vince

Excellent post, I absolutely love this investment, 25% of my net worth in it. At 80% Liberty will get access to Siri cash flows (which should happen no later than 4th quarter), and either the discount narrows significantly or heavy Lsxma buybacks. This is free money assuming Siri's business remains solid and it certainly looks like that will be the case imo. And there's more.....I find it very interesting to think about Liberty's position in music with Ticketmaster, Live Nation, Pandora, Siri, and iHeart especially in the hands of Malone and Maffei. For whatever reason the market is not even excited by the discount (Malone could close the discount tomorrow if he wanted to and has executed almost the exact same thing before), let alone the potential opportunities. I pray the discount holds as they allocate Siri's cash flows to Lsxma buybacks.

This is what Malone had to say today and he had commented a couple years ago about the difficulty that HBO faced in acquiring global scale...... “For me, the problem with HBO Max is it had no ability to go international at the time. The combination with Discovery, given Discovery’s existing presence, large presence in 200 countries around the world with a great brand, ... to me, that’s the great upside,” said the cable TV pioneer and longtime chairman of Liberty Media........Since that time I have been thinking long and hard about the global aspects of the industry and Discovery in particular. Without Warner I had come to the conclusion that Discovery as a whole had a long stretch of moderate (at least) growth because of their international opportunity. In fact, their international linear business was offsetting whatever challenges their domestic business were having. And Discovery plus (domestic and international) would almost certainly provide good growth and so far we have some proof that this is the case. I can't imagine that Warner makes that case worse off. And remember this combination is trading at 10 times fcf pro forma. Something else that kind of rings my bell is Discovery has an offering that has low churn characteristics. HBO has strong customer acquisition content (blockbuster films that they can use to entice customers to sign up). Thinking these things thru is very interesting.

I don't disagree with anything in this post, no doubt the game has changed. It's not black or white, NOBODY knows how this will play out and the market will eventually value the entities appropriately. I simply stated that its my observation that the multiple is too low ( has been for years) and implies a more negative future than what I see as likely

I think it's silly to imply that I downplayed operations. Obviously a well operating business is what feeds the capital allocation function. But change is constant and capital allocation is what saves the day when you inevitably find your business will soon be obsolete. On discovery specifically..... their industry is being disrupted by a different model. Something that you think makes them a sh@tco. They are trying to make the transition and I would argue it's their capital allocation skills that have increased the odds dramatically that they will thrive. Instead of blurting out sh@tco, show the board how they underperformed their peers using the "operational" metrics that are within their control. Enlighten us with your analysis of their capital allocation, I know how hard that is when looking backwards. Grading Discovery by comparing their stock price to AT&T is outrageous.

Another topic that I think is grossly misunderstood is "financial engineering". I have listened to close friends criticize executives that use debt, buybacks, recaps, spinoffs etc, claiming that these things couldn't possibly increase the stock price. I have seen countless talking heads on CNBC do the same thing. Mary Barra ran around the world and worked her ass off trying to apply her magic touch to operations and with a ton of excess cash sitting there that did no work at all. Imagine how many shares she could have repurchased at 30 bucks (and even less) and what the equity would be trading at now that the market has realized the business is more valuable than originally thought. And by the way, it took roughly 10 years for the market to realize. If you read the book "Outsiders" you will see that the CEO's profiled created just as much value with the balance sheet as they did with operations. That's how they achieved the magic 20% over long periods. Obviously, just putting lipstick on a pig is not going to produce superior returns. But when you have a decent business I think a CEO (with his 20 million dollar pay) is REQUIRED to use financial engineering (I call it financial basics) to maximize returns to shareholders.

The true value of Discovery to HBO is their globality. Anything less than global scale in this game will fail so the survival strategy is to get it as soon as possible. Netflix will soon be spending 20 billion on content (rising annually). So if your business does not allow you to get somewhere near that number, you are toast eventually. And you will not get there with a u.s. business. And the longer it takes for you to get there the harder it gets.

I think that the fcf per share that Peridotcapital references is distinguished from fcf growth, and I believe that's what he was trying to say with this post......."Not sure I follow... the interest on incremental debt funding of M&A shows up in the numerator and any equity issued to fund M&A shows up in the denominator". This goes a long way in determining whether the cash flow growth is adding to value. Jurgis is right to say that just because earnings are growing doesn't mean value has been created as Buffett has said before that even a savings account will kick out ever greater earnings by just retaining earnings annually. The true way to make the determination is to look at incremental and/or total returns on invested/tangible capital. If the returns on incremental capital (including debt capital) are north of say 10% then the best possible thing Malone can do is borrow at low rates to make acquisitions (assuming the debt ratios stay within reason or come back down when they go over that desired ratio) and use free cash flow to buy back as many shares as he can ESPECIALLY when the free cash flow yield is 10-12% on the buyback. Picture a bank that borrows at 4-5% and lends out at 12%. Malone is not perfect but his long term value creation record is phenomenal.

I haven't read any other posts after this one yet but will say that the following post is a fantastic (yet basic if you call yourself an investor) rebuttal to Spec's post. This is exactly what I wanted to write but am tired of wasting my time repeating what I thought was understood when I wrote my original post. I stand by exactly what I wrote and Spec's writings continue to inform me more about his abilities rather than providing anything of value about the businesses in question Discovery FCF: 2010: $0.72 per share 2020: $3.48 per share Yes, the stock has not mirrored that growth (multiple has gone from 25x to 8x) but I don't think you can argue that management has failed shareholders with respect to value creation. They can't control the multiple. It is entirely possible that 2025 FCF is $5 per share.

Roughly 80 billion equity value PF, 8+ billion of free cash flow. I believe what they say because Malone's entity's overperform their synergy estimates consistently. Their is a video on YouTube with Malone lecturing at a University where he talks about (among other things) how he determines synergy when doing acquisitions. Basically, he only counts the stuff that is easily calculable. I would be careful using 2020 numbers for obvious reasons. Even if we assume revenues do not grow as expected, you aren't paying for them to grow. Again, maybe I'm fooling myself but I see a high probability of growing earning power (you have to come to your own conclusions based on your understanding of the business) which equals fantastic returns starting with a 10 multiple and 2% interest rates. You would have to conclude that you see shrinking earning power for there to be a high probability of losing money here. That is my favorite starting position when I commit capital and has been very rewarding over 20 years and over 50 investments. Verizon fits that model perfectly. And I would say that Verizon has less risk of shrinking earning power but also less chance of growing earning power at high single digits vs Discovery. Another way these investments could turn out less than expected is how retained earnings are utilized. On that point, Malone is at the very top in terms of people that I want deploying excess capital and trust that he will create at least a dollar of market value for every dollar retained, including buybacks. So far, my investments in his entities have passed that test by a mile. And when you start with a 10ish multiple (or less) with earning power growing at least as much as GDP, and retained earnings being deployed advantageously....by definition equals a very good return. When measured against 2% interest rates, the returns are outrageous.

Maybe I'm just overly optimistic but with the average stock trading north of 20 times earnings and interest rates at 2% a stock trading at 10 times implies a high probability of something seriously wrong. I see a business that will probably grow revenues north of 10% for quite a few years which will drop down to earnings eventually. Discovery was already guiding north of 10% for their whole company and they haven't even started their international roll out of Discovery+. Hbo had over 30% growth in the first quarter. That doesn't mean these growth rates are necessarily sustainable but it does show business momentum for businesses that have been around for many decades. Remember, the combined business is trading for a price that implies no growth. Sure profitability at HBO has taken a hit but that is obviously expected. If they continue growing, profits will be there. And this combination just increased the chances for more growth than each company would have achieved separately. Almost every single time that I have found a decent-good business trading under 10 times current earning power it turned into a successful investment and sometimes really successful.

I think Discovery's content is much more valuable than some are giving them credit for. Their operating metrics speak for themselves. Yes their domestic linear subs have been decreasing but that's an industry wide phenomenon which they are overperforming. But the real attractiveness of Discovery's business is that they are global in a business where global scale is essential. It takes many years and much investment to develop what Discovery has which is extremely valuable to Warner Media's properties. It's a brilliant move imo and Disca is worth almost double what it's equity trading for.

LM, yes I think there is a good chance what you say is true. I didn't mean to suggest it was certain that Malone and T were setting things up for a merger. It just looks like many pieces have fallen into place.

CorpRaider, if you look at the transaction you will see that Malone created the deal with that in mind. I don't see how Comcast can disrupt it....the deal does not require a vote from T and the Disc vote is controlled by the deal creator. I can see the smile on Malone's face imagining Robert's realization that the deal is bulletproof.....specifically for Robert's gun.

This is a good point and has been brought up before but Malone has clearly stated that the synergies are large, measurable and guaranteed. He also said (to Dave Faber on CNBC) that it is inevitable eventually. I also agree with you about cable's superior economics however a merger can still be done fairly by adjusting multiples.

In addition, Charter will soon have to send 2-2.5 billion to the IRS. I think there is good chance that if the tax specialists around here do some work on T they will find some juicy tax attributes that Charter can use to push these payments back for a few years. DTV debacle? Warner Media adventures? Any takers?