Liberty’s Project Lightning: 40% take-up

Liberty Global is planning a wide-ranging expansion of its UK penetration, and a management briefing for the City has seen investment bank Jefferies issue a major (17-page) re-examination of Liberty’s prospects – and summarises its position with a “Buy” recommendation and a raised $59 price target (Liberty Global’s shares are currently about $53).

Liberty’s code-name for its UK thrust is ‘Project Lightning’, and it represents a wide-ranging footprint expansion within the UK. Liberty’s operation in the UK is taken care of by the Virgin Media brand.

Jefferies, in their March 20th report, say: “Management has repeatedly hinted at the possibility of footprint expansion in the UK. After running a trial covering an additional 10k homes, Virgin Media now announced a major project aimed at increasing homes passed by around 4 million or 32 per cent of the year-end homes passed (‘Project Lightning’). The main thrust seems to be ‘in-fill’ of previously uncovered streets within the footprint, rather than a broad-based extension into completely new regions. This obviously promises to keep costs in check.

The main cornerstones of management’s indications are as follows.

·  4 million homes passed, to be executed in a ‘sales-led’ approach. In other words, as in the most successful FTTH projects (in the Nordics), demand will be established by pre-construction marketing efforts. Management made a particular point of stating that the whole project can and will be scaled down if demand does not materialise as planned.

· £2.9-3.1 billion capex budget, of which £2.5 billion for the network construction and the remainder success-based (‘line drops’ and CPE). This corresponds to about £625 per home passed plus £320 per home connected.

· Less than 10 per cent of total incremental homes passed in 2015e, as the planning phase should take until mid-year and the actual construction starts only in 2H15e. A further third of the homes passed (i.e., around 1.3 million) is targeted for 2016e/17e, and the remainder until mid-2020e (5-year project).

The bank reports that Virgin is anticipating take-up of 40 per cent, and management showed rather an impressive take-up curve from the trials that achieved 23 per cent within 6 months. This is clearly related to the sales-led approach, and with an initial ARPU of £45, and £48 in the trials to date.

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