Liberty Global's 4.5% convertibles eyed as attractive equity alternative: Barclays analysts

By Rebecca Melvin

New York, Jan. 28 - Liberty Global Inc.'s 4.5% convertibles due 2016 look like an attractive equity alternative, given the proximity of the current stock price level to the strike and its high delta of 83%, Barclays Capital analysts Kannan Venkateshwar and Venu Krishna wrote in a note Thursday.

Investors should go long these convertibles, the analysts said. Apart from upside participation in the equity, the convertibles also provide income pickup of 3.8% relative to equity and a relatively defensive 1.5:1 risk/reward profile, with 80% of the upside and 55% of the downside, for a plus or minus 25% move in equity over a one-year investment horizon.

The convertibles also have call protection through 2016 and a low breakeven of five years, under the 6.8 years of call protection, the analysts said.

The bonds, which were issued in November, are convertible at a stock price of $26.54, and on Thursday afternoon the international cable and broadband provider's shares stood at about $25.00.

Liberty stock is trading cheap to its sector in spite of its better fundamentals, the Barclays analysts said, and they predict that Liberty Global stock will outperform its peers after trading at a discount for several months due to uncertainty about the liquidity requirements related to potential minority buyouts.

On Thursday, Liberty Global announced it completed an agreement originally announced in November to acquire Germany's second-largest cable operator, Unitymedia, for $5.2 billion to be funded largely through debt.

And its liquidity outlook was also improved following the sale of its Japanese operations for $4 billion in cash and a favorable resolution of its Chilean minority buyout, which effectively saves about $300 million to $350 million in cash.

While the $4 billion sale of its Japanese operations should help liquidity, it is unlikely to lower leverage given that the company's Japanese operations accounted for about 29% of Liberty Global's EBITDA but only a relatively small amount of debt, the analysts noted.

There are $935 million of the 4.5% convertibles outstanding.

The notes are trading at about 118. They have a current yield is 3.8%, a yield to maturity of 1.6% and a premium of 23.7%.

Given that the credit markets remain open and the outlook for issuance is positive, the analysts don't expect Liberty Global would have problems in "terming out" near-term maturities.

The company has about $638 million in debt coming due next year. The analysts said that this year they expect the company to work on terming out maturities further, in line with what it did during 2009, when $8.5 billion was termed out.

Liberty Global is a cable and broadband provider based in Englewood, Colo.

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