Liberty Global Ltd. Q1 FY2020 Earnings Call

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Liberty Global’s First Quarter 2020 Investor Call. This call and the associated webcast are the property of Liberty Global, and any redistribution, retransmission or rebroadcast of the 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 material can be found under the Investor Relations section of Liberty Global’s website at libertyglobal.com. After today’s formal presentation, instructions will be given for a question-and-answer session. Page 2 of the slides details the company’s Safe Harbor statement 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 in Liberty Global’s filings with the Securities and Exchange Commission, including its most recent filed Forms 10-Q and 10-K, as amended. Liberty Global disclaims any obligation to update any of these forward-looking statements to reflect any change in its expectations or any condition on which any such statement is based. I would now like to turn the call over to Mr. Mike Fries.

Okay. Thank you, operator, and hello, everyone. I appreciate you joining us on the call today. And clearly, we have a lot to talk about, so I’m not going to waste much time with formalities and jump right into what will be the most important topic, which is how we’re managing through the COVID-19 pandemic. First of all, our hearts and prayers go out to everyone who has suffered through this crisis. These are clearly unprecedented times, and I am particularly proud of our 27,000 employees across 8 countries who have dedicated themselves to keeping their customers connected, entertained, and informed. You can imagine, our primary focus has been on their safety and well-being, and while the policies and requirements vary by country, nearly 90% of our team has been working from home, and we are deep in preparation for their return to the office and the field on a gradual basis. And we appreciate that this is an extraordinary time for our customers as well. So in addition to providing them with the same reliable and robust connectivity services we’re known for, we’ve been improving their experience in a multitude of ways. We’re boosting speed and increasing data caps. We’re offering additional entertainment services, especially for kids, and we’re aware that our customers are experiencing economic challenges as well. So, we’re being very careful to keep folks connected and help them manage through the crisis, even offering lifeline services where necessary. And we’re paying special attention to our B2B customers, increasing capacity and providing emergency mobile coverage to hospitals and ensuring quick turnaround on product changes. As an essential service, we have crews and trucks in the field every day, maintaining our networks, installing new customers, and building plans. Our Lightning Construction crews, for example, are working as we speak. Of course, with additional precautionary measures, we’re on pace to light up at least 350,000 new homes this year. We’ve included a slide on Project Lightning in the appendix to provide details for the quarter. At the outset of the crisis, many wondered whether any network could withstand the increase in usage that could inevitably occur under these circumstances, and the answer for us is a clear yes. Our fixed broadband network has seamlessly absorbed 20%-plus increases in the downstream and 50%-plus increases in the upstream bandwidth with no problem at all. So, recent investments in infrastructure and speeds and connectivity products have really proved invaluable for all of us. From a trading point of view, our sales have been largely stable, but down from pre-crisis levels. At the same time, as many of our peers have reported, we’ve seen a considerable drop-off in churn. We are also experiencing softness in some of our premium sports products. That’s not surprising. But in markets like the UK and Ireland these are zero-margin packages for us. We don’t make much money, and they are not impacting cash flow. On the mobile front, store closures are impacting handset sales, and usage has dropped off a bit, as folks offload to WiFi. But in many markets we’re on our way to reopening and recovery. For example, two-thirds of the shops in Holland are now open and back in business, and for us, it’s just a matter of time. Charlie is going to address what all this means for our financial guidance for the year. On one hand, we’re fortunate that we have very little exposure to things like advertising or other sectors that are experiencing disruption right now. As a group, our services have proven to be even more vital for consumers during this crisis. On the other hand, we’re realistic about the impact this may have on bad debt and potential price increases and mobile roaming revenue and overall customer activity. Like our peers, we’re assessing the medium-term impact of the pandemic on our business. We expect to provide a more thorough update for you in the second quarter earnings call. There are a lot of uncertainties on the road ahead, from the lifting of lockdowns to testing a vaccine, but we feel well-positioned to power through this. In the meantime, we are not suspending or changing guidance. In fact, we’re actually pretty encouraged by our operating and financial prospects for the balance of the year. Let me reset the agenda here a bit, just for a minute and hit a couple of additional highlights on Slide 5. Now, despite the impact of the COVID-19 crisis, we delivered a solid first quarter operationally and financially. In fact, the quarter was largely in line with or ahead of our internal expectations. I’ll talk about this more when we dig into Virgin Media results. But we remain focused on a handful of key performance drivers in our European markets, in particular customer growth, customer ARPU, and Fixed-Mobile Convergence. We did well on all three with largely stable customers versus the prior quarter, solid ARPU growth versus the prior quarter and year over year, and good mobile additions. And it is evident that these operating strategies are working. We have over 32 million gigabit-ready homes across our European footprint, with 1 gig services launched in nearly 12 million of those homes. We’re widening the distance between us and our competitors when it comes to broadband speeds. We added 22,000 broadband services in the quarter as a result. And our Fixed-Mobile Convergence bundles drove nearly 115,000 postpaid mobile additions. Now finally, a quick update on capital allocation. At the end of February, we authorized a $1 billion share buyback and through the end of April, we repurchased $500 million of stock at an average price in the mid-$16 range. We’re generally buying through 10b5-1 plans according to preset grids or pace accelerated as the stock declined. It shouldn't be a surprise to most of you. Now, let me move to the most important announcement today, that is, of course, our agreement with Telefónica to combine our UK operations, Virgin Media and O2. We are really excited about this transaction and the partnership with Telefónica. Over the last several years, we’ve been successfully executing a very clear plan to create national Fixed-Mobile Convergence champions in all of our markets. In some cases, we’ve sold our broadband operations to mobile operators like Deutsche Telekom and Vodafone. We share that exact same belief in convergence, and we’ve closed those transactions at premium multiples, highlighting the big disconnect between public and private valuations. In markets like Belgium, we acquired an MVNO and are thriving with Fixed-Mobile Convergence in that country. And in Holland, we joined forces with Vodafone in a 50/50 joint venture to create what is now the fastest-growing and most important mobile broadband and entertainment provider in the market. This deal follows that path. By combining O2, the largest and most reliable and admired mobile operator, together with Virgin Media, the country’s fastest broadband network and most complete and innovative video platform, we are creating a powerhouse combination. First, it gives us the scale to invest competently in gigabit broadband and 5G right when it matters most. Second, with the best network infrastructure, market-leading positions, and world-class brands, we’ll have the strength to compete aggressively for customers. And third, of course, the combination delivers significant synergies that will accelerate operating cash flow and free cash flow. We know the playbook well, as we’ve executed on it many times. It’s also a strong statement by both Liberty and Telefónica that we believe in the UK and are right behind the government’s desire to bring next-generation connectivity to consumers and businesses as fast as possible. Let’s dig into the transaction itself on Slide 6. There’s plenty of detail here, so I’ll try to hit the key points. The main deal points are on the left-hand side of the slide. This will be a 50/50 joint venture in all respects. Obviously, we have experience with this structure in Holland and we know it can work well. It feels like a very good fit with Telefónica. We have similar values, comparable operating goals, and strong leadership on the ground. The economics of the deal are derived from relative valuations at the formation of the joint venture. You’ve all seen this equation before. In this case, we value Virgin at a total enterprise value of £18.7 billion, resulting in an equity value of £7.4 billion, assuming, of course, £11.3 billion of debt is transferred into the joint venture. O2 was valued at £12.7 billion and will be transferred in debt-free but with some working capital and debt-like items. Therefore, to equalize the ownership, Telefónica needs to receive a payment from us of about £2.5 billion, based on relative numbers. And that’s just math. The math could change as debt and debt-like items evolve between now and closing, but we expect it to be largely the same. The O2 business is largely unlevered. We intend to recapitalize the joint venture with about £18 billion of total debt, which means each partner will receive recap proceeds on or before closing of approximately £3 billion that covers more than our portion of the equalization payment. Outside of the joint venture, we should end up with net cash proceeds of about £1.4 billion or $1.75 billion. It’s worth pointing out that this is also a deleveraging event for our business, which will go from 5.5 to 5 times leverage in the UK. The transaction is obviously subject to regulatory approval, which we anticipate will be reviewed at the CMA and should be closed hopefully by the middle of next year, if not sooner. Moving to the right-hand side of the chart, the rationale for this combination from our perspective is compelling. I’ve covered some points already. We’re creating a clear convergence champion in our largest market and one of Europe’s most attractive. But the transaction also creates real value for shareholders. We’ve argued for quite some time that our stock doesn’t reflect any equity value for Virgin Media. Clearly, this deal changes that debate. With an implied multiple of 9.3 times in 2019 OCF or 25 times 2019 operating free cash flow, there is substantial equity value in our UK business, even before net cash proceeds or synergies. As you’ve read, the synergies are currently valued at an NPV of £6.2 billion, reflecting run-rate benefits of around £540 million per year. It’s worth pointing out that this compares favorably to other fixed and mobile convergence deals we’ve been associated with. In fact, it’s on the lower end as a percent of the combined costs. We have a strong track record of executing and over-delivering on synergies, so hopefully, that number should hold up well. On the bottom right, we present some financial metrics. The two businesses together generated £11 billion in revenue in 2019 and £3.7 billion of OCF or EBITDA, before intercompany service charges in the joint venture structure. Like our Dutch operation, we expect the joint venture to generate significant distributable free cash flow, and we will benefit from recap and dividends down the road. This is one of many, but a significant driver of the deal for us. Slide 7 provides some additional background on the combined group. I’ve already referenced the joint venture's best-in-class fixed broadband and mobile infrastructure. The key point here is that this deal will undoubtedly enhance our confidence and strategic positioning when it comes to expanding our network leadership in the market. O2 has already rolled out 5G to 30 communities, and Virgin has already rolled out gigabit speeds to 2 million homes, with the rest of our footprint ready to roll. We know that when the power of 5G meets 1 gig broadband, there is no looking back. Both we and Telefónica see eye-to-eye on the infrastructure network opportunity here. O2 is an ideal partner for Virgin Media. They’re extremely well-placed in the mobile market with the lowest back book, front book exposure, the lowest market churn, and very high NPS. We’ve done some of our own research, which confirmed what we knew, that both brands have strong customer appeal. What we didn’t realize was that the appeal grows even stronger when the brands are considered together. That’s a great starting point for fixed-mobile convergence, as are these other data points: 8 out of 10 Virgin customers use someone else's mobile service today, providing a huge pool for cross-selling O2 to those mobile services. Even more compelling research shows that 50% of O2 customers that don’t have Virgin broadband are more interested in adopting a converged product from O2 or Virgin than they would be from another broadband provider. The fundamentals here provide a very prosperous partnership, and we’re excited to get started. After a big transaction like this, it’s always good to step back and reflect on the composition of our business and assets. The value creation strategy is focused on. You’ll see that on Slide 8, which shows our major operating businesses along with other assets. I’ll provide just a few quick observations. First, we have significant scale across Europe. These operations together will serve 80 million fixed and mobile subscribers, and what we believe are the best European markets. Together, they represent over £24 billion in revenue that includes the joint venture revenue plus our consolidated revenue, and over £8 billion of operating cash flow calculated on this new basis with significant levered free cash flow generation. The second big takeaway is that our three largest assets are or will be less than 100% owned. This reflects the current European market, which is rapidly consolidating to drive scale and generate synergies. Sometimes, you require partners; we’re certainly willing to join forces to create that value. Sometimes it’s public shareholders partnering, sometimes it’s a strategic operator. So long as there’s scope for liquidity and transparency on value, we are satisfied. The third point is that the value creation strategy is largely the same across the footprint. We’re building national FMC champions, partially because many incumbents are vulnerable, under-invested, or late to the game, and because governments and regulators want scale-driven challengers. They know that consumers and businesses win when there’s infrastructure-based competition. That’s been our mantra for decades, and it’s just as true today as ever. Going forward, our focus is on free cash flow, which has always been one of the most important metrics of our business. Now with revenue and OCF growth flattening in a more mature telecom landscape, it becomes even more important. It’s particularly coveted among European investors; just look at where Telenet trades today, for example. Not surprisingly, we will examine the potential for public market listings where and when they make sense. At the group level, we continue to have significant liquidity in excess of $10 billion, even before this transaction closes. None of us predicted this crisis, but we feel fortunate to have the capital to pursue these types of deals. Our fundamental FMC strategies in core markets will tend to be opportunistic, which we will be. This includes our time-honored strategy of driving a leveraged equity capital structure, and of course, share buybacks, as and when appropriate. I’m using this chart as a reference, but there are several ways to look at the valuation of our group. We’re not trying to be prescriptive here. But more than a few investors have asked us to put forward a simple sum of the parts analysis that shows the value gap we talked about. This is always a debate with the lawyers and the IR folks, but we’ve tried to provide a reasonably complete and hopefully simple version of that on Slide 9. I’ll try to break this down, and of course, we’re happy to take questions. The first two building blocks of value are our cash balance at Q1 and the value of our publicly traded shares in Telenet. Together, these numbers add up to about $16 per share. Again, that’s an objective number. We don’t assign a specific value to our interest in Holland and Switzerland on this page, but we do provide the necessary metrics for others to do that pretty easily. There are plenty of comparables to measure against, but we think you can derive $5 to $7 per share pretty easily for our interest in these two markets; this is supported by a 14 multiple on OFCF at the low end and 10% free cash flow yield on the high end. If you were to use Telenet’s multiple OFCF, you would get somewhere in the middle. So again, many will find their own numbers here, but the point is that at our current trading levels, around $21, my analysts have pointed out that you could arrive at that price based on these three numbers alone: cash, Telenet stock, and our interest in Holland and Switzerland. In other words, the UK was and perhaps still is assigned zero equity value in our share price. The left-hand side of this chart addresses that point, showing just one way to look at the implied value of the transaction we just announced. There are three simple elements here: the expected net proceeds of $1.75 billion, which equates to roughly $3 per share, then you add our 50% of the estimated synergies, about $6 per share; and finally, there’s an implied transaction value for the underlying Virgin Media business when we combine it, which we agreed on at £18.7 billion, resulting in an implied value for the equity today of around $14 per share of Liberty Global. If you sum that up, you get to about $23 per share based solely on the UK business. We understand that everyone will have a different view and valuation approach, and some might argue that the implied value of Virgin in the deal and the combination is challenging or unacceptable. We don’t agree with that, but if you were to take 20% off the deal multiple, you would still arrive at the $16 per share for the entire transaction. It’s hard to argue that we don’t have a considerable value gap here, and I believe you are all capable of doing the math on your own. We just wanted to provide those components and clarify what we’ve been discussing for some time. One more slide here on Virgin Media to help round out the operating update, and then I will pass it to Charlie. As you will see, there are more operating update slides like this in the back for other assets. We’ve tried to focus on the data we believe is most important for tracking progress in our core market: firstly, winning and retaining customers across our fixed mobile B2B business; secondly, growing ARPU, up-selling, and cross-selling; and third, driving fixed-mobile convergence. We’re also focused on extending our network reach and speed leadership, and driving cost efficiencies. In fact, we've been forced to accelerate some of the transformation in our care and sales capabilities to be more digital, operate more efficiently, and that’s going to pay dividends on the other side. There are a few good visuals in the middle two columns here. You’ll see firstly that Virgin Media’s customer base has been largely stable, just under 6 million. In fact, the number moved about 20,000 customers in 5 quarters. Yes, the customer gains we pick up in lightning are often offset by customer losses in the BAU footprint, but the numbers are not significant in either direction. You can also see a strong customer ARPU trend in the last 5 quarters, with 1.2% growth year-over-year in the first quarter. This is driven largely by price increases and up-sell and cross-sell, but also underpinned by product innovation and improved base management. We are continually enhancing the value for money proposition for customers in this market, things like our next-gen V6 set-top box and broadband speed. In fact, in the past quarter we boosted over 1 million customers to 100 megabit broadband speeds, bringing our average speed across our base to an average of 140 megabit. For reference purposes, the rest of the UK market averages consumer speeds of 30 megabits per second. Our average Virgin customer is getting broadband speeds 4 to 5 times faster than the rest of the market. As we pointed out, 95% of the UK network is already gigabit-ready. We launched those speeds across major towns and 30% of the footprint. I put us on track for network-wide coverage of 1 gig in 2021, delivering 50% of the government’s national gigabit ambition 4 years early. I think that says a lot. The team has also been focusing on cross-selling mobile services into the fixed base following the launch of convergence bundles about a year ago. The Q1 postpaid net adds were good at 72,000. Fixed mobile convergence is already working at Virgin, as we're at a 22% fixed mobile convergence ratio with plenty of growth runway. Remember, Telenet and VodafoneZiggo are in the mid-40s, so fixed mobile convergence drives higher NPS and lower churn, which is the fundamental rationale for the deal we announced today. Overall, it’s been a good start to the year for Virgin Media even in light of the pandemic. OFCF margins are strong, at 23% before lightning, and 17% after. Our customer base grew 7%. The team is managing through the headwinds we identified at the beginning of the year, including the increase in network taxes and programming costs, very well. In fact, NPS is up, and churn is down. I think the group is really well-positioned to come out of this COVID period stronger than ever. That concludes my remarks, and I’ll pass it over to Charlie. We look forward to your questions.

Thanks, Mike. I’m now on Page 12 for the divisional overview. Mike has given you the key operational highlights of Virgin Media. In the appendix, we’ve included similar pages showing the key operational drivers for other major fixed-mobile convergence businesses. In the interest of time, we will not review these pages in our remarks today, but please contact the IR team if you want to discuss them further. On this page, we set out the key financial metrics we’re using to assess the performance of these national FMC champions. Our focus continues to be on driving OFCF or OCF minus accrued CapEx, and free cash flow as these markets mature in terms of broadband penetration. For reference, we’ve also included a page in the appendix setting out our view of 2019 free cash flow for each of our divisions after interest allocation and central technology and innovation CapEx. For the quarter on this slide, I will focus on the underlying OFCF trends year-on-year. Revenue in the UK is down slightly, 0.6%, but OCF declined 3.5%. OFCF before Lightning Construction CapEx increased by $18 million to $372 million for the quarter. We increased our investment in Lightning compared to 2019 Q1, spending $99 million, with 93,000 homes released during the quarter. Revenue growth in Belgium was slightly down at 9.4%, with OCF up 0.6%, and year-over-year OFCF down $10 million to $187 million. John already explained in the Telenet earnings call that there was an acceleration of prepaid sports rights costs and some front-loading CapEx in Q1, contributing to this year-on-year OFCF decline. For the full year, we confirmed that, excluding the effects of any lockdowns in the second half of the year, they expect to deliver full-year rebased OFCF growth of 1% to 2% on an IFRS basis and adjusted free cash flow in the lower end of the previous €415 million to €430 million guidance range. This assumes a gradual exit from lockdown starting in May, with a gradual economic recovery thereafter. In Switzerland, UPC was caught up in the continuing price competition in that market, which resulted in an accelerated decline in consumer and SOHO customer ARPU. This contributed to a 2.7% decline in revenue. They also had an acceleration in prepaid sports rights costs in the quarter, as well as accelerated CapEx spending contributing to a lower OFCF of $55 million. However, based on current expectations around the COVID impact, we expect cash generation to improve and the company remains on track to produce around $170 million of free cash flow for the full year, including central OpEx and CapEx allocations. In Holland, VodafoneZiggo had a very strong quarter with revenue growth of 3.3%, OCF growth of 4.9%, and OFCF of $258 million, as they outperformed our expectations in virtually every operating metric, showcasing the strength of these converged national FMC champions. They’re now expecting stable to modest rebased OCF growth for the full year and maintain their original free cash flow guidance of €400 million to 500 million in potential cash for shareholder distributions. Again, this assumes no further deterioration due to COVID. On the entitled Group Overview, we set out the key financial metrics for the group as a whole. Revenue declined 0.3% for the quarter, an improvement over the declines from the previous four quarters despite the impact of COVID-19. OCF growth also improved compared to the last three quarters of 2019, down 3.6%, in line with our pre-COVID expectations. OFCF continued to improve and, excluding Lightning Construction CapEx, it was $593 million for the quarter, up from $569 million a year ago. The continuing reduction in CapEx intensity contributed to this, and CapEx as a percentage of sales prior to Lightning Construction CapEx at 19.4% is lower than the previous four quarters. Liquidity remains extremely strong. Cash, including our $2 billion investment in separately managed accounts, was $7.4 billion. As many of you know, our SMAs are invested in low-risk liquid investments. Both our SMAs and money market accounts are now largely invested in government securities, as opposed to AAA funds, which will lead to a reduction in interest income going forward, but ensure maximum security for the cash. For the available revolving credit facilities and in our operating companies, the group as a whole has $10.3 billion of liquidity. Our leverage at the end of the quarter was 5.2 times gross and 3.7 times net EBITDA. The cost of debt continues to decline as we continued our refinancing program during Q1, now standing at 4.1% with an average life in excess of seven years. On the page titled ‘Adjusted Free Cash Flow,’ we lay out the key components of free cash flow. Q1 OFCF before Lightning Construction CapEx was $595 million, and our net interest for the quarter was $579 million. We make virtually all our interest payments in Q1 and Q3. So this phasing is in line with our expectations. Cash tax was positive for the quarter at $5 million. We expect the full-year 2020 figure to be lower than the full-year 2019 figure of $358 million, partly due to reduced U.S. tax payments. The distributions in the joint venture in Holland were $11 million for the quarter, but we continue to expect full-year distributions of €200 million to €250 million, in line with VodafoneZiggo’s recent guidance. As is typical in Q1, working capital was negative at $250 million, largely due to the phasing of the vendor financing program. In 2019, we continued to target broadly flat net working capital flows for the year. Adjusted free cash flow before Lightning Construction CapEx was negative $218 million for the quarter and negative $317 million after construction CapEx, which again was in line with our expectations. Turning to the outlook for the full year, we’re still assessing the medium-term impact from COVID-19. We’ll give investors a further update in Q2. Despite the impact of COVID-19, we are encouraged by our operating prospects. Unless there’s another step change in the macroeconomic environment, we don’t see a need to change or suspend our original full-year guidance as detailed on the slide. Note that our current assumption is that lockdowns are lifted from Q2, followed by a gradual economic recovery. Also, our original $1 billion free cash flow guidance was based on exchange rates of €1.13 to $1 and $1.33 to £1. Although we don’t guide on rebased revenue growth, we expect negative impacts to revenue from reduced handset sales and premium video, particularly sports, but both of these are relatively low-margin and have a limited impact on cash flow. We will continue to monitor the impact of the crisis on these forecasts and update you further in Q2. With that, I’ll turn it back to the operator to address everyone’s questions. We kindly ask that you keep to one question each.

The question-and-answer session will be conducted electronically. We’ll go to our first caller.

Hi, this is Robert Grindle from Deutsche Bank. I have a question about the joint venture structure. Why did you choose that option instead of taking a majority stake? Is this the only opportunity available, or as you mentioned, does it help confirm a positive equity value for VMED? Also, was the joint venture appealing considering your plans for an extended fiber build program, especially since Test has considerable fiber experience? Are you aligned on that? Thank you.

Okay, that’s three questions. Let me see if I can jump into those. There are always multiple ways to approach a transaction like this or a strategic move. But this felt to us like the best outcome and the best partner for all kinds of reasons. I’ve talked about those in the remarks I just made, so you’ve heard that. We’re comfortable, as I mentioned, with these structures. We have experience with them. It’s worked exceedingly well in Holland with Vodafone, who’s been a great partner. This was the transaction presented to us or one that we sought, and we think it will be the most accretive and advantageous. Sure, there are different ways to do it. It had nothing to do with what you’re describing. The value, once you decide how you’re going to approach a partnership, then you agree on values, not the other way around. It wasn’t driven by anything. It wasn’t the only game in town; there are multiple mobile operators in this market without fixed infrastructure. Clearly, there were other options, but again, we felt this was the best option. Credit to Telefónica for also being quite interested and focused on this. I think it is the best fit. It doesn’t change anything regarding our excitement around Project Lightning or network extension in the market. It takes nothing off the table. In fact, I would argue, and I think Telefónica would agree, this increases our confidence level in looking at a national scope or extending convergence with a best-in-class network. How you achieve that? How we finance that? How aggressive we are that is all to be determined. The main takeaway is that it doesn’t change our level of excitement; it takes nothing off the table. It enhances our ability to be strategic and financially aggressive, making sense of our network and the opportunities discussed historically.

Good morning. How are we? Hi, how reasonable is the comparison of your operating strategy and synergy upside? VodafoneZiggo— what do you sort of expect from this deal? If I could sneak one in about the back-book repricing in the UK, how’s that going relative to your expectations? Thanks.

Okay. Lutz, you can prepare for the back-book repricing issue. The punch line is in line. However, there are lots of things similar in this transaction to the VodafoneZiggo transaction. The structure itself has differences, of course, in terms of market size and competitive landscape. On the other hand, it is a similar playbook for us, and it’s one we’re familiar with. Our approach to synergies, integration, revenue, and convergence strategy is quite similar. It wouldn’t surprise us if these two companies together achieve similar outcomes; they might even exceed the convergence levels we see today in Holland, which are mid-40s. A lot of it has to do with how the market evolves and competitors react over time. I don’t believe any immediate reaction is worthy of discussion, but what’s critical is how the market evolves over the longer term. When we put this business plan together, we were conservative about the standalone mobile business and the challenges it might face. When we put those two businesses together, you can drive synergies through that business plan. It is very accretive and attractive, and that obviously drove the transaction. We had conservative assumptions, with good reason to believe the synergies are relatively conservative.

On end-of-contract verification, we have it out in the market since February 10. The churn level is exactly what we planned for. We track how many customers call in and how many decide to leave. The second lever is how much discount we offer to keep customers connected. The discount offered so far is only one-third of what we planned. Therefore, all in all, we are slightly better than expected. The caveat is that we are only six weeks into the quarter, and this was precluded. That might change, so we remain cautious. I have to say, although the market was quite competitive in March and February, we are doing slightly better than expected.

Thank you, guys, for taking the call. Mike, if I may express some gratitude more generally for the salary sacrifices, et cetera, in light of COVID. My question is on the UK joint venture and spectrum costs. There is a UK spectrum auction forecast, which probably should happen this year but could be next year. Should we expect, in the event of any delays, that this is a cost that Telefónica will bear, or is there a risk that it could drop into the joint venture?

Thanks, David. I believe the press release referenced this, but you might not have had a chance to review it. The basic deal is that Telefónica will bring the spectrum necessary to achieve the plan to the joint venture, at their cost. So that was the arrangement we reached early on. They will deliver to the joint venture at their cost when that auction occurs. Obviously, we have not discussed spectrum with them in any detail since it’s very complicated and must be handled carefully. So we don’t have real understanding of what they may do. But whatever they end up with will be at their cost. I appreciate your time, and I can continue. We’ve been vocal on the valuation of Lightning; you stripped it out, et cetera, dropping in at 10 times EBITDA into this deal. How do you think about valuing Lightning independently as part of the steady-state VMED cable infrastructure? Good question. We had some arguments on the assets on each side of the deal that we could have debated for different values. Still, we agreed that this would be a long-term partnership, and we should be doing things inside the partnership that makes perfect strategic, operational, and financial sense. So the valuation was considered, but we didn’t get into that kind of granularity regarding how this reference may include or not include Lightning. We also didn’t do this regarding their tower footprint.

Yes, thanks. Two very quick questions. Firstly, with a large cash balance, given this deal, is not consuming any of your cash. How do you think about managing that cash? And could I just follow up on the last question? You’ve been clear that Lightning is going into the joint venture, but regarding the other fiber company, it’s evident that the $10 billion CapEx commitment over five years doesn’t really assume, at least by my numbers, that there will be an announcement regarding the additional 7 million homes you’ve identified and also regarding the fiber joint venture in those discussions.

On the second point, anything we pursue or they pursue, typically considered JV activity, will likely be through the joint venture. Liberty fibers, as you described, is certainly something we would pursue through the joint venture. We believe we can exceed our budget on Lightning. We can choose to spend more or less between now and closing—it just works out in working capital. But you should assume that the JV will jointly address these strategic opportunities, and capital will come from both parties as a result of that. Regarding the cash balance, we will remain disciplined, as we have. No one anticipated this environment. We always said that you never know what the future holds, and this was not something we hoped for. On the other hand, we’re thankful to be liquid, and we will remain disciplined on how we deploy cash. The first order of business is our core markets, where we know we already operate. Secondly, we’ll look for consolidation opportunities or other similar convergence strategies within the region where we operate. We have a Ventures portfolio of about $1 billion in existing assets that we own in tech and content. We’ll be careful and thoughtful about opportunities to build new revenue streams, new investment portfolios, and new business opportunities. This is a good problem to have, and we consider it a good question. We’re not in a position to provide any more clarity now, but stay tuned. I didn’t mention, what we’ve used historically for excess capital is share buybacks. As I mentioned in my remarks, it’s always on the list for our leveraged equity growth strategy. As we start to drive free cash flow and free cash flow per share, it certainly accelerates free cash flow per share. But we're not providing details on this call. We’ll keep you informed.

Thanks. Good morning, everybody. Mike, I wanted to ask about the tax implications of this. I think you guys announced you’re moving effectively all the UK tax allowances into the joint venture. You originally reincorporated in the UK, partly for tax benefits, so I’m wondering how that – what the tax structure and tax leakage, if any, of the JV will look like? I assume there won’t be much in the near term, and then implications for the consolidated operations, Switzerland, Benelux, et cetera, regarding cash taxes as a result of this deal.

There are no implications for other assets. The UK tax losses have always been largely ring-fenced within the UK and only usable by a UK entity. It has no implications for other operations. The tax structure won’t be surprising to you; it's quite efficient. Without getting into details, there shouldn't be any tax implications regarding the formation of the joint venture. The losses that exist will be transferred and, to the best of our ability, will be used by the joint venture. There are some nuances there, but it’s a very tax-efficient transaction for both parties, particularly for us, and we don’t see any leakage of the type you described.

If you’re looking at pricing, I’d say since February and March, the market was a little more competitive than usual. When you compare the discount depth to a year ago, it was 5% to 10% deeper. Now, after COVID, sales are down, but we are operating at 80% of sales levels. Churn has gone down dramatically. In this environment, you tend to scale back on promotions. So while the market was more aggressive, we’ve been focused on creating long-lasting customer relationships with high-value customers. We’re not after the low-end broadband; we’re after better consumer revenue. Service revenue was down, but ARPU grew 1.2% year-over-year, driven by our strategy.

Thank you. I’m just curious about how you might be valuing your Swiss assets as you look towards a recovery. How do you see pricing pressures developing there?

Yes, I’m in Switzerland since February 1. The market remains competitive, and we’re striving for a balance between volume and value. This isn’t necessarily a bad thing—all the underlying trends are improving. Customer satisfaction is at an all-time high, and the company is managing through COVID very well. You’ll see improvements in the next quarter, and we have also launched a major simplification program that will kick in in the coming quarters.

I was not seeing anything in the press release, is there actually a break fee agreed, and what about the brands? What are you planning to use? Are we seeing something similar to VodafoneZiggo?

There’s no disclosure on the brands. It’s too early to have any discussions or agreements about that. The brands will be determined once the companies come together and a management team can have a thoughtful conversation about it. Business as usual for now, and no update on branding. I would simply point out that we believe both brands are strong and complementary, and that’s a good thing going into this. No break fee disclosed and no break fee agreed.

Can you shed some light on any MAC clauses in there, with the current dynamics in the UK? Are you able to secure concessions from major content providers such as BT and Sky?

I think the audience will clarify—it’s clear that we’re pursuing sports right now, and we follow exactly what BT has offered their customers. Therefore, we’re in a position to pause the sports contract packages, and so we would not be paying for those customers who decided to pause their packages with us. So, that has a neutral margin effect. If the combined EBITDA were to be 10% to 20% lower, do you have a provision to look at the overall debt in the joint venture when it closes? The partners can always agree to review it. However, I don’t believe there will be impediments to achieving that level of debt between now and closing, which is something that would likely occur.

Just interested in the pricing environment with BT’s announcement today, are you seeing any need to accelerate your own network expansion?

Look, I think BT will make its own decisions regarding its financial landscape. It’s expected that they will build and thus continue rolling out fiber, which they should. However, I don’t know whether their announcements or commentary change anything. They appear to confirm what they anticipated. I don't believe it changed our plans. Lutz, do you want to tackle the second question? I’m not sure I fully understood it or got all the nuts and bolts of it, but perhaps you did.

We are accelerating fixed-mobile convergence right now. The more customers we have locked in is fixed or mobile, the better position we are to ward off competition. We are looking for ways to boost that. So we currently view our current operations as on track and should have no surprises from BT.

With that, we will let you get back to your day. Always appreciate you participating in these calls and your support. We’re excited about this deal. We’re creating FMC champions, a mix of synergies that requires a strong vote of confidence—and it’s an exciting endeavor. My last bit of advice is to stay well, stay healthy, and stay safe. We’ll speak to you soon.

Ladies and gentlemen, this concludes Liberty Global’s first quarter 2020 investor call. As a reminder, a replay will be available in the Investor Relations section of Liberty Global’s website. There, you can also find a copy of today’s presentation materials.