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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Liberty Global's First Quarter 2018 Investor Call. This call and the associated webcast are the property of Liberty Global and any redistribution, retransmission or rebroadcast of this call or webcast in any form without the expressed written consent of Liberty Global is strictly prohibited. At this time, all participants are in listen-only mode. Today's formal presentations can be found under the Investor Relations section of Liberty Global's website at www.libertyglobal.com. After today's formal presentation, instructions will be given for a question-and-answer session. As a reminder, this investor call is being recorded on this date, May 9, 2018.
Page 2 of the slides details the Company's Safe Harbor statements 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 facts.
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 recently 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 in the conditions on which any such statement is based. Also please note that nothing stated on today's call constitute an offer of any securities for sale.
I would now like to turn the call over to Mr. Mike Fries.
Thanks, operator and hello, everyone. Appreciate you joining the call today. We've got a lot to talk about obviously so I'm going to skip the formalities and jump right in on Slide 4.
I'm sure by now you've all seen the announcement of our definitive agreement with Vodafone to sell them our operations in Germany, Hungary, Romania and Czech Republic for EUR 19 billion or just under $22 billion. This is an extremely important transaction obviously not just for shareholders, but also for our employees and our customers and our view the combination of our respective networks, our people and our services in these four markets will stimulate investment in catalyzing. And I think importantly strengthen competition with exactly with your page now. More on this deal in just a moment.
We also of course announced our first quarter results which included our strongest revenue growth in nearly five years, driver apart by Virgin Media which delivered its fourth straight quarter of improved financial results with 5.2% in revenue in 5.5% OCF growth. And then finally, we are confirming our 2018 guidance today on a consolidated basis. And in light of the announced deal, Charlie is going to give pro forma which strips out the countries that are part of a transaction with Vodafone as well as Austria all of which would be reported on a discontinued ops basis going forward.
Not jump into the deal itself, you'll see some transaction highlights on Slide 5. The four countries included here Germany, Hungary, Romania and Czech Republic represent together 28% of our consolidated 2017 and that does not take into account our 50/50 JV in Holland. We look at valuation on this transaction if you combine the four businesses, the total enterprise value is approximately 11.5 times their aggregate 2017 operating cash flow.
And not surprisingly, both we and Vodafone applied an even higher multiple to the German business close to 12 times and therefore a low but multiple to the Eastern European markets. Now we don't have the access to Vodafone's 2018 business plan, we got access to their forecasted synergies. And undoubted is going to be differences in our ITFRS and GAAP but, so you're invariably going to see different numbers out there from them. And that's how these things go. What matters to us in this case is fair value for what's demonstrably and that's 2017 operating cash flow.
After debt and working capital adjustments, totaled net cash proceeds from the transaction are expected to be EUR 10.6 million or around $13 dollars and that assumes we deliver the CE assets debt free and Vodafone assumes the debt in German. On top of that we will keep all the cash generated by these businesses between now and closing however long that takes. And we know at the top of everyone's mind is use of proceeds I get that but given that this transaction will take between 12 and 15 months to close. We're not going to start spending money that isn't ours. I'll simply say that our goal will always be to optimize growth where it makes sense and to maximize shareholder return is no different than what we've done in the past and exactly what we're doing with today's announcement.
The time period of completion will be driven by the regulatory process and we believe the transaction will be notified to the European Commission as soon as possible for merger review and we do not expect this deal to be referred back to the German regulator. But this is a large multinational transaction between two large multinational companies and as such it should in our opinion will be approved at the EU level.
If you turn to Slide 6, we lay out for compelling reasons why this deal makes sense and I'll start with the economics. This is now the third transaction in the last 18 or so where we've demonstrated our ability to crystallize a premium valuation for our broadband video operations. As you know both our Dutch and Austrian businesses were part of a fixed Mobile merger at multiples close to 11 times and with the growth and success we've had Germany not surprising that multiples higher here. And we're also convinced that this is an incredibly positive transaction for consumers and for competition. But don't be fooled by press reports or commentary that say otherwise there's only one dominant provider in Germany currently controlling over half the broadband market with national fixed and national wireless networks. The rest of us are fragmented and the market is screaming for investment, consolidation and convergence.
Together our businesses in Germany would still be half the size of Deutsche Telekom for example. The deal in our view is a natural combination of two companies that don't overlap and don't compete in cable today and who are both committed to innovation and competition in Europe's largest market.
By the way, it's probably not lost on anybody here that Deutsche Telekom just happens to be pursuing this very same strategy in Austria to their acquisition of our cable business there which by the way we think makes a lot of sense. And of course DT is trying to complete two mobile-to-mobile mergers, one in Europe one of the U.S. So clearly, they see the world in a very similar like to us.
Now for those investors who have followed us through the years, you'd know that this is not the first time we've rebalanced our business. This is in our DNA. Over the last 13 years in particular, we've been entrepreneurial, agile and willing to change shape when it makes sense. Just as we did over 70 years ago when we exited Asia and double digit multiples to focus squarely on European consolidation or even before that when we exited Francis and Scandinavian to invest in Switzerland and Germany.
We think our long term track record of value creation on this front is pretty good. Even after this transaction, we'll continue be Europe's leading broadband and pay TV platform with strong businesses in the U.K. and Ireland, Belgium and Holland, Switzerland and Eastern Europe. And together these consolidated markets will serve over 26 million RGUs generate $11 billion in revenue and almost $5 dollars of operating cash flow.
On top of that of course, we'll continue to own our 50% stake Vodafone in Hollywood which servers 10 million fixed share use and another 5 million mobile customers.
Now speaking about value creations, the German market in our mind is a textbook example of how we do it. Turn to Slide 7, we'll see that through some smart and timely acquisitions along with importantly focused and sustain operational execution, we've created Germany's leading cable TV operators. Over the last 7 years, we grew ARPU over 50%. We increased revenue by %60 and we even doubled our EBITDAA and operating cash flow.
We did this by investing in the network by launching super-fast broadband to having great video products and putting our customers first all while growing EBITDA margins to over 60%. Now on the right hand side of the slide, you'll see that strategy has paid off. During 2010 and 2011, we invested around EUR 2 billion in the acquisitions that formed Unity Media. Since then we've taken nearly EUR 4 billion of cash out, due upstream dividend. And with this transaction, we'll realize over EUR 9 billion of additional cash for a total return of EUR 13 billion. That represents a cash on cash return of over six times.
Now look, we're not a private equity shop, but we do look at our business to the lens of value creation. And we think that gives us latitude and that's unique to us in some ways, the latitude to both explore and execute strategic transactions just like this.
Now in the interest of time, I'm just going to quickly run through some highlights from our quarterly results. And I'll then turn over Charlie. As I indicated, we had strong revenue growth and strong operating cash flow growth in the quarter. And Slide 8 highlights some of the operating drivers behind those figures mostly positive. But I'll start of the top left that you'll see we had relatively weak quarter on net add growth and there were several factors at play, here you will pick up on these quickly. And even though we saw significant increase in net ads from Q4 to Q 1 in Virgin Media that was connected to better performance in our legacy footprint.
We're still focusing primarily on lightly markets and spending less on SAC and discounting less in those areas which resulted in lower sales.
Elsewhere if you go back over the last three to four years you'll see that the first quarter is historically slow in Germany. And then we continue to encounter price in volume headwind in Switzerland as a result of growing FMC competition. This remains a tough market and while we're working hard to reduce churn, drive new bundles and build a sports platform, it's going to take time and that's one of the reasons we've been looking at strategic alternatives there as we said in the past.
Finally, net RG losses were up a bit in Belgium in the first quarter mostly in video as a share shift continued with Orange. That's been a lot of focus on video subs in our industry of course, we added video subs in our largest market the U.K. but we lost a total of 84000 in the first quarter and 25% of those subs were part of our low end DTH platform in Eastern Europe which we do not spend a lot of time or money on. And if you net those customers out, our Q1 and Q4 net losses were right in line with each other, which means the trajectory seems stable at the moment and remains better than it was, far better than it was three to four years ago.
Then lastly I'll just point out that RGU growth did trend up through the first quarter, and in April alone, we had nearly as many RGUs as we did the first three months combined. So we're optimistic about the remainder of the year.
The other three metrics on the slide are all positive contributors to growth in the first quarter. And ARPU continue to trend up increasing 1.3% year-over-year and Virgin Media in particular saw another quarter of solid ARPU growth which was offset by decline in Switzerland and B2B revenue growth was 12 percent in the quarter. That's four straight quarters of 12% or higher revenue growth. Obviously SOHO is the primary contributor there, growing nearly 20% in the quarter.
And then post-paid mobile growth largely driven by Virgin Media and Telnet that contribute to 5% mobile revenue growth in the quarter, despite continued regulatory headwinds. That's quite a turnaround for where we were a year ago and we've let yet to launch two FMC products on our MVNO platform in the U.K. and it's still very early days of penetrating the We Go [ph] product in Belgium.
Now to conclude, one update slot of Virgin Media which will represent as you know around 50% of our consolidated results after completion of the transaction with Vodafone. Let me start by saying that this market remains competitive but rational and it's going to continue to present both challenges and opportunities for us. But by all accounts, we've ridded the ship in the U.K. over the last twelve months and we think we're sailing pretty smoothly again, evidenced in part by four straight quarters of improving revenue in OCF growth from the one to two percent level a year ago to over five percent in the past quarter and we've talked about the key. Drivers of this turnaround beginning with some critical changes in the management team in the structure, but three more highlighted on the slide, three important drivers.
For starters, the 2017 price increase continues to land well. The digital tools we put in place are supporting better retention in ARPU the resulted in another quarter of reduced churn and in fact a 3% sequential ARPU uplift in the last six months. And our competitors by the way are also raising rates both BT and Sky increased their prices four 4% and 4.5% somewhat recently. We're also seeing the sustained benefit from our investment in network and product quality, cannot underestimate how important this has been for us.
For example we now over 1.6 million V6 boxes in the field which are driving meaningfully higher MPS and lower churn. These customers watch more television and they are happier. Our Virgin's 360 megabit broadband service is now available to 95% of the footprint. And the latest Ofcom report, I'm happy to tell you, Virgin scored highest in the market for broadband reliability. Anchoring Virgin's performance is continued and steady execution of the lightning New Build program with another 111,000 homes added in Q1 bringing the total to 1.2 million premises released. Penetration rates, ARPUs, build cost they all remain largely on track and that supports what we know are going to be strong capital returns here.
So in summary, we're pleased obviously to have announced the deal with Vodafone today. It's the right strategic decision, it's the right financial decision for all the regions have just articulated. And I think it's also important point that we believe we're seeing the playing field in Europe very clearly, which means we're staying agile and we're staying flexible and we'll always be opportunistic not just we've had a best drive growth but also how to create shareholder value for you guys.
So Charlie, over to you.
So, thanks Mike, and hello everybody. I will walk you through our Q1 financial results and then provide further detail on segment performance and then finally conclude with a high level recap.
So turning to our Q1 2018 financial results. In terms of our topline performance, which you can see in the upper left, we grew our rebased revenue by 4.2% to $4.2 in Q1. And by continuing to hold indirect cost flat, we were able to generate rebate OCF growth of 4.7% to $1.9 billion dollars. These results were largely shaped by the strong financial performance of Virgin Media has described by Mike Fries and we also benefited from the settlement of prior year retransmission fees related to the execution of a new carriage agreement in Germany. Our Q1 property and equipment additions were $1.3 billion dollars which was 30% of revenue. And this was driven by continued investments in the U.K. and Ireland but capital intensity was 31.4% in the quarter. This level of spend was largely attributable to project lighting, as well as our investments in customer experience and most importantly the V6 upgrade program.
Moving to the bottom left of the slide, adjusted free cash flow was negative $625 million dollars in Q1, partially attributable to the facing of interest payments. The year-over-year decline was primarily due to the net negative impact from vendor financing, as repayments exceeded additions for the quarter.
From a leverage perspective, our consolidated adjusted gross debt to RCF stood at 5.3 times, while our net debt ratio stood at 5.2 times, both on the basis of last quarter annualized OCF. Net leverage was up sequentially from 4.9 times at the end of 2017, which was mainly related to the lower absolute OCF in Q1 versus Q4, which we analyzed in our calculation and that's a situation that we experienced last year as well.
Our average tenor exceeds seven years with approximately 75% of our debt you in or after 2024 and a blended fully-swapped borrowing cost is now down to 4.2%.
Finally, we repurchased nearly $500 billion of our stock in Q1 as part of the $2 billion of repurchase program that we previously announced at 2018.
Turning to our results by segment, we present rebased revenue in OCF for operations. As you know, Virgin Media delivered rebased revenue in OCF growth of 5.2% or 5.5% respectively, through improved cable operation and another strong quarter in mobile. Unitymedia in Germany delivered 8.7% revenue growth for first quarter while OCF grew 11.8%. Both revenue in OCF are boosted by the settlement of the prior year fees that I mentioned earlier in relation to the New German carriage agreement.
The benefits of the settlement of prior fees in revenue in OCF were $33million and $24 million respectively. Our German operations also benefited from higher cable subscription revenue through continued RGU adopted growth. Additionally, B2B revenue doubles compared to Q1, 2017, largely driven by an increase in wholesale voice revenue. These positive impacts were partially offset by the headwind from analog switch off in June of last year, which reduced our Q1 revenue in OCF by $7 million and will continue to affect growth at Unitymedia until the impact laps in Q3 of this year.
In addition, mobile revenue was $8 million lower year-on-year, as a result of the transfer of our wholesale handset program to our central and corporate segment which was affected January 1, 2018.
Our CEE segment posted 4.3% rebased revenue growth and 6.3% OCF growth for the first quarter, supported in part by our New Build activities across the region. And in Belgium, Telenet's revenue declined by 1.3% on a rebased basis in Q1 driven by lower cable of mobile revenue and a $5 billion headwind due to a VAT related revenue benefit that we recorded in Q1 of 2017. Revenues been impacted by an unlimited data plans in the Belgium market which is reduced to after bungled usage, in addition the regulatory impact of 'Roam like at Home' also reduced mobile revenue.
Cable revenues been affected by customer losses reflecting market competition as well as the decision to delay our annual price rise of Belgium, pending regulator determination on wholesale pricing. This price rise is historically been implemented in Q1 which was the case in 2017. Meanwhile, Telenet's OB rebased OCF growth was 2.5% in Q1 benefiting from the continued migration of legacy MVNO customers to our own mobile network.
Moving to Switzerland and Austria, our revenue was broadly flat in the challenging market with the effect of competitive pressures offsetting the increase in revenue from my MySports distribution fees, mobile services and B2B revenue. Our Swiss revenue was also affected by a $4 million headwind relating to a revenue reversal in Q2 of 2018 and a further $4 million impact related to the recognition of unclaimed customer credits in Q1 of 2017. The 10.3% rebased OCF contraction in Switzerland and Austria in Q1 was heavily impacted by the previously mentioned challenging market dynamic and increased content costs related to MySports, which are more heavily weighted to the first and fourth quarters of the year.
After considering the distribution fees that we receive from other cable operators, our MySports programming costs were approximately $10 million in Q1. In the central and other segment we continue to streamline our cost base. We've reduced our central and corporate net expenses by approximately 5% on a rebased basis.
And then finally on this Slide, taking a step back, most of our operations have delivered solid OCF growth this quarter and when we look at our results without the drag from Switzerland, we're pleased with our performance.
Moving to the conclusion Slide to wrap things up. In summary, we had a promising start to 2018. Transaction with Vodafone highlights the strategic value of our assets. And on the operational front, we delivered the strongest quarterly revenue growth in nearly 5 years supported by an accelerating in U.K. ARPU and German carriage fee settlements.
B2B continues to achieve double-digit revenue growth and we expect strong growth to continue through the remainder of the year. To an investment perspective, we continue to deploy capital in New Build and improving the customer experience across steady RGU growth and reduce channel existing footprint. We expect to see a much more meaningful OCF contribution from New Build this year.
If not for the Vodafone transaction, our 2018 guidance would have been unchanged. However, given that we expect to treat the assets being sold to Vodafone, as well as our Austrian businesses been sold to do Dutch Telecom as discontinued operations are also provide a new 2018 guidance on VAT accounting basis, namely generate around 4% rebased OCF growth for continuing operations, deliver $1.6 billion of adjusted free cash flow from continuing and discontinued operations, spent $4 billion on property and equipment additions including $800 million on the New Build and upgrade projects for continuing operations and finally, purchase another $2 billion of our equity.
And with that, operator, we'd like to turn over for questions.
[Operator Instructions] And we'll take our first question from Michael Bishop with Goldman Sachs.
Yes. Thanks. So just two quick questions for me. Firstly, I appreciate you don't want to talk about the use of proceeds given the regulatory approval, but if I could just ask about how you're thinking about the buyback in the medium term considering obviously there is a break free you know this deal going on and also the Austrian disposal, so whether there's any potential to increase the buyback near term from the $2 billion?
And then secondly you mentioned you're looking at strategic alternatives very closely in Switzerland given the slightly weaker performance, so just wondering if there is any update there when you're thinking? Thanks very much.
Sure. Thanks, Michael. Look I repeat what I said in the remarks, the deal won't be done for over years, so if you can tell us where stocks and interest rate and market multiples will be 12, 15 months from now, I'll tell you what we'll do with the capital. But I can assure you we have no deals in the queue that require any capital, so there's nothing for us to announce, there's no big transaction spending, there's nothing. We even have our eye on beyond view that would require capital.
And I think as you know and I have already indicated, buybacks are a big part of what we do. We've already bought back half this company in the last ten years. And at today's price where it is right now if this is where the stock was in a year, we'd probably use every 10 year of it bought stock back that's what up to you.
In terms of what we can what we're going to do in the next quarter or two or three in terms of increasing the buyback, let's see how things unfold. We've announced a $2 billion our buyback that's a big chunk of our market cap. This is historically how we have seen and believe is the best use of capital when you've got a stock that we believe is undervalued. So we're obviously not changing our strides here guys. Let's be clear4, now changing our strides. What we've been saying that we don't know where the market will be and I just said you know if we think at this price today right now, we're probably valuing the rest of our stuff at five times. I'm a buyer. Call up requests from in, I'm a buyer. But we don't have the money today. So we're not going to pre-determined where that money is going to go. We're not working on any transactions that require the money. So there's really nothing more to say other than that we are changing our stride just as who we are. Who we've been for 13 years, we bought back 900 million shares already. So don't anticipate anything changing materially there Michael and let's see when the year unfolds.
All right. We'll take our next question from Jeff Wlodarczak with Pivotal.
Good morning, guys and congrats on the deal. A couple on the deal. Can you provide more color on what your cash procedure left would be after paying off the debt that was on Hungary, Romania and Czech Republic assets and any tax associated with that sale? And then how much cash can you give us some color you expect to generate from these assets over the next year or so until deal close?
Yeah, yes, thanks. So the EUR 10.6 billion or the roughly $13 billion number is kind of how this transaction was built up. So there's been some dueling enterprise values out there and I try to indicate my remarks as we get that. But you can't - but if you believe that you believe the EUR 10.6 billion or EUR 10.8 billion that we have both Vodafone reported, that is the cash proceeds figure after all debt is accounted for, Jeff and all taxes. And I'll tell you that at this point we view, we think there will be no cash taxes owed on this transaction.
We get to that the €19 billion by simply adding as GAAP accounting requires us to do the various liabilities in the transaction and that is €19 billion. So everybody's got their approach to it, that's fine. The main figure here is we agree on the net proceeds, so you can build up the enterprise value as you choose, we did it on a GAAP basis and that's how we got the 19 billion which is a 11.5 times 2017 operating cash flow. But the EUR 10.6 billion figure is after all debt is either assumed in Germany and therefore reduced from the €19 billion or already repaid, we're delivering the Eastern European assets debt free, so that is the number.
Great. And then how much cash you would anticipate generating in the assets that you're selling to Vodafone over the next I guess six months?
Hey, Charlie you want to address that figure?
You know I think we owe Jeff, we owe in the free cash flow of the assets between now and close, so we are not changing our guidance for this year to $5.6 billion of cash flow this year. And obviously give guidance relation to 2019 when that comes about. In terms of the split, you could be careful because obviously we currently scale across from the centers, so I'd rather not break it out as we speak. We should assume until the deal closes is the same free cash flow guidance we've given you.
Yeah.
And you asking me about Germany, specifically and it's a big chuck right, you know the operating free cash in Germany, so - and you can look at the free cash in their own earnings results, it's a big number.
Thanks.
And we'll take that next question from Vijay Jayant with Evercore.
Thanks. Mike. First given the sale announcement today, the pro forma leverage, is it still going to be the same or do you think you need to lower that take given German's free cash flow contribution?
And second, really appreciate your comments about where the stock is and how would you proceed if you had to do something today on it. Just wanted to understand with your current portfolio, really focusing on the U.K. do you think you are strategically complete that because we always keep hearing ITV and some wireless assets might be an opportunity at some point, but just want to understand obviously I think part of the stock reaction is that from the proceeds may be used to fortify some of the existing portfolio, if you could address that would be really appreciated? Thanks.
Sure. Charlie I'll let you prepare the leverage question. On the U.K., today we are not stressed about our position there. We think we are relatively complete strategically in that market as we sit. As you've seen, in the results we've had four straight quarters of improved performance back to the 5%, 5.5% growth and that's attributable to the things I referenced in the remarks of course stronger management, focused on retention, the lightning build, great network, all the things that work.
And so we actually feel like we're hitting our stride in the U.K. based on the business we have today. We have a completely unexploited mobile platform with 3 million subs that are just now migrating to the full MVNO deal with BT and we're in the works in the midst of developing a quad play plan for the U.K. and Ireland market which we haven't even rolled out. So we as you know have a very full MVNO deal with BT and we think tremendous opportunity to very cost effectively push convergence across the Virgin platform. And the lightning build itself is giving us greater reach and greater strategic relevance in that market.
So and of course on the content front, we've got access to the sports, we've got the Netflix on the box. We feel like we're complete in that regard as well. So there are no transactions we're contemplating in that market. As I'm sure, most people wouldn't want us to do, we're focused on execution, operations and delivering, we think so the best result that market has to offer in terms of both share of broadband ads, all the personality TV customers, we're generating 3% ARPU growth over the last six months. Good margins and a strategic plan to extend the reach of our fiber base network show. So it feels pretty complete to me at this point.
Just on the leverage - sure, you know for a very long time, our leverage target I think it's 10 years now has been 4 to 5 times, I don't see any reason why we change that target. We are currently at the top end of the range. We always evaluate what is the right part - place to be in the range, but 4 to 5 still feels about the right way to generate share of returns in this business. And I think the remaining assets you know still very attractive as a Mike articulated.
Yeah. And after this transaction, we will be reducing debt of course across Eastern Europe and UPC credit, please address that Charlie?
We will obviously need to pay debt down on the assets were selling because we current as a group just about 5 times. But the question of whether we would take the whole group down into an investment grade rating or whatever that is does not current intention, we're going to stay with our current level equity strategy of 4 or 5 times.
Thanks so much.
All right. And we'll take our next question from Daniel Morris with Barclays.
Hey, good morning and thanks taking the questions. I've got a couple of follow-ups on the U.K. please. And you see the strong ARPU momentum and you mentioned also some of your competitors raising prices, so I just wondered if you can kind of confirm that that momentum should continue through the back half of the year? And I guess the context here is that despite the price increases on the main brand we've seen I think incremental competition and actually some price reductions in the low end office in the U.K. since the media sales price come through, so you focus on U.K. operate here?
And just as a quick follow-up, we heard Vodafone this morning talking about potential cable wholesale access for the digital single market review, they pointed out their use of big part of the German market is even bigger part of the U.K. market, so just can you update your thoughts as we all thought from potential for cable wholesale access and risk reward there please? Thank you.
Sure. Tom, why don't you grab on the ARPU question unless I take one. On the cable wholesale access, listen we don't think it's necessary and we don't believe it's an appropriate remedy in Germany for this transaction or quite frankly anywhere. We continue to believe that if you go back over the last 8 to 10 years, we have been the only challenger to incumbent telcos, we have been the only operator forcing investment and innovation in these markets. And as a result, we're in a position today where we think we're finally reaching some scale but it's not done. We don't have complete national reach in any of our markets hardly and today it's still very much a day behind the light story.
Having said that national regulators in Europe are quite anxious and they have quite a bit of political tailwinds around what they may choose or not choose to do. The electronic communications code which is still on a summer plan ought to be in our minds resolved relatively favorably in terms of how you define symmetrical access and significant market power. But you will find that out. So in our view, we don't believe it's necessary and we don't believe it should happen. Having said that, it did occur at Belgium as you know and in that market what we're doing fine in terms of both our ability to compete and our ability to provide the access as required and the returns we get on the add customers on the wholesale basis.
So it's not something we think is necessary, it's not something we believe is required, but it devastating to our business in Belgium, I don't think so, we've actually managed to do that quite well especially on an economic basis. But we will try to do our best to make sure regulators especially in Europe at the European Union continue to see us in the proper light.
And again, on the German deal, listen Tom is going to say what Tom is going to say. That's okay, I love him, but in the end but we know and we all know what the German market needs. It needs a proper challenger, it needs somebody with scale who can truly provide convergence, force investment and innovation that hasn't really occurred. And the video market is highly come competitive in Germany, half of the customers don't even have replay TV. Netflix and Amazon have very strong penetration rates. I don't know where he's coming up with his stats but the German video market is a very low ARPU, highly competitive business and I think the combined company will do wonders for not just our customers but broader German customers in terms of giving them what they need which is cost effective and cost efficient bundles both mobile and fixed. Tom, you want to address the ARPU question?
Yes. Thanks, Mike. Look, clearly a much improved ARPU picture in the U.K. and being caught out on the deck two consecutive increases of 1.5% tying us to 3% over the six months. So there's been a lot of focus on that both in terms of the price rise that we implemented last November and in particular the base management that we've been permitted since that period. And I think that's where we are saying the relative guide and particular that we have retired and more of the price rise we are applying at digital support systems more effectively and their teams in the context and as just better resourced, better trained and better supported across the business because we have got innovations via V6 box, our ER box which is a much stronger TV box can continue the roll out of the of the improved router for the broadband customers.
So we're in a much better position there and we've focused on that and that's obviously had an impact to some extent on the volume piece and that's an issue that we can address going forward and I think you see our address that in a very good disk as way. It's true that some of the other operators have discounted down the bottom but frankly that's not where we're at. We've got now 75% of our customers on 100 meg or more. So that's up from 50% a year ago so the low end discounting down at the DSL, very low really VDSL under 40 meg is not our position.
Going forward, I think just as we took a price rise November last year, I think you can anticipate that we'll do the same this year. And I think with the improved ability to learn that price rise, I think we never had harder great confidence in our ability to do that. And in terms of our ARPU going forward, we got to look at innovations to continue the trend and one of those coming through is the targeted advertising where we've joined with the Sky and a joint venture there and so we'll be looking at that opportunities.
So to the extent, there is some element at ARPU particularly the home telephoning which has been declined, we're looking at elements that will substitute that. That as I suggested on the top line and we still think, we can grow up on the top line. Thank you.
That's very clear. Thank you, both.
We'll take our next question from Robert Grindle with Deutsche Bank.
Yeah, good morning, Mike. My first question is about the technical services payments from the sold assets to you guys I think around $60 million OpEx, $70 million CapEx in the first year post completion. Do you guys make a good healthy margin on such payments or are they just to cover your costs and you're sort of rather those disappear as quickly as possible?
And my other question is with regard project lightning, new homes in U.K. and Island, just over 110,000 is a bit lower than the prior run rate. Is that sort of an underlying slowdown or is it something to do with the horrible weather we've had here in the U.K. or something else? Many thanks.
On the TSAs I think your latter point is the right one. We are and I think Vodafone would agree trying to migrate out of these agreements as quickly as possible that we don't want to be a service provider, and they don't necessarily want us to be a service provider. So there's a very complex and detailed migration plan, which I don't believe we're disclosing the details up, but trust me when I say that it's not for us revenue stream or source of profit that we're going to bake in the guidance or necessarily look to monetize or promote. It's a necessary part of the transaction, we totally appreciate that, we're willing to provide these transition services subject to a very specific migration plan and we're not losing money on it, let's put it that way, but we're not really making money either. And that's the same structure we have in place in Austria and the same structure we have in place in the Netherlands.
In terms of partly gliding, Tom I'm sure add to this. It was a quarter where we have course winter day, shorter day and weather pattern. So from our perspective this is not indication of how we're ramping up or where we think we can continue to grow the new bill program. It's I think it's an extraordinary quarter. Tom, you want to add any color to that?
You know I think that's exactly, the comparable is with Q4, 2016 and Q1, 2017, and both those numbers were we were hard in the prior year period. So basically you it down as you run into Christmas and then a down period as you come back after the holiday period, as well as having me here the weather effect. So we're certainly up year-on-year, against the background where we are relative to where we were over a year ago, clearly we have a tape in ambition at the price of the build but we certainly demonstrating we can build at this space and affectively and sell affectively.
Thank you.
Let's take our next question from Jonathan Dann with RBC.
Hi, there. Thanks for taking the question. Is there any thought about redirecting some of project lightning to some of the countries where you're not building. And then I supposed could you just sort of provide some confidence that the vendor financing inflows will swing back positively through the rest of the year?
Charlie, you want to address vendor financing point?
Yes. I can't provide confidence Jonathan. I'm - the event financing very cyclical and this is very typical what's been happening but very comfortable that it will flow back in Q4 and extremely comfortable confirming our free cash flow guidance.
And then in terms of new build outside of the U.K. we did build like 100,000 somewhat] homes in the quarter. So we're definitely not just building in the U.K. We're building other markets a bit in Germany, bit in Central and Eastern Europe, bit in Belgium, even a bit in Switzerland. So we are constructing homes and extending reach in all markets obviously in a different economics and different build cost but we are in fact doing some of the same stuffs outside of the U.K.
Thanks a lot. Thank you.
Yep.
And we'll take our next question from Ulrich Rathe with Jefferies.
Thank you. Have two questions, please. The first one is on the deal whether you have already agreed any particular arrangement if the remedies come through. I mean I'm not obviously it's not now to talk about remedies in specifically but just wondering are there arrangements in place at Vodafone and you would share them in case the commission comes up with any ideas that sort of destroy a bit of value in that transaction that? That would be the first question.
The second question is the RGU intake, you sort of Mike you highlighted reasons why high level reasons why a bit slow on the U.K. and in Germany. But sort of going back historically I mean it really is a bit of a low point in that consultation permit, I think it's never been had six months. I'm just wondering could you be give similar sort of specific color on why it was quite as low in the U.K. and in Germany as it all turned out and not necessarily forward looking but just exactly what happened in the quarter on those two counts? Thank you.
Sure. We don't have anything to offer in terms of remedies either what they may look like or what we may have agreed to in terms of how they may end unfold or impact us. On the RGU intake, Lutz you're on the call, you want to talk about Germany?
Yeah we can. Yeah, so we made 29,000 RGUs that is indeed 29,000 lower than the year before. There's two reasons for it, one is that you remember we did the analog shutoff second half of last year and because of that we were pretty busy with that and didn't really shift gears for grossest in a way the grossest machine could do. And number two is also you see 5,000 higher churn in the video business, also kicking in if you compare that with the previous quarter 15,000 now it's 20,000 quarter one comparison. So a bit higher video channel also because of the analog shutoff. But that is behind us now and now we have shifted gears and you will see strong growth and net ads if you're used to from Germany.
And in the U.K., I mean Tom, you can add here, our lightning net ads gone up every quarter and Q1 lightning net ads where actually higher than Q4 as your highest quarter of lighting net ads. The issue is one of the BAU where we did much better than Q4 but lost about 24,000 but in the end that was a function of what Tom described which was holding discipline on promotions, pulling back a bit out sales and marketing and putting a lot of effort into our lighting territory. You want to talk about how that looks in April, Tom in going forward?
Yeah I think really following up on the point that you just made and I mentioned earlier I think having made a significant difference to our ARPU position in sort of solidified operating metrics layer, I think we are in a stronger position frankly to try going forward. But also change the seasonality of this business because before we used to have a price rise at the end of Q1 which used to have a Q2 impact, we have obviously shifted that to November. So that include trading position at the moment and we see ourselves is building volume quite successfully through Q2.
So partly to cyclical change and I think in the end going to look at the numbers over 12 month period. And probably frankly it was a choice in Q1, we were really focused on ARPU and that to have a tried off against volume maybe we are bit too firm on some of their pricing decisions but we just wanted to get that piece right before pushing on.
That's helpful. Thank you.
We'll take our next question from James Ratzer with New Street Research.
Yes, thank you for taking the question and congratulations on the deal. Two quick questions please. Firstly, I mean given the share price reaction we've seen this morning on the deal, I mean that scenario in which you would consider increasing your share buyback about $2 billion, you've got to be pretty confident this deal will get regulatory clearance, so expanding liquidity now and bringing forth some of the share buyback, surely would seem like a good idea at the current time?
And then secondly, I wondering if you could give us some more update around project lightning take up, I mean you did used to provide the charge showing take up by cohorts every quarter, see that chart is no longer in the presentation, I mean can you confirm you still seeing 15% take up after the first three months even in the latest cohorts, I mean what you can say about how that is trending compared to what we've seen in the past? Thank you.
Lightning is trending right on track. We didn't put it in because we had all the extra slides for the deal, but I think we're at 34% after 36 months on the chart and any time you can address how we're doing in the one and two year time frame. But we're on track. You want to add any color to that, Tom?
I just that the point of profile frankly very similar to what you've shown in the past with a good early take up and then a steady build. And as Mike said in that final quarter, we were at 34% but now hedging 35% I think will be honest that we are breaking through 35 mark would and we keep pushing penetration is right across the time scale.
Yeah. And on the buyback, let's see when we get the Austrian deal closed. We think that's pending here and should definitely close relatively soon this year. Let's see where the stocks trading but as I've indicated just a moment ago, there is no change in our buyback approach and we have in the past certainly raise the buyback especially in moments where we believe stock is particularly undervalued. So let's see how things unfold here looking at the Austrian deal closed and we'll keep you posting.
Great. Thank you.
Yep.
We'll take our next question from Matthew Harrigan with Buckingham Research.
Thank you. I actually have a three-way big picture questions. One, the transaction value was roughly what we thought the assets were worth on organic basis, Vodafone talked about EUR 7.5 billion value and synergies I'm sure you were allocated a portion of that. I'm trying to figure out what might be miss for organic evaluation, I mean certainly 8.6 times organically, the number that Vodafone crossed out next year would be all that appealing for so many of the businesses since particular term at a premium. Charlie, you really have two businesses the new builds and the core business are kind of low 20% on the CapEx, the sales on the core business but you're well above 25% of Germany even now all that much new build activity. When you spoke with Vodafone, is there some sort of sense that you maybe they thought the core capital intensity on the business is going to be a lot higher than the low 20's, no longer term and I think that 1% point CapEx, the sales is probably worth about 2 points in the evolution?
And then secondly, maybe even grander question, is it why now, I mean cable evolution are very depressed, we got to fixed mobile conversion side, a lot of attractive deals done in Europe, but I mean you're managing those asset very well under loads, CapEx has been going on for a while, it's frustrating. But you think you possibly could have done better value in 6 to 12 months even though this is still an attracted deal in the surface? Thank you.
I don't know Matt, I think we feel we got fair value. As I said, we look at the business as we look at the deals twelve multiple that's how we see it. I don't have access to their business plan, I don't know what their fiscal 2019 estimates are that they used in their press release. We didn't share synergy numbers. So they're going to spin the multiple the way they need to spend at their shareholders and I'm cool with that. What I know is, what we delivered last year in operating cash flow only a few months ago when we were negotiating this it was certainly we hadn't finished the year. What we felt the proper multiple on that would be given where the market sits and in relation to our own stock price and 11, 12 times for this group in our opinion is fair value but we would have done the deal.
At this point, it's a meaningful premium to any and all cable stocks. It demonstrates our ability to monetize and crystallize a business as we've been building for some time we believe are undervalued in the scheme of things, could be a way to gear to possibly what would the market have done at that moment, we don't know where would growth be, where would interest levels be in the merger, who knows. But the transaction was presented at this particular juncture. We look at our future in that market and realize that we were subscale and somewhat landlocked. They were anxious to consolidate their position which we think makes great sense for customers and for the country.
And as a result, we reached agree a deal we think was double-digit multiples in excess 11 to 12 times for the group. I don't know how anybody on this call could look at this transaction and say man you guys really didn't nail it. You should awaited for 12.2 or 11.9, I'm quite sure that that extra EUR 100,000 million here or there would have made a difference in the end. This is about crystallizing a moment for a business that we generated 6 times cash-on-cash return on and then looking at our options as time progresses here and as we see what the capital can be used for. So I don't believe there's - it would have been used a good idea for us to wait and I think this is exactly what our business needs and I think the market will see that in time.
And one of the reasons why you're CapEx sales is higher because you have low video ARPU basically was basically was vulnerable, the streaming and all that, but do you still agree Charlie's perspective that you can get low 20s CapEx sales if you think that you might be stuck more in the mid-20's even as the things like Project Lighting going down?
I think, listen, we're always evaluating our CapEx and we will continue to evaluate CapEx in relation to our free cash flow profile. We still believe and are focused on free cash flow. So we'll continue to look at our CapEx carefully. The new build is a high return use of capital. We'll stick with that for the time being because we know we're getting good IRRs on that investment and we're advantaging the strategic platform that we're dusting in and building. There are other things where we can be more efficient on CapEx, we're looking at that. So you can expect us to have a very strong view or I guess I would say we're going to look very carefully at our CapEx going forward and its impact on free cash, especially on a pro forma basis because we want to be able to generate them returns we think we need so.
Congrats on the transaction. Thank you. Congratulations.
Yep. Thanks, Matt.
We'll take our next question from Nicolas Cote-Colisson with HSBC.
Oh, thank you. Do you see some dis-synergy in some part of Europe after you are setting Hungary, Romania and Czech Republic or do you think overhead cost can be reduced cost to disposals? Thank you.
It's unclear at this point what this synergies will be I think for the longest for a very long period of time here we're going to be owning and operating these businesses just as they are. And so there's no immediate impact certainly not in 2018, on margins or dis-synergy that that might impact our business. Business is usual and so I think the 2018 period will be as it is, so to speak no dis-synergy whatsoever.
Going forward, we're going to be I would say highly strategic and highly analytical about exactly what the operating model should look like, where our synergies still reside, how we continue to drive scale and we'll bring you into that out of the tent on that as we get smarter, but today they will be no change in the business, you shouldn't expect any dis-synergies.
Okay. Thank you.
Yep.
We'll take our next question from time Henrik Herbst with Credit Suisse.
Yeah. Thanks very much. I have two questions. The first one was on as you point out there is still you continue to operate a business for quite a long time before, are there any potential adjustments to the price depending what business looks like about points?
And then secondly, just in terms of the U.K. and the gross ads which - it seems like lower gross ads and part of that seems to be yourself pushing more for retention of ARPU. I just wondering are you seeing any signs of the U.K. market as a whole slowing down sort of lot of market gross ads, and with competition at the low, I think there were press reports about you potentially launching a low end ground, some point have you - sort of trying to take a bigger share of that pie by using brand? Thank you.
Yeah, on the contract point there are no price adjustments for performance in the transaction. Tom, you want to address the second point?
Yeah, on the second point I think frankly it's a small pie and we'll leave it to others, we're are in a position as the highest ARPU operated in the market and with the growing business as I suggested earlier, we did really hard that price point in Q1. We can target good volume growth in Q2 at a good ARPU and so we continuing to focus on that. So the short answer is no, we're not going to deploy brand.
Okay. Thank you.
And we have time maybe for one more, operator or?
Actually this does conclude today's question-and-answer session.
All right. Well, listen, we appreciate everybody joining us for the call. I'll just repeat a couple of things. We do believe and I think time will support in fact that this is a very good deal for us strategically, financially, we think the deal will get approved. We think nothing is changing in our focus and how we create value particularly for shareholders. There is no change in the basic strategy. If we can find deals like Germany with six times cash on cash returns, we'll do them. If our stock stays where it is, we'll buyback a ton of it. So there is no change in this. We just want the transaction launched, we could done when it get approved which we think it will be. In the meantime, we are focused on keeping the operations in a growth mode and I am particularly pleased with the performance of Virgin as should you be I think in terms of ability to get back to the revenue and growth profile we are looking at and its ability to be a strategically and I think particularly powerful brand in the market.
We look forward to catching up with you soon. You know where to find us meantime. Thanks very much for joining.
Ladies and gentlemen, this concludes Liberty Global's first quarter 2018 investor call. As a reminder, a reply of the call will be available in the Investor Relations sections of Liberty Global's website at www.libertyglobal.com there you can also find the copy of today's presentation materials.