of Horizon. So we will have ready to launch a cloud-based version that user-interface which will make future releases simpler, reduce per cost of the cost exactly where it should be dealing.
So I'm really pleased and proud of the development and that’s happening really all internally with Horizon and the fact that our online platform in the iPad App are used regularly and also we just launched – dropped a new version of the iPad application into our customer base. So that’s just expecting to continue innovation as we should expect and it’s going to get better and better in every quarter.
Justin Funnell - Credit Suisse
Thanks very much.
Mike Fries - President and Chief Executive Officer
I think yes, I think that ends our time it’s 7:57 so we appreciate really getting on the call this morning and afternoon thing where you are. As I mentioned in my remarks we feel very good about our business our core European business is right on track.
We only and it’s a owned version for 23 days or whatever the numbers are. We had inherited a fantastic business.
And it may appear to the outside that may be there is issues around the revenue or the EBITDA strong but I will tell you, you give us a chance here and we will be I think given you some very positive feedback in our next call once we get a chance to really get our hands around it and but I will tell you to a person of Board e is enthusiastic about the opportunity extremely positive about the management team, really feel really good about the market and the rational approach operators are taking and it’s going to be great, great long-term business integrated with the rest of our European operations. So thanks for listening and we’ll speak to you all soon.
Operator
Ladies and gentlemen, this concludes Liberty Global’s Q2 2013 investor call. As a reminder, a replay of the call will be available in the Investor Relations section of Liberty Global’s website at www.libertyglobal.com.
There you can also find the copy of today’s presentation materials.