SATELLITE, CABLE & BROADCASTING
David B. Kestenbaum
212-218-3851
dkestenbaum@morganjoseph.com
James Leahy
212-218-3784
jleahy@morganjoseph.com
Company Update / Estimates Change
July 31, 2006
Key Metrics
$21.73
07/28/2006
$30.00
$27.35-$18.21
495.0
$10,756.4
2,120,762
NM
55.5%
NM
$16.30
1.3x
NM
NM
LBTYA - NASDAQ
Pricing Date
Price Target
52-Week Range
Shares Outstanding (mm)
Market Capitalization ($mm)
3-Mo Average Daily Volume
Institutional Ownership
Debt/Total Capital
ROE
Book Value/Share
Price/Book
Dividend Yield
LTM EBITDA Margin
Liberty Global Inc.
Rating: Buy
A Trip Around The Liberty World: Chile
Investment Highlights:
■
We continue to present our view of the Liberty Global world. We
are in the process of examining each of Liberty Global's major markets,
gauging the relative competitiveness in these markets and assessing the
company's position. Our stop in Chile represents our sixth stop on our
Liberty Global tour.
■
In our view, Chile is Liberty Global's most dominant market.
Liberty's operator, VTR, is the largest provider of video and data
services in the Chilean market and second only to the incumbent in the
voice market and in terms of total homes passed (VTR's network passes
about 50% of total homes).
■
Competition in the market beginning to intensify. VTR's dominance
in the Chilean market has led many of its competitors to partner in
order to create triple-play service offerings that can compete more
effectively with VTR's suite of triple-play services. However, we view
the moves of its competitors as highlighting the strength of the
company's positioning in the market.
■
We are adjusting our model to account for the recent sale of the
company's French subsidiary. We are lowering our 2Q06 revenue
estimate by $140.4mm, to $1.54bn. Our EBITDA estimate for the
quarter declines by $40.4mm, to $556.8mm.
EPS($) FY: December
Prior
Curr.
Prior
Curr.
2005A
2006E
2006E
2007E
2007E
0.08
-0.09A
--(0.34)
(0.13)E
(0.11)E
--(0.32)
-(0.07)E
--0.36
-(0.03)E
--(0.20)
(0.14)E
(0.13)E
0.02E
0.09E
NM
NM
NM
1Q-Mar
2Q-Jun
3Q-Sep
4Q-Dec
FY
P/E
Revenue($mm)
2005A
1,235.3
1,276.3
1,295.8
1,443.1
5,151.3
1Q-Mar
2Q-Jun
3Q-Sep
4Q-Dec
FY
Prior
2006E
-1,677.2E
1,739.0E
1,787.3E
6,829.5E
Curr.
Prior
Curr.
2006E
2007E
2007E
1,625.9A
--1,536.8E
--1,601.9E
--1,644.5E
--6,409.1E 7,479.0E 6,797.8E
1 Year Price History for LBTYA
30
27
24
21
Q2
Q3
Q1
Q2
18
15
2006
Created by BlueMatrix
Company Description: Liberty Global Inc. (www.lgi.com) is a
worldwide provider of broadband distribution services and video
programming, including analog and digital video television, Internet
access, and telephony. It also offers direct-to-home satellite service in
certain markets as well as multi-channel distribution systems. As of
March 31, 2006, the company's networks reach approximately 29.7mm
homes, including 13.6mm video subscribers, 3.3mm broadband
Internet subscribers, and 2.4mm telephone subscribers.
The Disclosure section may be found on pages 11 - 12 of this report.
The Valuation section may be found on page 11 of this report.
Liberty Global Inc.
July 31, 2006
Market Overview
Chile represents Liberty Global's most dominant market among its portfolio of markets worldwide. The
company, through the merger of its VTR subsidiary with Metropolis, created the largest provider of triple play
services, the largest provider of video services, the largest provider of residential data services, and the second
largest provider of voice services in the Chilean market. In addition, VTR's network in Chile passes roughly
50% of total homes, giving it, aside from the incumbent telecommunications service provider, the largest reach
of any network in Chile. Finally, VTR's two-way network penetration of over 60% gives it the ability to
deliver a powerful triple play bundle of voice, video, and data services and the leading broadband Internet
access service with download speeds of up to 10.0Mbps, which are over twice as fast as the nearest
competitor.
In our view, VTR's merger with Metropolis has given rise to new competitive threats in the market, as
competitors partner (especially among DTH [direct to home] providers and voice/data providers) to create new
triple play service platforms. For example, the incumbent and Zap TV now provide a triple play service,
Telsur and DirecTV Latin America (DTV - $17.38 - NYSE) now provide triple play service (after Telsur
moved away from Metropolis), and GTD-Manquehue and DirecTV Latin America also provide triple play
service. At the same time, most of the country's voice and data service providers are also exploring and/or
planning IPTV (Internet Protocol Television) service deployments. Telsur has announced IPTV-related capital
spending of $20.0mm in 2006 while CTC Chile (TEF - $51.00 - NYSE), the incumbent, plans to spend as
much as $200.0mm over four years on IPTV technology. Zap TV has its own DTH service and in June 2006,
CTC launched its own satellite video product. In our view, these moves not only create a healthy competitive
telecommunications market in Chile, but they also highlight the strength of VTR's positioning in the market.
Basic Economics
The Chilean economy has been largely modernized and reformed, resulting in high levels of foreign trade and
foreign investment (and a very healthy telecommunications services market). The company's recent free trade
agreements and strong commodity pricing have helped boost GDP in the first half of 2006. According to CIA
World Factbook statistics, the country currently has approximately 16.1mm people and is currently
experiencing population growth at a rate of 0.94%. In addition, GDP per capita as of 2005 was a relatively low
$11,300 with a moderate 8.0% unemployment rate and relatively high inflation of 3.2%. These statistics are
relatively healthy compared to the rest of South America but rate as fairly weak compared to the rest of
Liberty Global's service areas. Chile retains trade agreements with the nations of the European Union and the
US, and its currency is the Chilean peso.
VTR Services
VTR is the largest provider of pay television services in Chile, one of the country's largest providers of
broadband Internet access and telephony services, and the country's largest provider of triple play services.
Liberty Global currently owns 80% of the company, with the remaining 20% held by Cristalerias de Chile, a
diversified holding company with a number of interests (including glassmaking, winemaking, and even a
newspaper). While VTR's primary service market is the area in and around the capitol city Santiago and the
other major cities including Iquique, Antofagasta, Concepción, Viña del Mar, Valparaiso, and Rancagua, the
company's network passes about 50% of all Chilean homes, giving it a nearly unrivaled national reach. The
company's network currently passes 2.3mm homes (1.4mm two-way homes passed) and, as of the end of
2
MORGAN JOSEPH & CO. INC.
Liberty Global Inc.
July 31, 2006
March 31, 2006, VTR had 754,400 analog cable subscribers, 12,900 digital cable subscribers, 330,000 Internet
subscribers and 387,500 telephony subscribers. VTR's cable network is approximately 60% upgraded to
two-way digital capacity with available bandwidth in upgraded areas at or above 750MHz. According to its
own internal estimates, VTR has about an 89% share of the Chilean cable market and about 98% of the cable
market within their footprint. We also note that cable providers have approximately 89% market share across
Chile among multichannel television service providers. The three DTH providers only encompass 7% of the
market (see Table 1 below).
Table 1: Market Share Figures
National
In Footprint
VTR Market Share by Service
Television
Internet
89%
43%
98%
73%
Telephony
19%
31%
Industry Market Share - Video
Cable
89%
DTH
7%
Other
4%
Industry Market Share - Broadband
VTR & CTC
85%
All Others
15%
Source: Company reports
On the video side, the company has two primary analog cable service packages and a new digital service plan
that is very similar to the company's premium analog service package. In fact, the company is currently
working to roll out its digital service in areas where its cable plant has been upgraded to two-way capacity and
plans to transition its premium analog customers over to digital during the next several years. VTR's basic
analog tier offers between 32 and 68 channels (depending on the service area and the capabilities of the
network) and the premium analog service offers an additional 11 channels. We note that, like many cable
operators in the US, VTR has continued to increase the amount of content offered in its basic tier
(programming includes movie channels like HBO, Cinemax, and Cinecanal) and, as a result, has reduced the
overall attractiveness of its premium analog service (see Table 2 below for a look at VTR's video service
offerings). However, we believe that, with the rollout of digital services over the next several years, premium
services as a percentage of overall video services will begin to increase. In addition, the company has a
number of attractive triple play bundled service offerings, which have fostered a new competitive landscape,
as we mentioned above. In Table 3 below, we highlight the company's current bundled service offerings.
3
MORGAN JOSEPH & CO. INC.
Liberty Global Inc.
July 31, 2006
Table 2: VTR - Cable TV Service Packages (prices in USD: 1 USD = 562.4 CLP)
Cable Light
26.00 per month
47 channels including:
BBC
CNN
Discovery Health
Fox Channel
Fox Sports
MGM
TNT
MTV
Animal Planet
Nickelodeon
Cartoon Network
Deutsche Welle
Rai Italia
TV5 France
TVE Espana
TVN Chile
Canal 13
La Red
Mega
Chilevision
Full Cable
38.24 per month
69 channels (Cable Light plus):
HBO
History Channel
CineCanal
National Geographic Channel
Cinemax
E! Entertainment
Disney
Warner Channel
ESPN
Sony Entertainment
Discovery Channel
D-Box
3.98 per month
includes:
EPG
parental channels
40 radio channels access to premium packages
Source: Company reports
Premium Packages
A La Carte Channels
Magazine
HBO
Arabic Programming
3.80 per month
Europachannel
Europa Europa
Retro
Cosmopolitan
Fashion
Discovery Science
Discovery Civilization
Discovery Turbo
Speedchannel
MTV Hits
MTV Jams
VH1 Soul
Clase
Fox News
Bloomberg
OTI TV
CSPAN
3.80 per month
HBO
HBO Plus
Cinemax
11.80 per month
Art Latino
Aljazeera
Canal de Futbol
6.00 per month
Playboy
3.80 per month
HBO Max
7.80 per month
HBO O
HBO Plus E
Cinemax O
HBO Plus O
HBO Family E
HBO Family O
MAX Prime E
MAX Prime O
Movie City
3.80 per month
CineCanal 2
CineCanal Classics
Movie City E
Movie City O
Brazilian Programming
11.80 per month
Record
O Globo
CCTV9
7.80 per month
Arirang
7.80 per month
NHK Premium
13.80 per month
Zee TV
13.80 per month
Fox Sports Premium
7.80 per month
Table 3: VTR - Bundled Service Offerings (prices in USD: 1 USD = 562.4 CLP)
Monthly Price
Cable Package
Broadband Package
Calling Package
Light
Classico
Gold
59.80
85.80
99.80
Cable Light
Full Cable
Full Cable + d-Box
300Kbps
600Kbps
1200Kbps
Unlimited on-net + 350 minutes off-net Unlimited on-net + 350 minutes off-net Unlimited on-net + 340 minutes off-net
Source: Company reports
On the broadband side, the company offers a variety of high-speed Internet access packages to subscribers in
Santiago and 19 other Chilean cities. Branded under the name Banda Ancha, the company's service offers
download speeds ranging from 128Kbps to 10Mbps (see Table 4 below for a look at the company's broadband
Internet access service portfolio and a comparison to competitive packages). Approximately one third of the
company's video subscribers currently take an Internet product, or about 83% of the company's total Internet
subscriber base. The company is achieving significant growth and high penetration, 30%, with its voice
products. VTR offers services to subscribers in Santiago and 18 other Chilean cities. Telephony services
include basic dial tone, voicemail and other value added services (see Table 5 below for a look at VTR's
telephony services). About one third of the company's video subscribers currently take voice services, or about
68% of VTR's total voice subscriber base. Chile was the first market in which Liberty Global began providing
a triple play offering. Today, roughly 40% of VTR's subscribers take a bundled package; roughly 23% take a
triple play while 18% take a double play. The ratio of RGU (revenue generating unit) to customers is a robust
1.6x.
4
MORGAN JOSEPH & CO. INC.
Liberty Global Inc.
July 31, 2006
Table 4: Chile - Broadband Service Provider Pricing (prices in USD: 1 USD = 562.4 CLP)
VTR
Monthly Pricing
Per Minute Charges
Speeds (downstream/upstream)
Data Limits
Flex 128
5.80
0.30
128Kbps/64Kbps
NA
Flex 600
5.80
0.50
600Kbps/128Kbps
NA
Flex 1200
5.80
0.70
1.0Mbps/256Kbps
NA
CTC Chile
Monthly Pricing
Speeds (downstream/upstream)
Data Limit
Speedy 128Kbps
29.98
128Kbps/64Kbps
NA
Speedy 200Kbps
41.98
200Kbps/64Kbps
NA
Entel
Monthly Pricing
Speeds (downstream/upstream)
Data Limit
ADSL 200
41.80
200Kbps/64Kbps
NA
Telsur
Monthly Pricing
Speeds (downstream/upstream)
Data Limit
GTD
Monthly Pricing
Speeds (downstream/upstream)
Data Limit
Tariff Plan 300
41.80
NA
300Kbps/64Kbps
NA
Tariff Plans
Speeds from
100Kbps
to
2.0Mbps
10 Mega
79.80
NA
10.0Mbps/512Kbps
5GB
Limit Refills
5GB for 10.00
1GB for 5.00
Speedy 400Kbps Speedy 600Kbps
47.98
51.98
400Kbps/128Kbps 600Kbps/128Kbps
NA
NA
Speedy 1Mbps
63.98
1.0Mbps/256Kbps
NA
Speedy 2Mbps
77.98
2.0Mbps/256Kbps
NA
Speedy 4Mbps
89.98
4.0Mbps/512Kbps
NA
ADSL 600
51.80
600Kbps/128Kbps
NA
ADSL 1024
63.80
1.0Mbps/256Kbps
NA
ADSL 2048
77.80
2.0Mbps/256Kbps
NA
ADSL 4096
89.80
4.0Mbps/256Kbps
NA
Broadband 160
37.98
160Kbps/64Kbps
NA
Broadband 320
43.98
320Kbps/64Kbps
NA
Broadband 1MB
49.98
1.0Mbps/256Kbps
NA
Broadband 2MB
73.98
2.0Mbps/256Kbps
NA
Fastnet 128
30.80
128Kbps/64Kbps
NA
Fastnet 200
41.98
200Kbps/64Kbps
NA
Fastnet 400
Fastnet 600
47.98
52.44
400Kbps/128Kbps 600Kbps/128Kbps
NA
NA
Fastnet 2000
77.98
2.0Mbps/256Kbps
NA
Fastnet 4000
89.98
4.0Mbps/512Kbps
NA
Fastnet 1300
63.98
1.0Mbps/256Kbps
NA
Source: Company reports
Table 5: VTR - Telephone Services (prices in USD: 1 USD = 562.4 CLP)
Total VTR
***ALL plans include unlimited calling to VTR lines***
350 Minutes per month (off-net)
450 Minutes per month (off-net)
550 Minutes per month (off-net)
850 Minutes per month (off-net)
1500 Minutes per month (off-net)
25.00
27.00
29.00
35.00
49.00
Source: Company reports
Perhaps the most important recent development for VTR is its new role in deploying next-generation wireless
services in Chile. The Subsecretaria de Telecomunicaciones, Chile's primary telecommunications regulator,
recently awarded the company wireless spectrum licenses in the 3.4GHz-3.6GHz range. VTR has said that it
plans to use this wireless spectrum to deploy broadband data and voice services using the new WiMAX
standard, targeting the more rural portions of the country where deploying a wired network would be too cost
prohibitive. By deploying a WiMAX-based network, VTR will be able to increase its total service area by
1.3mm homes. Chile's WiMAX has been challenged by a third party.
Incumbent Competition
CTC Chile, or Compañía de Telecomunicaciones de Chile, is the country's incumbent telecommunications
service provider and a Telefonica subsidiary. The company, or one of its successor companies, has been in
business since 1930 and has spent most of its existence as a publicly-owned and/or privately-owned enterprise.
During the period of 1971-1987, the Chilean government held a controlling stake in the business before
deciding to privatize the company once again. Today, Spain's Telefonica owns a 44.89% stake. According to
the company, it currently serves about 73% of all active telephone lines in Chile, or over 3.0mm total lines
installed. As of March 31, 2006, the company had 2.4mm total fixed telephony customers, 345,400 total
broadband ADSL (asymmetric digital subscriber line) customers and 110,700 other Internet access
subscribers. We note that, like every other major incumbent provider worldwide, the company is subject to
fixed-to-mobile substitution, which has hurt its traditional telephony business, but helped its market-leading
mobile telephony business.
5
MORGAN JOSEPH & CO. INC.
Liberty Global Inc.
July 31, 2006
On the telephony side, CTC Chile is Chile's incumbent telecommunications service provider and the dominant
provider of telephone services in the Chilean market. The company offers a number of tariff options to its
subscribers, which include monthly minute plans, prepaid plans, and hybrid plans that include overage
coverage. As of the end of 2005, the company's new flexible tariff plans represented about 25% of total
subscribers. On the broadband side, the company offers ADSL services in select markets nationwide where its
plant has been upgraded to make it DSL-ready. CTC Chile offers a range of high-speed broadband Internet
access services that feature download speeds ranging from 128Kbps to 4.0Mbps (see Table 4 above for a look
at how CTC Chile's broadband services compare to those offered by VTR).
Only recently did CTC Chile begin providing television services. In June, the company launched its own
DTH-based television service using its own content agreements, satellite uplinks, space segment, and
consumer equipment (see Table 6 below). CTC Chile has also said that it is working to spend $50.0mm this
year on the launch of this DTH service as a way to provide a competitive product while using the ease of DTH
as a stop-gap until it can complete an upgrade of DSL facilities. This new service offering would replace the
company's partnership with Zap TV that was announced last year following VTR's merger with Metropolis.
Once CTC Chile finishes its DSL facility upgrades, the company plans to move forward with a launch of IPTV
services, most likely towards the end of 2007 and into 2008, though it may occur earlier. We note that CTC
Chile believes it can win approximately 20%-30% of the Chilean pay television services market over the next
five years with both its DTH and IPTV products.
Table 6: CTC Chile - Telefonica Digital TV Television Service Packages (prices in USD: 1 USD = 562.4 CLP)
Entry Package
19.80 per month
Canal 13 UC
ChileVision
MEGA se Vive
RED Television
TeleCanal
TVN
TNT
The Film Zone
Fox
Fox Life
E! Entertainment
WB TV
CNN en Espanol
AXN
National Geographic Channel
Utilisima
Discovery Channel
A&E
The History Channel
Sony Entertainment TV
VH1
MTV
Discovery Kids
Cartoon Network
Disney Channel
Nickelodeon
People+Arts
ESPN
Fox Sports
CDF
CDF
29.78 per month
***All Additional Packages include Entry Package***
Cine HBO
Plan Total
28.98 per month
59.98 per month
HBO
25.00 per month
HBO
HBO Core
HBO Plus
HBO Family
Fooball
37.98 per month
Fox Sports Premium
Canal de Futbol
Cinecanal
FX
Hallmark Channel
Space
I Sat
Europa Europa
Universal
Cinemax
Animax
TCM
HBO
HBO Oeste
HBO Plus
HBO Family
Plus HBO
32.98 per month
Cinecanal
Retro
FX
Boomerang
Hallmark Channel
Infinito
Space
Discovery Home & Health
I Sat
Discovery Travel & Living
Europa Europa
Film & Arts
Universal
elgourmet.com
Cinemax
EWTN
Animax
CNN International
TCM
RAI
HBO
TVE
HBO Oeste
Peru Magico
HBO Plus
BBC
HBO Family
Telefe
ESPN Plus
Antena 3
Jetix
Eurocanal
Animal Planet
Source: Company Reports
6
MORGAN JOSEPH & CO. INC.
Cinecanal
FX
Hallmark Channel
Space
I Sat
Europa Europa
Universal
Cinemax
Animax
TCM
ESPN Plus
Jetix
Animal Planet
Retro
Boomerang
Infinito
Discovery Home & Health
Discovery Travel & Living
Film & Arts
elgourmet.com
EWTN
CNN International
RAI
TVE
Peru Magico
BBC
Telefe
Antena 3
Eurocanal
Fox Sports Premium
Canal de Futbol
Movie City
CineCanal 2
CineCanal Classics
HBO
HBO Oeste
HBO Plus
HBO Family
Cinemax Prime
Cinemax Plus
Liberty Global Inc.
July 31, 2006
Other Competition
There are a number of smaller competitors in the Chilean market that are essentially all unbundlers, given the
local loop unbundling regulations set forth by the government's telecommunications regulator. As a result,
basic service offerings among these providers are largely similar to those offered by CTC Chile. The largest of
the other competitors in the Chilean market include Entel, Telsur, and GTD-Manquehue.
Entel (Empresa Nacional de Telecommunications S.A.) is the largest of Chile's alternative service providers,
serving about 10% of the total telecom market and offering customers mobile telephony, long distance
telephony, local telephony, and high-speed Internet access services. The company had, as of March 31, 2006,
4.3mm mobile subscribers, 51,818 broadband Internet subscribers, and 108,265 local lines in service. Entel's
services include a standard suite of telephony and broadband Internet and a number of value-added and
bundled products that complement its portfolio. All these services are delivered using the company's access to
the local loop provided for by local loop unbundling regulations in the Chilean market. On the telephony side,
the company delivers standard voice services using traditional twisted pair copper lines and also by wireless
local loop to its subscribers. The company also offers a suite of broadband Internet access services that are
comparable to those offered by the incumbent in the market (see Table 4 above for a look at Entel's broadband
service offerings) and range in speeds from 128Kbps to 4.0Mbps.
Telefonica del Sur, or Telsur, provides telephony and high-speed broadband Internet access services primarily
in the southern regions of Chile. As of December 31, 2005, the company had 190,971 total telephony
subscribers (159,691 postpaid and 31,280 prepaid) and 36,542 total ADSL-based broadband Internet access
subscribers. The company's primary product, local telephony services, is offered on both a pre-paid and
monthly tariff basis to subscribers throughout the southern regions of Chile across both its wired network and
its wireless local loop network, which reaches the rural regions of southern Chile. On the postpaid side, the
company has updated its tariff structure in an effort to transition more of its customers over to this form of
pricing, which charges customers flat rates for monthly service. By the end of 2005, the company reported that
about 70% of its customer base was taking a postpaid pricing plan. On the broadband side, the company offers
a suite of four broadband service packages (see Table 4 above for a look at Telsur's service offerings), which
enable customers to access the Internet at speeds ranging from 160Kbps to 2.0Mbps. The company has also
said publicly that it will spend approximately $10.0mm in 2006 and 2007 to upgrade its core network as it
moves towards deploying digital television services in late 2006 or early 2007. Telsur's Blue Two Chile
subsidiary is also currently investing in a hybrid public access network that will enable broadband Internet
access throughout the country using both Wi-Fi and Bluetooth connections. The network recently went live for
the first time and is available currently on a trial basis.
Finally, GTD-Manquehue was formed in 2005 following commercial service provider GTD Group's
acquisition of Manquehue Enterprises, a local loop unbundler serving the residential market. The combined
entity delivers a standard suite of telephony and data services to its client base. On the telephony side, the
company delivers voice services using traditional twisted pair copper lines and, on the broadband side, it offers
a suite of broadband Internet access services that are comparable to those offered by CTC Chile (see Table 4
above for a look at GTD Group's broadband service offerings).
7
MORGAN JOSEPH & CO. INC.
Liberty Global Inc.
July 31, 2006
Satellite Competition
The Chilean market is not a satellite-intensive market and, as such, DTH providers have only about 7% of total
pay-TV share. The two major satellite players are DirecTV Latin America and Zap TV and both currently
offer nationwide access to their satellite television programming. DirecTV Latin America, a subsidiary of
DirecTV, is one of the largest providers of satellite programming to the Latin American market, including 27
countries throughout South America, Central America, and the Caribbean. The business was founded in
February 1995 and launched its initial services in 1996. In 2003, the company filed for bankruptcy protection,
which ended in early 2004. Later that year, the company completed a number of transactions with News
Corporation (NWS - $20.01 - NYSE), Televisa (TV - $18.80 - NYSE), Globo, and Liberty Media
International, which had the effect of consolidating Sky Latin America and DirecTV Latin America onto a
single platform, which exists today. The company currently has approximately 1.8mm subscribers throughout
the region, with about 85% of those subscribers located in just four countries: Brazil, Argentina, Venezuela,
and Puerto Rico. Programming available over the DirecTV Latin America system represents a small sample of
the programming available over DirecTV in the US and also includes a number of national broadcasters and
Spanish language channels (see Table 7 below for a look at DirecTV Latin America's service offerings).
Today, Liberty Global does not have an interest in DirecTV Latin America.
Table 7: DirecTV Latin America - Satellite TV Service Pricing (prices in USD: 1 USD = 562.4 CLP)
Basic Package
43.80 per month
Premium Plans
Movie City/CineCanal
Space
The Film Zone
Hallmark Channel
De Pelicula
TNT
I Sat
Golden
MGM
HBO
CineCanal
Cine Latino
Cinemax Plus
Multipremier
AXN
Universal
Sony Entertainment TV
WB TV
Ritmoson Latino
MTV LA
Fashion TV
Sony Entertainment TV e s l e
Retro
Canal de los Estrellos
Source: Company reports
Venevision Continental
FX Networks
Animax
MUCH
Telehit
Ultisima
MTV
Fox Life
E! Entertainment
HTV
FOX
elgourmet.com
Casa Club
VH1
Disney Channel
Jetix
Cartoon Network
Nickelodeon
Discovery Kids
Boomerang
ZAZ Moviepark
Film & Arts
People & Arts
Discovery Channel
Animal Planet
A&E
Infinito
Discovery Home & Health
Discovery Travel & Living
The History Channel
National Geographic Channel
TVN
ChileVision
MEGA de Vive
Canal 13 UC
RED Television
CNN en Espanol
CNN International
Fox News Channel
Bloomberg Television
TeleSur
Globovision
ESPN+
ESPN
Fox Sports
Mundial Total
CineCanal Oeste
CineCanal 2
Movie City Este
Movie City Oeste
HBO/Max
HBO
HBO plus
HBO family
Cinemax
Cinemax Prime
International
BBC World
TVE
Antena 3
TV5
RAI
DW
RTP
Promotional Plans
Japanese
NHK
Arabic
ART TV
Playboy TV
Playboy TV
Fox Sports Premium
Fox Sports Premium
Canal de Futbol
Canal de Futbol
Adult
Playboy TV
Venus
TV Globo
TV Globo
Cine Premium
CineCanal Oeste
CineCanal 2
Movie City Este
Movie City Oeste
CineCanal Classics
HBO
HBO plus
HBO family
Cinemax
Cinemax Prime
Max
Above plan +
BBC World
TVE
Antena 3
TV5
RAI
DW
RTP
Zap TV is the other nationwide satellite television provider in Chile but, unlike DirecTV Latin America, Zap
TV is primarily focused on the Chilean market. The company provides a full-featured television service that
includes a basic package with CDF, the national soccer network. The promotion of a relatively inexpensive
programming package, which includes CDF, is a primary differentiator for Zap TV, but we note that other
providers in the Chilean market do provide CDF in their premium tiers. Beyond the national soccer channel,
the company's service offerings are relatively similar to those of the other multichannel television service
providers in Chile (see Table 8 below for a look at Zap TV's service packages).
8
MORGAN JOSEPH & CO. INC.
Liberty Global Inc.
July 31, 2006
Table 8: ZapTV - Satellite TV Service Packages (prices in USD: 1 USD = 562.4 CLP)
Zap Total
19.49 per month
Extra Channels/Packages
Fox Sports Premium
Canal de Futbol
Fox Sports
ESPN
ESPN Plus
Teletrax
Disney Channel
Discovery Kids
Cartoon Network
Nickelodeon
Jetix
AXN
Universal
FOX
Sony Entertainment TV
WB TV
The Film Zone
Space
I Sat
Retro
TNT
Source: Company Reports
HBO
Cinemax
CineCanal
Channel 13 UC
People + Arts
Discovery Travel & Living
A&E
Discovery Channel
CNN en Espanol
National Geographic Channel
The History Channel
Documentary Channel
Animal Planet
Discovery Home & Health
TVE
Eurocanal
MTV
E! Entertainment
elgourmet.com
Utilisima
5.95 per month
Fox Sports Premium
HBO
5.49 per month
HBO Plus
HBO +
HBO Prime
Playboy TV
4.13 per month
Playboy TV
CineCanal
3.88 per month
CineCanal 2
Movie City
Regulatory Environment
The regulatory environment in Chile is currently governed by the 1982 General Telecommunications Law,
which introduced new competition into the market and added new oversight. As in almost every other country,
operators must obtain licenses to provide services. On the telephony side, the Chilean government typically
grants 30 year licenses (some of CTC Chile's licenses have longer terms), which are indefinitely renewable for
up to 30 additional years at a time. Additionally, if an operator has a license terminated by the Ministry of
Transport and Telecommunications, they are barred from obtaining a new license for a five-year period. On
the cable side, wireline cable television permits are non-exclusive and are granted indefinitely while wireless
television permits are granted with 10-year terms and are indefinitely renewable for up to 10 additional years
at a time. Finally, the presence of triple-play services in VTR's product portfolio indicates that ownership of
cable, Internet, and telephony permits is allowed and we note that most of these licenses have no geographic
restrictions and most do not force operators to provide universal services.
The competitive environment, from a regulatory point of view, in the Chilean market became much more
complex during 2004 and 2005 thanks to two significant mergers and three other transactions that involved
changes in asset control. In 2005, Liberty Global closed on its acquisition of Metropolis-Intercom, creating the
largest cable operator in the Chilean Market. Other transactions included Telefonica Moviles' (TEM - $13.54 NYSE) merger with BellSouth Chile (BLS - $39.23 - NYSE), Telecom Italia's (TI - $27.15 - NYSE) sale of
its interest in Entel, America Movil's (a September 2000 spinoff of Mexican incumbent Telmex) acquisition of
Smartcom, and GTD Group's acquisition of Manquehue. Of these events, the VTR acquisition of
Metropolis-Intercom has changed some of Liberty Global's business practices in the market. The Chilean
government mandates that VTR re-sell its broadband capacity to competitive service providers on a wholesale
pricing basis, and limit basic tier pricing increases to the inflation rate (plus an escalator for programming cost
increases) for three years following the transaction. Also, VTR must activate 2.0mm-3.0mm two-way homes
passed within the first five years following the completion of the transaction.
9
MORGAN JOSEPH & CO. INC.
Liberty Global Inc.
July 31, 2006
Liberty Global Inc. - Quarterly and Annual Income Statements 2005-2008E ($ in millions)
1Q05
$1,235.3
114.3%
59.2%
2Q05
$1,276.3
119.8%
3.3%
3Q05
$1,295.8
82.8%
1.5%
4Q05
$1,443.1
85.9%
11.4%
2005
$5,151.3
95.0%
NA
1Q06
$1,625.9
31.6%
12.7%
2Q06E
$1,536.8
20.4%
-5.5%
3Q06E
$1,601.9
23.6%
4.2%
4Q06E
$1,644.5
14.0%
2.7%
2006E
$6,409.1
24.4%
NA
2007E
$6,797.8
6.1%
NA
2008E
$7,447.3
9.6%
NA
Cost of Revenue
Operating Costs
Selling, General and Administrative Exp.
Total Operating Costs
502.3
284.1
$786.4
535.3
312.5
$847.8
553.3
279.2
$832.5
616.7
355.0
$971.7
2,207.6
1,230.8
$3,438.4
694.0
359.6
$1,053.6
645.0
335.0
$980.0
680.0
345.0
$1,025.0
705.0
345.0
$1,050.0
2,724.0
1,384.6
$4,108.6
2,487.6
1,625.0
$4,112.6
2,702.0
1,750.0
$4,452.0
EBITDA
% of Revenues
$448.9
36.3%
$428.5
33.6%
$463.3
35.8%
$471.4
32.7%
$1,770.8
34.4%
$572.3
35.2%
$556.8
36.2%
$576.9
36.0%
$594.5
36.1%
$2,300.5
35.9%
$2,685.2
39.5%
$2,995.3
40.2%
Depreciation
Stock-based Compensation
Other Charges/Asset Impairments
327.6
18.7
4.9
345.8
42.9
(2.1)
365.2
60.8
0.9
416.3
(63.1)
1.9
1,454.9
59.2
5.6
462.7
16.0
6.4
426.7
20.0
0.0
426.7
20.0
0.0
426.7
20.0
0.0
1,742.8
76.0
6.4
1,850.0
50.0
2,000.0
50.0
Operating Income (expense)
Operating Margin
$97.8
7.9%
$41.8
3.3%
$36.4
2.8%
$116.3
8.1%
$251.2
4.9%
$87.2
5.4%
$110.1
7.2%
$130.2
8.1%
$147.8
9.0%
$475.3
7.4%
$785.2
11.6%
$945.3
12.7%
Interest Expense
Interest Income
Share of Earnings of Affiliates, Net
Realized and Unrealized Gains on Derivative
Foreign Currency Exchange Gains (Losses)
Gain on Extinguishment of Debt
Gains (Losses) on Disposition of Assets, Net
Other Income (expense)
Pretax Income
Pretax Income Margin
(91.0)
20.5
(21.3)
85.9
(64.8)
(12.0)
69.6
0.7
$85.3
NM
(86.7)
22.3
4.5
69.3
(136.9)
(0.7)
(44.0)
0.6
($129.7)
NM
(134.4)
18.9
2.1
(29.2)
7.3
(433.5)
77.6
(22.9)
310.0
(209.4)
(33.7)
115.2
(3.7)
$50.8
1.0%
(150.7)
15.7
1.4
113.8
38.6
(8.9)
45.3
(1.0)
$141.4
NM
(150.7)
15.7
(150.7)
15.7
(150.7)
15.7
(450.0)
30.0
($24.9)
NM
($4.8)
NM
$12.8
NM
(602.8)
62.8
1.4
113.8
38.6
(8.9)
45.3
(1.0)
$124.5
1.9%
(450.0)
30.0
0.3
0.0
($98.6)
NM
(121.3)
15.9
(41.8)
184.0
(15.1)
(21.1)
89.3
(4.9)
$201.3
NM
0.0
$365.2
5.4%
0.0
$525.3
7.1%
Income Tax
Net Income
(45.7)
$39.6
43.9
($85.8)
(28.4)
($127.1)
0.4
$201.7
(29.8)
$20.9
(70.5)
$70.9
0.0
($24.9)
0.0
($4.8)
0.0
$12.8
(70.5)
$54.0
(193.6)
$171.6
0.0
$525.3
Minority Interest
(13.3)
(37.6)
(25.7)
(27.9)
(104.5)
(27.5)
(30.0)
(30.0)
(30.0)
(117.5)
(125.0)
Net Income (Loss) Applicable to
Common Shareholders
$26.3
($123.3)
($152.8)
$173.8
($83.6)
$43.4
($54.9)
($34.8)
($17.2)
($63.5)
$46.6
$525.3
EPS (Weighted Average)
EPS Growth
$0.08
NA
($0.34)
NA
($0.32)
NA
$0.36
NA
($0.20)
NA
$0.09
NA
($0.11)
NA
($0.07)
NA
($0.03)
NA
($0.13)
-36.0%
$0.09
NA
$1.05
196.0%
Fully Diluted Shares (Weighted Average)
346.9
368.2
474.4
479.5
417.2
495.0
495.0
495.0
495.0
495.0
497.0
499.0
Total Revenues
Yr/Yr Change in Revenue
Qtr/Qtr Change in Revenue
Accretion of Div. & Special Charge
Source: Company reports and Morgan Joseph & Co. Inc. estimates
10
MORGAN JOSEPH & CO. INC.
Liberty Global Inc.
July 31, 2006
Required Disclosures
Rating and Price Target History for: Liberty Global Inc. (LBTYA) as of 07-28-2006
09/26/05
I:Buy:$30
28
24
20
16
Q2
Q3
Q1
2004
Q2
Q3
Q1
Q2
2005
Q3
Q1
Q2
12
2006
Created by BlueMatrix
Price Target
Our price target is $30.00.
Valuation Methodology
We believe the cable assets in Europe, Chile, and Japan deserve a 9x 2007 EBITDA multiple in light of their superior growth vs. the
US cable operators. We estimate that Liberty Global's adjusted EBITDA for its J:COM (4817 - ¥78,300 - JASDAQ) minority interest
will grow 30.8% in 2006 and 18.5% in 2007. From a growth perspective, we believe Liberty Global warrants a premium valuation
since we estimate that revenue will grow 32.6% in 2006 and 9.5% in 2007. In contrast, US operators Comcast (CMCSA - $34.46 NASDAQ) and Cablevision (CVC - $22.20 - NYSE) are forecast to grow revenues at a rate of 10.1%-11.4% in 2006 and 9.9%-11.1%
in 2007. EBITDA should also grow in advance of the US operators in 2006 and 2007. We believe Liberty Global can grow EBITDA
37.8% in 2006 and 13.0% in 2007 compared to the US operators at 8.4%-11.3% in 2006 and 11.7%-14.7% in 2007. In order to
segregate the value of the cable assets, we have excluded the values of the other assets. We used 8.0x-10.0x multiples on the private
investments and multiplied our 2006 EBITDA estimate for J:COM of $176.1mm by 12.0x. We believe the public and private assets are
worth roughly $2.0bn. After net debt of $7.7bn is subtracted, we reach our price target of $30.00 per fully diluted share.
Risk Factors
Many of Liberty Global's subsidiaries plan to integrate cable acquisitions into their portfolio of assets. Unsuccessful acquisitions
■
could damage the company's ability to grow free cash flow, encumber management resources, or worse, over-leverage the
company.
■
■
UPC, the predecessor to UnitedGlobalCom, acquired cable assets at a very rapid pace; overspending on acquisitions and system
upgrades forced the predecessor into bankruptcy.
Outside the UnitedGlobalCom property, which Liberty Global now fully owns, it maintains minority or 50% stakes in many of its
subsidiaries, so it cannot always implement the strategies it deems necessary for the health of its various investments. Chairman
John Malone is highly incentivized through stock options to increase shareholder value though he does maintain effective control of
the company through his 27% voting stake.
I, David Kestenbaum, the author of this research report, certify that the views expressed in this report accurately reflect my personal
views about the subject securities and issuers, and no part of my compensation was, is, or will be directly or indirectly tied to the
specific recommendations or views contained in this research report.
11
MORGAN JOSEPH & CO. INC.
Liberty Global Inc.
July 31, 2006
I, James Leahy, the author of this research report, certify that the views expressed in this report accurately reflect my personal views
about the subject securities and issuers, and no part of my compensation was, is, or will be directly or indirectly tied to the specific
recommendations or views contained in this research report.
Research analyst compensation is dependent, in part, upon investment banking revenues received by Morgan Joseph & Co. Inc.
Morgan Joseph & Co. Inc. intends to seek or expects to receive compensation for investment banking services from the subject
company within the next three months.
Investment Banking
Services/Past 12 Mos.
Rating
Percent
Percent
BUY [B]
63.89
19.57
HOLD [H]
34.72
12.00
1.39
0.00
SELL [S]
Meaning of Ratings
A) Buy means reasonable outperformance relative to the market over 12-18 months.
B) Hold means market-type risk adjusted performance; potential source of funds.
C) Sell means expected to underperform the market.
Other Disclosures
The information contained herein is based upon sources believed to be reliable but is not guaranteed by us and is not considered to be
all inclusive. It is not to be construed as an offer or the solicitation of an offer to sell or buy the securities mentioned herein. Morgan
Joseph & Co. Inc., its affiliates, shareholders, officers, staff, and/or members of their families, may have a position in the securities
mentioned herein, and, before or after your receipt of this report, may make or recommend purchases and/or sales for their own
accounts or for the accounts of other customers of the Firm from time to time in the open market or otherwise. Opinions expressed are
our present opinions only and are subject to change without notice. Morgan Joseph & Co. Inc. is under no obligation to provide updates
to the opinions or information provided herein. Additional information is available upon request.
© Copyright 2006 by Morgan Joseph & Co. Inc.
Morgan Joseph & Co. Inc.
600 Fifth Avenue, 19th Fl
New York, NY 10020
Tel. 212.218.3700
Fax. 212.218.3789
Sales and Trading
New York
Tel. 212.218.3767
Fax. 212.218.3705
Pittsford
Tel. 877.237.6542
Fax. 585.899.6029
12
MORGAN JOSEPH & CO. INC.