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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 Fourth Quarter 2019 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 presentation materials 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 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 it’s conditions on which any such statement is based.
I would now like to turn the call over to Mr. Mike Fries.
Thanks, operator, and welcome, everyone. Good to be back online with you, we have a lot to talk about today, so I’m going to kick it right off with some highlights, then Charlie will hit the numbers and we’ll get to your questions for the balance of the hour.
I’m on slide four, which is a good snapshot of the year. I’m just going to stay upfront that there are handful of important story lined here, so bear with me. I’m going to spend a few minutes on this page. And we’ll start with the fact that we met or exceeded all of our guidance targets for 2019. You would know that revenue was largely flat year-over-year and we have had positive customer ARPU growth that was offset by a small customer loss of 74,000 and fee [Ph] based operating cash flow of 4.9 million was down 3% year-over-year. That's essentially what we forecasted it, and by the way was right on budget for us, and we widely reported the reasons for that, right, namely the turnaround in Switzerland, and the headwinds in the U.K. which we’ll talk a lot about today.
And then finally, we had better than budgeted capital efficiency, which helped deliver 770 million of free cash flow exceeding our guidance. And that's a number that's up nearly 100% year-over-year.
Now as we discussed for sometimes, just put these numbers in context. Europe is a more mature market today than it was five, 10 or 20 years ago. Broadband growth is slowing, that's inevitable, and the video business, while much healthier than the U.S. is flattening out in most countries.
So having said that though, the opportunity to drive sustainable growth and healthy free cash flow is as real as it ever was. And to achieve that, our operating strategy is clear. Number one, we're investing in gigabit broadband speeds across our footprint, usually well ahead of the fiber guys, two, we’re digitizing the customer experience to improve cost and churn. This takes him upfront investment that works everywhere we do it. Three, we're prioritizing profitable video subscriber growth, which makes total sense as we roll out advanced set tops, integrate apps and support the bundle, and four, we're committed to driving fixed mobile convergence. There is no debate here.
Fixed mobile convergence delivers significant synergies, and the winning customer strategy that improves churn in NPS, and grows market share over time.
Now, by the way, some of you were wondering if we would ever be able to resize and reskill our operating model up the Vodafone deal, and the sale of Austria? And the answer is yes. You'll notice that total central costs were reduced by $170 million or 16% in 2019 with continued reductions coming in 2020, and Charlie will dig into those numbers.
We also announced a partnership with Infosys to deliver the services required to our TSA partners like Vodafone, and to ensure that the revenue and costs completely align in those contracts over the next four to five years. So hopefully we would put that issue to bed.
Now, continuing on this slide, last year was pretty transformational for us on the strategic front, with the sale of four markets to Vodafone for $21 billion. This transaction perhaps more than anything, highlighted the disconnect between public and private market values in Europe. The price to Vodafone, which by all accounts they were and remains thrilled with, was around 11 times operating cash flow or EBITDA all in, which is twice where our current trading multiple seems to be.
The deal also validated the power of fixed mobile convergence mergers with reported synergies to them, I think around €7.5 billion on an NPV basis, and it left us with significant liquidity right, which now sits at $11 billion including $8 billion of cash.
Now of course, we used a large proportion of those proceeds on capital return to shareholders, and we bought back a record amount of stock last year repurchasing $3.2 billion of our equity or approximately 15% of the company. $10.7 billion of that was through the Dutch auction tender that we completed in September at $27 per share. And to show our continued commitment, that we're announcing today, another $1 billion buyback authorization. That number might seem small to some of you, but if you go back over the last 10 years, this number is consistent with our buyback programs of the past.
Usually the quantum of our buyback authorizations generally represents around 5% to 10% of our market cap and around 75% 225% of our projected free cash flow. In this case, we're right down the middle, with 8% of our market cap and 100% of our free cash flow guidance, which is $1 billion for 2020.
And then the final story line here is that we're in a great position to continue crystallizing value in our core markets. I won't run through each country, and I'm not going to talk about real or hypothetical discussions, but the strategies that we might be pursuing are completely consistent with what we've been doing the last couple of years.
Fixed mobile convergence works, and fixed mobile combinations are materially accretive operationally and financially to our core cable platforms. You should assume, we're always examining those options. And that's because our fixed networks are extremely valuable. We'll be one gig everywhere, many years before the incumbents and with that expansion, comes opportunities to finance, capitalize and reseller infrastructure. You should assume, we're examining those sorts of options as well.
And then lastly, as we demonstrated in 2019, our operations are highly cash generative and already delivering substantial free cash flow, which as our guidance for 2020 indicates will continue to grow significantly both on an absolute basis and a levered free cash flow per share basis as we continue to shrink equity.
Now that was a mouthful. I realize, and I’m happy to take questions on any or all of it, but since the U.K. is our largest market, let me spend a couple minutes on Virgin Media, and I'm on Slide five now.
Consistent with the European theme I just outlined, the last 18 months have been a bit tougher in the U.K. as a result of three key challenges; first, the broadband business has become more competitive and promotional with the entire market slowing down, and we're still adding broadband subs, and holding share, primarily because we're investing in gigabit speed and network expansion, but price competition at the low end of the market has been aggressive.
Second, the video market is also flattening. Sky has lost millions of satellite subs, a portion of which they've converted to now TV. We've done much better than our peers, but we're still losing video audio users, we focus on higher end customers. And third, the impact of external headwinds has been significant. In the last three years, we've incurred over £200 million in increased costs, associated with broadband tax increases, inflationary programming contracts, mobile regulation changes and other factors.
And despite these challenges, as our fourth quarter results demonstrate, we are more than holding our own in this market. We deliver the highest revenue and the highest customer ARPU growth in Q4 at around 1.5% each. We had a record year for mobile postpaid sub ads, and CapEx discipline drove operating free cash flow up 26% for the full year and that's including the cost of bundling out over a -- building out over a half million new premises to Project Lightning.
Just to reiterate, because I know it's on everyone's mind. Lightning continues to be a smart use of Virgin's free cash flow. We've now built over two million homes, and we're serving over 450,000 new customers, we generated £240 million of revenue, £120 million of OCF.
And just as importantly, penetration rates and ARPUs are still tracking and the cost per premise declined 20% last year, which helped solidify our capital returns. Now the bigger question on your mind is the strategy moving forward for Virgin Media I imagine. And the short answer is, we're confident, that Virgin has a sound operating plan that will retain and grow customers, drive modest revenue and operating cash flow growth, and deliver significant and sustainable free cash flow over the medium term.
And that's the base case. So excluding any strategic transactions we might consider in the market, and we say medium term, because as we foreshadow 2020 will be another year of unavoidable headwinds. I'm referring of course to Ofcom’s out of contract notification requirements, another increase in our annual broadband taxes, and contractual programming cost increases all of which will total about £100 million in negative operating cash flow this year.
Now Lutz has his work cut out for him. But in my opinion, he’s doing all the right things. First of all he's revitalizing the talent and leadership at Virgin. The addition of Severina Pascu who transferred from Switzerland to the U.K. as CFO and Deputy CEO was a great move for us. They're going to make an outstanding team in my view.
Secondly, he's focused on the right organic growth drivers, get the network to 1 gig everywhere and well ahead of the competition, who are out busy making promises while we're delivering. This is a huge strategic and political advantage for Virgin by the way.
Continue pushing our fixed mobile leadership and preparing for a switch over to the Vodafone MVNO, which provides access to 5G and much better pricing, and invest in the customer experience through digital initiatives that will create better customer journeys at lower cost. All those things are working, and will work.
And then obviously we continue to explore strategic options in the market. For example, there is a clear opportunity to scale up our network, and potentially look at other infrastructure related moves that create value. And by the way, everything we're doing today with lightning is self-funded at a Virgin free cash flow, and if we were to look at expanding to an additional seven to 10 million homes, we would almost assuredly see to do so off balance sheet and with third party partners or financing sources, hope that's clear to folks.
Now I’m going to switch to a couple of other markets quickly here on Slide seven. The folks have asked us in the past, why would Vodafone or go to telecom? Pay us 11 to 12 times EBITDA for cable assets, or why would we acquire mobile assets in Belgium or Holland? Admittedly at lower multiples. But why would we do it? And I think perhaps the best way to answer that question, is to look at the JV in Holland and Vodafone, which after just a couple of years has achieved everything we hoped it would, and is in the process of becoming and has become the undisputed market leader in Holland.
2019 was a breakthrough year for VodafoneZiggo. They hit or exceeded all of their guidance targets, which included modest decline in fixed RGU but considerable market share gain from KPN. It was a similar story in Mobile, with VodafoneZiggo adding 269,000 postpaid subs and the incumbent going backwards. That helped drive revenue and EBITDA up 1% and 4% respectively last year so they're back to growth in this market.
And the JV delivered €470 million of levered free cash flow. So put a market yield on that, and you'll arrive at a pretty meaningful equity value for both partners. How have they done that? Well they followed the same playbook that has underscored all fixed mobile mergers in Europe. They've already hit 85% of the publicly disclosed synergy target of €210 million.
They prioritized product innovation, including nationwide gigabit speeds, the launch of next-gen set top boxes, product simplification. I mean they took bundles from 42,000 to 300 and a great set of content arrangements like ZiggoSport and HBO. And through a convergence they become the number one fixed broadband provider in Holland, with seven out of 10 homes taking at least one product from VodafoneZiggo.
So simply put, the strategy worked. Finally, a short update on UPC Switzerland, where the business is clearly turning around, and why do we say that? Well, we had all of our internal targets for 2019, including a 40% improvement in fixed customer loss, a 40% improvement in RGU loss and revenue and cash flow results right on plan.
Even in this heavy investment period, UPC Switzerland generated 300 million of operating free cash flow, and significant free cash flow or levered free cash flow. There have been four consistent drivers to our success, and this is going to start to sound repetitive, because it’s the same strategy we're deploying in all of our markets, beginning with a nationwide 1 gig launch, which already reaches 75% of Swiss homes well ahead of Swiss Common Sunrise. We've transformed the TV proposition with advanced TV boxes rolled out to 60% of our sub base now. And like U.K. and Holland and Belgium, a fixed mobile convergence is taking hold with a 70% improvement in mobile subscriber ads last year and a doubling of the NPS.
And then finally, our investment in digital, across the organization and including customer interaction is working. We've had the highest NPS since we began measuring it 11 years ago. So at this stage, we're happy to own this business. Switzerland is a strong and rational market with a stable economy and good political support for our initiative. I just met with the President of Switzerland, as he was thrilled that we're still there to drive innovation.
On top of that, we're living 50% operating cash flow margins and significant and growing free cash flow from this point forward. So I guess, if Swiss Com and Sunrise can trade at high single digit multiples of EBITDA and mid-single digit levered free cash flow yields with results similar or not even as good as ours, there's tremendous value to be created with this business on our own.
So to wrap up my remarks, for the balance of 2020, we're focused first and foremost on navigating the headwinds in the U.K. market and delivering steady and growing free cash flow. Virgin is a strong brand, with the best network, the fastest broadband speeds, all of the key content and a robust fixed mobile strategy. And these are powerful drivers for operating success, and I believe in this team they're going to get it done. And just as importantly, and as you would expect, we're exploring strategic opportunities in the U.K. in all of our core markets, to create meaningful value today, and over the long term.
So three drivers, sustainable and growing levered free cash flow, real strategic opportunities, to close the value gap in our core markets, and $11 billion of liquidity to fuel this narrative.
Charlie over to you.
Thanks Mike. And I’m on the page titled “Group Overview”. Mike's already kind of detailed the results of our key markets. So the annual figure, so, I'm going to focus on the key financials for Q4. Group revenue declined in Q4, 0.5% and OCF declined 4.1%. Both figures are broadly similar to the Q3 figures.
The reduction in CapEx in Q4 to 28.2% of sales versus 32.9% last year continued the 2019 trend of lower capital intensity resulting in a Q4 OFCF of $443 million. Liquidity remains very strong with $8.1 billion of cash and revolver credit facilities of $3 billion.
Since year-end, we've been very proactive on the refinancing front, and we now sit with a fixed cost of 4% for our interests and average maturity in our debt of approximately 7.4 years.
Total consolidated debt was $26.3 billion, which resulted in a consolidated debt to OCF ratio of 5.4 times gross and 3.7 times net.
Now we should note, we've changed our targeted four to five times debt to OCF leverage definition. From an LQA last quarter annualized, to an LTM last 12 months OCF basis. As we believe LTM approach is more appropriate metric for our portfolio of maturing assets.
Now in Q4 the LQA numbers would've been slightly lower than the LTM at 5.2 times gross and 3.6 times net. On the next slide, we continue our additional disclosure which we've had over the past few quarters on how our central spend breaks down.
Now I think, I can see from the chart, total central costs have been reduced by roughly $170 million in 2019, and we have further reductions planned for 2020. Now of the total $819 million spent in 2019, $660 million related to centralized technology and innovation activity, roughly half of this spend relates to the companies that we have sold, but continue to supply what is called TSA revenue or transition services agreement revenue. This also includes our Dutch JV. The balance of the spend release to our retained companies, in particular Virgin Media in Switzerland.
Now in 2020, we estimate that this total T&I spend will be around $600 million with over $300 billion of revenues being earned from the various TSA agreements. We expect the TSA Virgin spend to decline over the next four to five years, as the contracts roll off, and the net spend of approximately $300 billion to our retained operations will also decline and should be flat-to-down over that timeframe.
Much of this spend is with third parties, which makes it relatively easy to scale down, and we've recently announced additional efficiencies through a deal with Infosys to take some responsibility for the flexing down of the spend, further de-risking it to our shareholders.
The balance of our Central spend is our Corporate spread and kind of typical corporate activities of finance, legal, HR Management etcetera. Following our corporate downsizing in the summer, this was reduced from $260 million in 2018 to $230 million in 2019 and we expect this to be lower still in 2020.
Turning to the next page, we set up the key financial metrics for our core divisions. Now as promised, we will now show the OCF and OFCF of all our companies after the allocation of those central T&I costs. Those further detailed in our 10-K and press release for those that want more detail on these allocations. But this is designed to allow our investors to compare our key divisions on an apples-to-apples basis with for example Belgium and our Dutch JV who have always disclosed OCF and OFCF after their share of Centralized T&I costs.
As you can see, on a fully allocated OFCF basis, Belgium made $838 million of OFCF for the full year 2019, with our Dutch JV making $1.1 billion. We expect the Dutch JV overtime to reach the same OFCF margin of around 30% that Belgium currently achieves as it completes the integration of its fixed and mobile operations.
Switzerland made $298 million of OFCF in 2019 at a margin of around 24%. We're also targeting margin increases for Switzerland going forward, as the heightened investment related to the turnaround plan is completed.
Finally, the U.K. made just under $1.1 billion in 2019, which included an investment of $390 million in Lightning construction CapEx. Whilst we would expect the ex-Lightning margin of 22% to also increase as capital intensity declines.
The higher programming costs of the U.K. relative to the other markets, as well as the fact that it rents the mobile network, not owns one, as we do in the Benelux, meaning that the long-term OFCF margin is more likely to be in the mid-to-high 20% of sales, rather than around that 30% mark.
On the next slide, we break out the key drivers of the group's free cash flow, which remains our key focus from a financial performance point of view. Overall free cash flow was ahead of guidance at $770 million.
Net interest payments were $1.1 billion in 2019 including interest income, and we would expect our interest payments to modestly decline in 2020. This is not least due to the recent refinancing of our debt. Cash tax of $358 million included a $72 million U.S. tax payment. And we would also expect this to decline in 2020. The Dutch Joint Venture contributed $214 million to our free cash flow through dividends and interest on our shareholder loan.
The €100 million shareholder loan repayment in 2019 is not included in our free cash flow definition. That means, that total cash returned to us from the JV was $325 million. At our guidance FX, the Dutch JV has recently guided to $450 million to $560 million of total cash available for shareholder distributions in 2020. And clearly, we would expect to receive 50% of that figure.
Finally, our cash flow from working capital items including customer cycle, vendor cycle, operational finance, restructuring and VAT cycles amongst others was broadly flat with a net investment of cash of $37 million and we expect broadly the same pattern in 2020.
Turning to the last page, we set our key guidance metrics. The key focus remains on free cash flow. And we’re guiding to 30% year-on-year growth to around $1 billion. And this includes the Lightning Construction CapEx. So without that, the number will be higher. This is underpinned by a mid-single digit increase in our OFCF. As the mid-single digit decline in OCF is offset by further reductions in overall capital intensity.
And as Mike mentioned, we continue to see value in our stock, and the board recently approved a buyback authorization of $1 billion. And with that, we're going to turn over to the operator to answer questions. One quick comment on questions, because everybody hasn't had a chance in the past to ask questions, we're going to ask that you limit it to one question, and one follow up, if that is possible. So with that operator, over to you.
Thank you.[Operator instructions] And our first question comes from the line of Vijay Jayant. Please go ahead.
Good morning. It’s James Ratcliffe for Vijay. I wonder if you can go into give some more color on the expected impact of the front book, back book or loyalty, penalty work in the U.K. And, both in terms of the magnitude, the timing, when you expect this impact, and any thoughts about how you're going to balance your potential ARPU impacts versus you know a potential growth that impacts the environment? Thanks.
Thanks, James. I'll say a couple of things. I'll let Lutz chime in here with his thoughts. First of all, we're not providing any specific detail around that for obvious reasons. It's not really in our best interest to tell you specifically what we think we will, or won't do, how we'll price things, and what we think the impact will be, because this is obviously a competitive market.
Second thing I'll say, is we've already implemented the program about 10 days ago, I believe in advance of the requirement to start notifications tomorrow, just to get a sense of how customers are reacting and what we think the outcome will be. And I would say, we're conservative overall in our assumptions of the impact. There's a wide range of impacts of course, but we're overall conservative and I think we have a lot of tools at our disposal here to ensure that the impact is minimized. But I think as it relates to almost our entire guidance and budget this year I would say in all instances we have been conservative. Lutz, you want to provide a little more color on that?
Yes. I mean, there's some public data available. Of course, there broadly half of our customer base is out of contract, so they have the opportunity to look for new deal. I think, what we are doing to simply keep them onto our network is a couple of things. So first of all, until end of March, we have given all our customers a one million all together which have speed below 100 meg, a speed upgrade free of charge. So we simply playing a different league in terms of speed. And we are leveraging that to keep our customers with us. And as Mike said earlier on, we drive fixed mobile convergence roughly 1, 2 percentage points, people who have quad-play with us on that.
And then we have also to offer more stuff on the content side. So and guess, what I'm saying is, yes it is a change. We are definitely informing our customers about our products, but we have also a lot to offer, and we play in the high value segment meaning that our customers value our product, and therefore also are not necessarily so price sensitive than customers in the low end segment. We have planned capital for you -- for it, we have 10 days in the market and [Indiscernible]. And so far, I think the impact is it’s absolutely under control.
By the way the 50% that book from -- book is about the same as Sky, so it’s not that dissimilar from other players in the market.
Thanks.
And our next question comes from the line of Polo Tang from UBS. Please go ahead.
Hi. I've got one question and one clarification question. So in terms of strategic options, press reports have stated that you're in talks with Sky about both the fiber JV and the potential cable wholesale deal. If such a deal did happen, can you remind us what the merits of a deal would be from both the Liberty Global perspective, but also a Sky perspective, and the clarification question is really just about guidance, because can you clarify what's implied for your U.K. and Swiss guidance, because you obviously said mid-single-digit declines to the group. Telenet guides towards plus 1% and you've outlined 100 million impact from the U.K. headwinds. So does this imply therefore minus 5% OCF decline in the U.K. and high single digit OCF declines in Switzerland?
Charlie, I'll let you prepare for the guidance question. On the strategic options, Polo as I said at the -- in my remarks, I'm not going to get into great detail about what we might or might not be doing, doesn't generally serve us well. On the other hand, just speaking theoretically, what would a partnership with anybody doesn’t have to be Sky, a partnership focused on driving greater reach for the Virgin network mean to us. I think, that's pretty straightforward.
Today, Virgin, reaches half the country. We think we have a brand, a product, a capability that's underutilized and getting our network into our products for the rest of the U.K. market would be just by itself a very valuable outcome. Secondly, we've already shown with Lightning that there is potential to penetrate and drive returns on capital. And while we're not willing to sacrifice our free cash flow to do that on balance sheet, because we believe in levered free cash flow and never to free cash flow per share, we would certainly entertain ideas or ways of achieving that off balance sheet that could accelerate the reach of one gigabit speeds, and the Virgin brand. And you would expect us to do that.
So there's lots of almost logical reasons why extending our reach, driving scale and doing it in an efficient way from a capital point of view would be hugely valuable to Virgin, and to us, and to you and others as shareholders. On the wholesale question, trickier, obviously. But if you look at Virgin today, we're only utilizing about 40% of our networks. So on footprint generally we've got 40 plus percent of the network being utilized, which is the highest market share of anybody in our footprint. But nonetheless, there are other operators, and those who don't utilize our services at all.
So the question really is, whether you build out another seven to 10 million homes, or you look at your existing footprint, you know should you consider monetizing the value of this one giga network. There are obviously pros and cons. The pros are immediate cash flow to the bottom line that would both drive expansion of the network in a self-funded manner and value creation, because we know infrastructure assets trade at much higher multiples than even we're able to sell in the private market our assets. And then secondly, of course, you know the benefits would be well basically that is the primary benefit. The negatives of course is as I mentioned would have to be examining the impact on your own business itself. So cannibalization and what are the negative synergies if you will of that.
So we examine it closely. As you know, we already provide wholesale access in Belgium, something we're quite familiar with technologically, commercially it's not something we want to be regulated and it won't be regulated in the U.K. But it's something we ought to be looking at constructively to see if there's a value creation opportunities. And so, of course we would be doing that. Go ahead, Charlie.
Yes just to say, look we as in the past we're not going to give specific guidance for our retained operations. But look as you rightly point out mathematically, those companies will see declines. The biggest issue I think in our guidance, and Mike referenced it, is this end of contract life? We also don't think any company in the U.K. can give you precision of what it means, because it's so many variable factors. And I would echo Mike’s comment that we've tried to be prudent in our guidance, just to make sure we don't mislead you later in the year, but hopefully, we've been conservative. So I hope to know if nothing else. But the other thing I’d already highlighted, there's a big shift going on between OpEx and CapEx. I'm sure many of you are aware of this, but as the world moves towards cloud services, that is a very different accounting treatment.
So for example, a cloud product is an OpEx cost whereas if it's a data center, as it was five years ago, that's CapEx. So, some of the decline in OCF and the increase in OFCF is just a shift between from CapEx into OpEx. And that's one of the reasons why we're continuing to really focus on operations are bonuses and whether our companies are running the OFCF line, because for us that is a much better metric going forward of the underlying cash flow generation.
Clear. Thanks very much.
Thanks, Polo.
And our next question comes from the line of David Wright from Bank of America. Please go ahead.
Yes, hi guys and thanks very much for taking the calls. Mike, if I could just ask you one more question on the whole concept of building and potentially creating some kind of off balance sheet venture. You've talked about having an infrastructure investor alongside. I guess, you know by definition of balance sheet probably means does it have to be some kind of 50/50 JV or less from your side? So that would imply fairly substantial infrastructure investor, could you also consider bringing into the party and maybe a wholesale operator as a kind of, as a kind of joint partner on a venture like that, could that be foreseeable?
I think it's safe to say David, that we're examining all options. And you should expect us to be doing that, and that this will take time. Those are two points I'd make. So yes, it would and could make sense, because obviously if you're going to build 7 to 10 million homes, while we believe, we could penetrate effectively at the 30% level as we seem to be doing effectively on our own lightning expansion, wouldn't it be materially better for a partner and financing if you could add additional operators onto that network, or drive greater penetration of network.
So there's puts and takes there. But clearly, we would be interested in discussions not just with financial partners, but also with network operators, who are interested in the same opportunity. So I think, the answer to that question is yes, we would. And I just repeat that, this is not happening in the first quarter. This is not stuff that's going to occur overnight. This is a long game that needs to be played in the market. Remember that both BT and the altnets are virtually nowhere in the marketplace. Maybe they've built as many homes as us in the aggregate, but are our lightning machine at -- four or five thousand homes a year, is working like clockwork, with declining cost per premise and consistent top line and customer results.
So even at just half million homes a year, we're going to keep driving the growth of the Virgin network. We ought to be looking at ways of supercharging that, but doing it in a manner that's consistent with our belief in levered free cash flow, and levered free cash flow per share. And I think that's achievable. It's not going to happen overnight, but it's the kind of thing we should be looking at and we're uniquely positioned to repeat that. Virgin is probably uniquely positioned to be the one to evaluate those types of opportunities, just another example where we sit in this U.K. market, and why our business we believe is worth a heck of a lot more than zero.
My follow up question if I can please Mike is, is given that BT is talking about ramping up potential build, by a factor of two, you know 25,000, 30,000 treating 50,000 a week. In the kind of midterm, is the capacity for you guys to kind of double your build as well? Is there actual capacity of the workforce required to take Rhodes to actually lay this cable, if BT is doubling that build, is the capacity less for you guys to do the same?
We think there is, and remember, if we were to and I’ll let Lutz chime in a little bit. If we were to expand beyond the lightening program, which is a fairly targeted program where we're extending network and it's a fairly intensive construction process. If we were to extend beyond that, and for example, the Liberty networks entity we set up were to build networks similar to say how CityFibre is building networks, that would be faster and more efficient using PAA and existing BT infrastructure. But Lutz, why don't you comment a little bit on the current supply situation in the U.K. on resources?
Yes. So I think we definitely get ourselves prepared to ramp up the build. Right, I mean, last year we've done 5000 [ph] premises. We are leveraging PIA. So we are definitely understanding how to use the ducts and folds of Openreach. So for that, we have secured all sorts of resources, and also we have just finalized a new RFP to ensure vendors and the partnerships for the future.
And I think, like we have a good relationship built up over years with our vendor. And if you -- if you are a vendor in the U.K. you want to stand on two legs instead of one. So we haven't met really big vendors who only want to engage with one company. So therefore, I think, yes, it is a critical resource. And we are prepared to deal with it like that. And we have done some commitments to increase, to make sure that we are enabled for increased rollout for the next year.
Thank you, guys.
And our next question comes from the line of Nick Lyall from SocGen. Please go ahead.
Yes, morning. Just a simple one from me, please. Just only the buyback, Mike, on the $1 billion permission, why pick that number? I was just interested the number was down obviously versus the 10 the last year, the shares are pretty low now, does that mean there's maybe more of a focus on M&A rather than buyback, could you just walk us through that please? Thank you.
Sure. Sure. And as I mentioned in my remarks, Nick. Historically if you were to take a look at all of our buyback authorization in the past, they have more or less been of an equal quantum. So by that I mean, if you look at generally what we've done outside of the Dutch auction tender, we've normally announced at this point in time buybacks that equal roughly our free cash flow guidance and roughly you know 5% to 10% of our market cap. And so, here we're at about 8% of our market cap, and 100% of our free cash flow guidance.
That's good discipline. That means that we're able to drive free cash flow back to shareholders. It doesn't mean that we won't do other buybacks. I'm not being specific about how quickly or how slowly we might put that capital to work and it wouldn't be a surprise to you that while we're certainly pleased, and believe that $27 a share was a smart decision on our part, and of course, we have information that you would have as well. But on the other hand, we know where our strategic opportunities are, and we believe, we know where value sits. So while for us, $27 a share was certainly a price we were willing to pay at 20 bucks, I wish we’d waited.
So I think to some extent, we're looking to be smart here, and as to the timing of buybacks not simply to rush into a decision knee jerk, it's not necessarily a buyback or M&A decision on. As we look at it, we're sitting on 11 billion of liquidity, 8 billion of cash. I think, there's a lot of things that go into capital allocation, decisions on our part, but we think it's the right message today. It's not, doesn't mean we won't do additional buybacks, doesn't mean anything. It just means that we believe at this point, that's the right number to allocate, and we'll get at it. So there you go.
Great. Thank you.
And our next question comes from the line of Ben Swinburne from Morgan Stanley. Please go ahead.
Hey, good morning guys. I will limit myself to I guess one question around the U.K. Last quarter, you gave us some nice disclosure on lightning financials within Virgin. There's some additional detail this quarter on their CapEx. I'm just wondering if we're at the point now where the free cash flow burn of that project has peaked or if we have kind of line of sight to when that shifts from maybe a free cash flow headwind to a free cash flow tailwind in the business as you guys continue to scale it?
And then just broader on the UK for any of you. I don't know if now that Brexit is, I guess, largely behind us if you're starting to see sort of the economic headwinds because they hit your business at the consumer or business level abate a bit or even reverse as we head into as we're starting here in 2020?
Yes. On the Brexit question, while we did see modest consumer reaction to the uncertainty and the volatility in that political process. You should expect that we're seeing more optimism and I think the market generally is seeing more optimism in the clarity of the process today. Now it's still a moving target in terms of the final deal and all that, all those good things. But I would say, on balance, this is a positive for us resolution, clarity, general certainty and we should expect and we intend to see hopefully a more tailwinds in that regard then headwinds.
Charlie, you can jump in here on the Lightning financials. But it's my recollection looking at the specific P&Ls that we have already are starting to see improvement in the negative free cash flow of that business with $120 million of EBITDA in 2019 that I believe grew around 40% year-over-year from the prior year opt to be growing. It's pretty material improvements in operating free cash flow. Go ahead, Charlie.
Yes. But that's also be clear. As Mike said, it's a very high -- well we believe it's a high return project. I appreciate there are others who are concerned. But in our minds the mass stack up and the performances is supporting that. So -- and you can work this out from the disclosures, we invested on OFCF basis about $320 million in 2019. The other number we disclosed here is the CapEx, we spent on construction. But remember we are also investing CapEx into CPE and like against 1.4 billion for the core business as usual. So that's the kind of quantum. It will get less in 2020 at least on our budget numbers it will, but it's still only a negative investment as we try and continue to support this rollout and build towards getting more scared in the market.
Right.
Sorry, Mike, but less negative. But I'd really rather not give specific guidance. But it won't be -- it'll be less than 320. Can I make that statement.
Thank you, guys.
And our next question comes from the line of Matthew Harrigan from Benchmark Please go ahead sir.
Thank you. Just one question, but it's a bit of a long question. I think VodafoneZiggo has just been a great template for fixed mobile convergence and we probably get more rational in pricing behavior there competitively as well getting the integration benefits and presumably with the small cell topology for 5G that just keeps getting better and better. But how much do you think you leave on the table on a fixed MVNO with Vodafone in 2012 versus getting everything done outright and putting the two businesses together.
And also when you look at Vodafone dallying with Openreach and CityFibre and not having much of the back book and being aggressive on broadband pricing. Is there some scenario where just beyond limited financial engineering or an outright sale you could actually look at something in the U.K. or even Switzerland in terms of doing new JVs or taking someone else's equity as opposed to an outright cash sale today at the 11 time multiples --11x multiples that we saw in Germany et cetera?
Thanks Matt. That was actually a very clear question even though it was long as you say, but I'll say a couple things. Number one, on the Vodafone MVNO deal in the UK, both parties had an incentive to enter into that arrangement. On their part, clearly they saw an opportunity to drive revenue to their network and it's all incremental revenue to their network and that's a positive for them. And so they were very aggressive and willing to be aggressive with us on great pricing access to 5G. We think it saves us, I don't know, Lutz, I think we've said hundreds of millions in OCF over time. And so that was their motivation I believe and I'm sure they're trying to some extent to make us happy in the mobile space and maybe we don't do something somebody else. We'll see. I mean they weren't clear and we weren't discussing it with them on that basis. From our point of view it was purely an economic decision that if we're going to push fixed mobile convergence as an MVNO in the absence of any broader transaction as you've been implying why wouldn't we do it with someone who is willing to give us access to 5G in great pricing.
So there was -- I say in mutual interest on both parties parts to do this deal and it's going to benefit us obviously materially going forward beyond 2020 when we really roll it out. In terms of what we are "leaving on the table" you would have read, I'm sure multiple analysts have estimated what the synergies might be if we were to acquire or be acquired by a mobile operator in the UK and the numbers I think range from 5 million to 6 billion pounds NPV of synergy and that number does not surprise me in the least since we've already been part of either as a seller a buyer or a merger partner in something like seven fixed mobile deals. It's one of the reasons we keep saying that this fixed mobile convergence is not just a fad, it's it is the direction for all players that we believe in these markets.
And certainly, if you look at the numbers that Vodafone publicized, the numbers we publicized in Belgium or we publicized in Holland, those are not unrealistic merger synergies. Would we be creative on structures and outcomes in the event of somebody was interested in either Switzerland or U.K. or Poland or any market or Ireland willing to do something less, of course, I wouldn't we be creative and flexible. The goal is to create value close the value gap, recognized the output [ph], we know the value -- recognized value we know exists in our business. We respect the fact that for many shareholders and as one analyst said this is a show me moment and we're cool with that. Those are the kind of situations we thrive in. And so, yes, I think we would be flexible. Why would we be. Because I'm not being I'm not being specific about any particular transaction or market. The goal is to create value.
And I think as we have been in the past, we have been buyers, we have been sellers, we have been 50/50 partners. We have done all three models or executed on all three models in different European markets. Clearly, we are capable of being flexible. That would be obvious. What exactly could or might happen in any of these markets, I can't predict and I'm not going to predict for you. I'll simply say as I said in my remarks, it's here to stay, fixed-mobile convergence, whether its through an MVNO or an MNO relationship, and that's a good thing for cable networks.
That's Mike.
And our next caller is coming from the line of Sam McHugh from Exane. Please go ahead.
Yes. Good morning guys. Just a quick read on the U.K. and TV. I guess you called out Sky's losses and yours as well. Do you think we've passed a bit of a tipping point in the U.K. in terms of traditional TV or do you can stabilize your subscriber base again? And then maybe if you just remind us how much gross profit you make on TV in the U.K. And with the broadband market being so competitive at the moment, do you think you can offset those TV losses with broadband prices? Thanks very much.
I'll let Lutz chime in here a little bit. I'll just simply say that, I don't -- there are very few pay TV markets in the first world if you will that aren't experiencing, obviously, the impact of direct-to-consumer streaming subscriptions, as well as I would say general cord cutting of cord shaving. You won't be able to find one and they don't exist. And that's okay. Certainly had an impact in Charter or Comcast and their ability to drive valuation and growth. I would say, as they have said broadband is the business, it's the one that generates essentially meaningful gross margin and is the product that you need whether you're subscribing to our video product or any video product.
Having said that, we generate gross margin and I would say good gross margin on our video business in the U.K. arguably better gross margin than the U.S. guys and so it's worth protecting and we are doing all the things we think are necessary to protect it including rolling out our advanced user interface very shortly here called Horizon 4 to replace TiVo and be available on the V6 box, that's going to we think be transformational to the consumer experience in the same way X1 was for Comcast. And this is our basic --our version of RDK-based X1. And so, we are investing in the user experience. We are rapidly integrating apps into the box wherever we can.
We've got Amazon. We've got YouTube. We've got Netflix. We are open for business when it comes to an app integration and that is going to make our platform we think sustainable and viable and even necessary for consumers who want to lean back, watch television and get access to whatever they're interested in by simply saying to their remote control, play Netflix. And so that's the play and we think it will be -- will allow customers to be sticky. On the other hand, as Lutz has said many times and as we said, we're not going to chase low end customers and we're not going to spend capital to retain low end customers. We're going to be smart about profitable growth and we know that a video product combined with a broadband product and a mobile and a voice product is a much more compelling service for four customers.
And so the bundle matters and video is a big part of the bundle. So I don't see it going away. I think it's critical to us. There is gross margin. We think it can be stickier as we continue to innovate with Horizon, which we'll do this year. And as we integrate apps and become friends even greater friends with the streamers, consumers, we think we'll see the benefit of leaning back, speaking into the remote, play Amazon, play BDC, play ITV, and being sort of the aggregator of that content experience. To us that's a powerful a powerful proposition which we really haven't exploited yet in the UK market. So long answer. Lutz, have I missed anything or do you want to add to that on the video side.
No. I mean I can -- I'll need write, I mean, only couple of numbers to support what we said, Mike, right. We are focusing really much more on the customer than on the single RGU. Broadly, we kept our customer base flat. And we have had the highest option increase in the market in Q4. So that's our high value customer strategy we think pays off. Yes, we lost video, as you said, but this is on the low end and simply we are paying lot of CapEx for the boxes and the customer didn't used to pay for the free TV video money to us. And so, we are not focusing on that anymore. And you see certain operating free cash flow contribution out of that. And at the same time, we ensure that we participate in the OTT growth, as Mike said. And the OTT growth onto our platform is even higher than the video RGU loss. So therefore I think these numbers are supporting exactly our strategy.
Awesome guys. Thanks very much.
And our next question comes from the line of Andrew Beale from Arete Research. Please go ahead.
Hi. I guess you've got $8 billion in cash and that's a pretty high proportion of your market cap, and probably says that there's pretty limited equity value implied for Virgin Media after you've sort of taken out the other assets and liabilities. So just wondering if you could weigh up your current thinking about the relative merits of various possible approaches to realizing value which could be spin offs, could be the Liberty networks infrastructure transactions that you've been mentioning earlier, your traditional approach of buybacks or M&A or anything else?
Yes. Well, I'd say, look it as a base case, I mean, you're correct by the way. We believe that there's -- you can get to our stock price, but pretty much ignoring Switzerland and the UK, which is highly questionable in our minds of course. But there are several ways to get there. And I would say we begin first and foremost with the base case business. So -- and as Charlie has said many times as we've all repeated many times, we believe we can generate good free cash flow and free cash flow per share out of these businesses including Virgin and sustainable free cash flow is in our minds, the metric that matters. So as a first instance, we hope to be able to convince you and others that simply the free cash flow yield on a market like the UK is worthy of a meaningful valuation especially if you consider Sunrise, Swisscom, even our own business, Telenet, and where those yields and multiples sit.
So first and foremost, this is a bit of a transformation in thinking both for us and for investors that we believe there is sustainable free cash flow in the business without any transactions, without any inorganic moves to close the value gap that we know exists. That's -- that's step one. And I think we can achieve that and that's what we're focused on.
Obviously there are multiple things we could be doing beyond that around you know for example as you describe monetizing our networks in a more creative way, looking at inorganic combinations whether with mobile or other operators that public listings, spin-offs are clearly if there's any company out there able and capable of and willing to look at creative ways to shrink the value gap you're talking to. So you should assume that is something we are working on every day, and trying to be both sensible but also creative and strategic about how we close that value gap. That's how I answer that question.
Okay. And just a quick follow up on the seven million to 10 million premises that you're talking about for the expanded U.K. infrastructure opportunity. I mean, it's quite a big volume of homes and it probably means quite a bit of overbuild of others. But just can I just clarify that, is that seven to 10 beyond two million Lightning as now or from the [Indiscernible] million end of Lightning? And is that actually….
Yes, in our minds it’s 7 to 10, yes. Good clarification. It's seven to ten from this point principally. Yes. And just to be -- just to add to your earlier question, certainly we could consider you know maybe lightning itself is an asset that should be lifted and shifted and you know be -- could and become the engine of that growth. So we've -- I would say it’s incremental to where we are today.
Okay. And that is all your build or is that a footprint ambition including you will build and then third party also?
Well, look in general terms, we believe the opportunity exists to economically consider expanding our network to seven to 10 million homes. The way in which you do it is to be determined, but that's what we think is an economic ambition.
Okay. Thank you.
And our next question comes from the line of James Ratzer from New Street Research. Please go ahead.
Yes. Good morning everyone. Thank you. Question regarding just kind of a follow on really from Andrew. It’s just around use of capital. I mean, it seems like the message from today is that although the kind of final structure of any U.K. network build out hasn't been finalized. It's clear that more capital is intended to be allocated towards U.K. network build. But I would have thought a lot of that could also be covered from your organic free cash flow.
So it still leaves the question really, of how the $8 billion of liquidity that you have could be used. So I mean, it's just wondering if you can give us more thoughts on how M&A might feature in that. I mean, it's now six months since the Vodafone deal close. It will be interesting to understand, kind of what situations you've looked at? I mean there have been stories about Univision around in the press. Can you comment on how M&A might play a part in use of capital, if at all?
And then just as a clarification, just regarding the £100 million of headwind in the U.K. which would be around kind of 5% of Virgin's OCF. Is that a headwind in addition to the 2019 trend, which was already down 2%. So we should be thinking about Virgin all else being equal down 7% OCF for 2020? Thank you.
I don't believe that's accurate in the £100 million. But Charlie, you can decide how you want to address that particular point. With respect to capital allocation, I think your first point is accurate. We do not intend to allocate significant balanced sheet capital to a build in the U.K. and don't believe it's necessary. So a combination of free cash flow and potentially third party financing sources would be the primary source of capital for that. It's an important clarification. While we think the opportunity is exciting and we think the need and the ability to drive Virgin to the rest of the marketplace is exciting. I don't believe we intend to allocate significant amounts of balance sheet cash to that. And don't believe we need to. It doesn't mean we won't put some cash into it, but simply to say that, you shouldn't assume we're opening up the spigot and pouring all that capital in the U.K. network build. That is not the intention. That wouldn't be consistent with our free cash flow objectives and it's not consistent with how we would consider allocating capital. Doesn't mean, we wouldn't put some to work, but it's not the principal source of that. So that's good clarification.
I would say you know in a few calls ago or maybe two calls ago, we went through the buckets of capital allocation, and we identified those as being first and foremost capital structure with meeting buybacks. Well, we took, we put 3.2 billion of our capital to work in that category last year, certainly can't be accused of not paying attention to that category or we're being serious about our investment in that category. We took another 1.6 billion and de-levered that was the second category. We did delever in the Central Europe area about 1.6 billion as part of the closing of the Vodafone transaction. So we certainly trimmed leverage a bit, and that we thought was smart in that particular moment.
The third category was core markets. That's what we've been talking about today. Core markets, meaning U.K. Switzerland, Ireland, Belgium, Holland. And that is where we think the first and best use of cash if it were necessary to be used, it would be spent. And I think that is smart for us, because that's where the biggest value gap exists today, both in terms of apparently shareholders minds and so we want to be sure we're looking at creative and smart ways of allocating capital or perhaps even generating capital in the core markets.
Now, we did also say quite clearly in prior calls that, we have an existing Ventures portfolio, it's got a billion of value plus we think 2 billion unhedged. We have put money to work in various strategic opportunities, small amounts of capital, generally. And when 8 billion of cash is earning 2%, we should certainly be looking at capital solutions and in ways of putting small amounts of money to work that could create interesting opportunities.
I would say that is -- that is not the main goal. It's not something that should get people nervous. You know that the reports about us “Buying Univision for $9 Billion” were not accurate. But, we will look creatively at deploying capital in small venture like ways in order to drive potentially future strategic opportunity. But, that is the last category on the list. It begins with capital structure, followed by leverage, followed by our core markets, followed by let's say new markets and/or ventures.
And that is the order in which we're looking at it. That is the order in which we've been spending our time and effort. And that's where you should want us to be spending time and effort, because clearly, that's where the greatest opportunity is. Do you want to Lutz, you want to comment on $100 million Charlie, Lutz?
Yes. You're trying to get me to give you guidance. Look, it's not 7%. That's far too high. Look, if you take 100 million, it's broadly minus four. I would actually say, it looks plus or minus is holding the thing flat, excluding those one-offs. And at some point, you know hope the British government takes his foot off his throat, and we get back to growth. I think it's true to the industry as a whole. I think, there's some myth about Virgin. Virgin actually from revenue growth. Yes, you take out lending, it's slightly down and maybe slight down this year with the end of contract I think. But actually it’s performing broadly in line with many of the other markets. And if you think of the revenue decline it’s largely to do with the video business, which is not a cash flow generator. I keep going much this point about free cash flow, it will be lost on either the capital intensity and Virgin of the video product is nothing like the capital intensity of the fulltime product. I think Virgin’s in much better shape than people realize.
And yes, thank you. Thanks for [Indiscernible] Chuck.
You got it. You got it. So I think, we're done operator, we'll pass. We’ve got another question?
We do sir. We have our last question comes from the line of Robert Grindle from Deutsche Bank. Please go ahead.
Yes thank you. Just slipped in there. May I ask about the distribution from VodafoneZiggo in full year '20. Do you still expect shareholder loan repayments? Or can the bulk of this be in dividends? And then if I may, just a follow up on the Project Lightning build cost. I think, you flagged it went down 20% on a per home basis, but it's still over £600.
Now regardless of any new balance sheet of, off balance sheet vehicle to roll out more fiber, can you get the existing Project Lightning bill cost much closer to the CityFibre level using PIA? Thank you.
The answer to the second question is yes. I'll let Lutz prepare a quick response to that. Charlie, you want to talk about VodafoneZiggo's distributions?
I think, you're quite right to point out that the distributions are understated in our free cash flow number. If you dated back €100 million share of the loan repayment to us, and €100 would obviously went to Vodafone. In fact, in our free cash flow in 2019, but that should be much higher than the 70 odd number, more like 900.
So that's a fair point. I think at this stage, they're planning not to repay the shareholder loan, that may change. It will be lost to me, but that's helpful from a tax planning point of view, but we will see. But I think certainly in our guidance we factored that in. And I think we've taken a relatively conservative view on distributions from VodafoneZiggo.
I mean on the -- on the Lightning build cost, Right, only to make sure that we compare apples-with-apples. The current lightning costs are 618 [ph]. And this is fibre-to-the-home, right. A lot of costs, which are disclosed by our competitor is actually fiber-to-the-cabinet and not really the last mile to the home is included there. That's number one. Number two is, as you said PIA is substantially cheaper now, be assured that if we are in the position to rollout additional seven to 10 million homes, we would absolutely leverage PIA. And why would we run it at a higher cost than our competitor. So therefore you can expect us to get the CPP further down leveraging PIA.
Many thanks.
Okay. Thanks Robert. Yes. I think that, I'm guessing that's it. Operator, so we appreciate everybody jumping on the call. I’ll just repeat what I said at the end of my remarks. We're focused on three primary things; sustainable free cash flow, we think the free cash flow story here is the most significant story and one that we will demonstrate over time is, is hopefully important to shareholders as well.
Secondly, closing the value gap. I think, you know what that means, and you should expect that we're focused very seriously on opportunities to do that in core markets. And then thirdly, being disciplined about capital allocation, and I think the one billion we've allocated today to shareholder buybacks, it’s the beginning of that, but we will and we do intend to stay very disciplined about how we allocate that capital. I think that creates a lot of opportunity for us today, and down the road. So thanks for joining. And we'll speak to you soon. Take care.
Ladies and gentlemen, this concludes Liberty Global's fourth quarter 2019 investor call. As a reminder, a replay of the call will be available in the Investor Relations section of the Liberty Global's website. There you can also find a copy of today's presentation materials. Thank you.