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Why Warren Buffett Really Likes Malone's Liberty Global

NEW YORK (TheStreet) - Warren Buffett's investing lieutenants, Ted Weschler and Todd Combs, appear increasingly enthusiastic about Liberty Global (LBTYA - Get Report) after boosting Berkshire Hathaway's (BRK.A - Get Report) investment in John Malone's European cable company in the first quarter.

Liberty Global has recently caught the eye of prominent hedge fund investors, who view the John Malone-founded company as way to profit from trends in the U.S. broadband and wireless market.

Some hedge funds expect that consolidation efforts currently underway in the wireless and cable market in the U.S. will move across the Atlantic to Europe. They see Liberty Global as a prime takeover target for large telecom conglomerates such as Comcast (CMCSA), AT&T (T) and Vodafone (VOD). Meanwhile, Malone has emerged as a careful steward of Liberty Global's purse strings and may have expanded smartly in European cable and broadband markets just ahead of a surge in user activity.

In February, Berkshire disclosed it had built a nearly 3 million share stake in Liberty Global's Class A shares worth just under $300 million. That disclosure, made in a fourth quarter filing with the Securities and Exchange Commission, was seen as a bet made by Berkshire Hathaway's up-and-coming investing guru's Ted Weschler and Todd Combs.

This quarter, Berkshire took a position in Liberty Global's Class C shares, building an over 7 million share stake. Berkshire also added to its existing holding in Liberty Global Class A shares, buying over 4 million shares in the quarter, putting its investment at about 3.42% of the company's outstanding shares.

Must Read: Buffett's Berkshire Builds Verizon Stake, No IBM Buying Spree

Both stakes hinge on a distribution made in late January, where Liberty Global distributed one Class C share per every Class A share. Berkshire's C Share position appears to be a result of that distribution and an increase in the company's investment in Class A shares.

In the first quarter of 2012, Berkshire disclosed a 5% stake in Liberty Media (LMCA) and a large position in DaVita Inc. (DVA). Both stocks had been large investments of Ted Weschler's Peninsula Capital before the fund was wound down when he joined Berkshire Hathaway.

Berkshire is not alone in buying Liberty Global shares.

Lone Pine Capital Management and Point 72 Management, the recently re-named family office of Steven A. Cohen, also built stakes in Liberty Global's A Shares. Lone Pine, meanwhile, doubled its investment in Liberty Global Class C shares to 21.6 million shares, or 3.79% of the company's outstanding stock.

Other hedge fund's reporting stakes in Liberty Global Class C shares included Tiger Global Management, Third Point Capital Management and Coatue Management.

Liberty Global A Shares have fallen nearly 4% year-to-date. 

Coatue Presents Liberty At Sohn

If Netflix (NFLX) succeeds in expanding in Europe, Liberty Global may see the benefit of increasing subscribers and higher-cost service bundles, Philippe Laffont of technology and media-focused hedge fund Coatue Management, said in a presentation at the Ira Sohn Investment Conference earlier in May.

Laffont highlighted Liberty Global as a stock that will benefit from growing broadband and wireless usage in Europe, and savvy management of the company's capital. Laffont also noted that consolidation among cable and wireless providers in Europe could ultimately put the company in the hands of Vodafone, AT&T, or Comcast.

Currently, European markets are well behind the United States when it comes to streaming video usage. While Netflix shows such as House of Cards and Orange Is the New Black have created a sensation in the U.S., the same is not true in key European markets such as Britain. "That will change very quickly with Netflix," Laffont said of Netflix's international expansion.

Laffont added at the Sohn Investment Conference that he believes Liberty Global is best positioned to benefit. He also described Liberty Global as a fundamentally cheap stock.

Currently, the company generates about $4.4 billion in un-levered free cash flow, which Laffont believes can grow at between mid-teen to mid-20% rates depending on Liberty Global's share repurchase activity.

With 5% revenue growth, Coatue forecasts the company's earnings before interest, taxes, depreciation and amortization, or EBITDA, to grow 8% annually. That EBITDA growth, given Coatue's forecasts of capital expenditure, would yield 15% free cash flow growth, Laffont said. Finally, depending on Liberty Global's share repurchase activity, free cash flow per share growth could reach 25%, according to Laffont.

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