Is The Liberty Lilac Spinoff Worth Investing In?

In a report published Monday, Morgan Stanley analyst Michel Morin initiated coverage of Liberty Global PLC LiLAC Class A LILA with an Equal-weight rating and price target of $43. The analyst believes that the spin-off of the company’s Latin American assets is likely to help the management focus better on capturing Liberty Global’s growth potential, both through M&A and organically.

Upside via Spin-off

“We see scope for triple-play penetration to increase further in LiLAC's existing markets (Chile and Puerto Rico) and in other LatAm countries, should the company expand to new countries,” analyst Morin stated.

The analyst also expressed confidence in the management’s track record, stating that the Choice deal, signed in June 2015, was likely to drive margin expansion, similar to the way the management was able to unlock significant cost savings from the acquisition of OneLink in November 2012.

According to the Morgan Stanley report, “Management has stated that there is a long list of potential M&A candidates with a combined EBITDA opportunity of more than five times LiLAC's current size.”

Equal Weight for Now

However, the analyst believes that this positive outlook is already priced into the stock. While Liberty Global is a compelling long term growth story, local organic Fx growth is expected to slow down sharply in 2015-2016 to the mid-single digits, due to tougher competition in Chile, more difficult comps and the weaker Puerto Rico macro environment.

What Liberty Global had Announced

In a press released published May 20 on Yahoo Finance, Liberty Global had announced that it would separate the LatAm and Caribbean operations into the LiLAC Group on July 1.

On this date, the company announced that it would distribute to the holders of its Class A, B and C ordinary shares, shares of LiLAC Group, where one ordinary share for every 20 Liberty Global ordinary shares held as of the record date.

“We intend, prior to the distribution, to attribute $100 million of cash to the LiLAC Group in order to provide liquidity to fund, among other things, ongoing operating costs and acquisitions with respect to the LiLAC Group,” the press release said.

The company also stated that Liberty Global’s Class A, B and C ordinary shares would continue to trade on the NASDAQ under their existing tickers.