CHTR - Charter Communications

[merkhet]

Yes. I understood the reasoning behind the customer trade, but I didn't quite see why they touted the other part -- the management agreement -- as being that great a deal.

 

At the end of the day, they have various fixed costs that they were going to incur anyway, and now they get to offload some of that onto GreatLand.

 

I'm still a little unclear on whether acquiring GreatLand would be more beneficial to them than their current arrangement. I suppose it all depends on price.

[Wilson-TPC]

Yes. I understood the reasoning behind the customer trade, but I didn't quite see why they touted the other part -- the management agreement -- as being that great a deal.

 

At the end of the day, they have various fixed costs that they were going to incur anyway, and now they get to offload some of that onto GreatLand.

 

I'm still a little unclear on whether acquiring GreatLand would be more beneficial to them than their current arrangement. I suppose it all depends on price.

 

The management agreement gives them "pure" profit, which is why they are touting it.

 

The pro-forma EBITDA is roughly 7 something with synergies and the management fee.

[merkhet]

HBO Sets Stand-Alone Streaming Service http://online.wsj.com/articles/hbo-to-launch-standalone-streaming-service-1413385733

[dwy000]

I don't get that move.

 

At the end of the day HBO is just an aggregator of movie content plus some proprietary shows.  If Charter (or Comcast or Verizon or TW, etc) increased their broadband price by $5/month and offered unlimited movies (a la Netflix) it would kill the Netflix and HBO and Showtime and Starz business model in one fell swoop.  They would turn into channels that only show proprietary content - and while I love the HBO shows I'm not sure how many would pay $10-12/month for just those (or $9/month for the proprietary Netflix shows, etc.

 

As HBO, why would you antagonize and make an enemy of the very partners that you rely on for survival - whether that's through a cable distribution relationship or as the provider of broadband that's needed to access your new business model.

[morningstar]

I don't get that move.

 

At the end of the day HBO is just an aggregator of movie content plus some proprietary shows.  If Charter (or Comcast or Verizon or TW, etc) increased their broadband price by $5/month and offered unlimited movies (a la Netflix) it would kill the Netflix and HBO and Showtime and Starz business model in one fell swoop.  They would turn into channels that only show proprietary content - and while I love the HBO shows I'm not sure how many would pay $10-12/month for just those (or $9/month for the proprietary Netflix shows, etc.

 

As HBO, why would you antagonize and make an enemy of the very partners that you rely on for survival - whether that's through a cable distribution relationship or as the provider of broadband that's needed to access your new business model.

 

I don't think HBO relies on a Charter for its survival, particularly... the pay-TV services have been very resilient precisely because (1) subs really want their content (even to the point of paying for it ala carte) and (2) they provide revenue to the MVPDs via revenue sharing (they are not cost centers, unlike traditional cable). It's a mutually beneficial relationship. I'd expect that the new streaming service will ultimately be priced such that if you are subscribing to cable, it's still cheaper/higher quality to get HBO via cable than as a stand-alone package; it will also probably force cable to take a smaller cut as revenue share.

 

Bigger picture, the breakdown of the existing model, and proliferation of over the top/streaming services, seems more dangerous for Charter and other big cable companies than for the companies controlling the content. The main advantage of scaling up in cable may be lower content costs, not lower installation costs, e.g. I think Google's experiences in Fiber largely point to this. Charter definitely does not want to position itself as just a generic provider of bandwidth.

 

As it stands the cable channels create a lot of value by aggregating content, thereby (1) forcing subs to end up paying more than they really want to or would in an alacarte world - creating new revenue - and (2) generating market power for themselves by being indispensible to the content creators/controllers who can't afford, for instance, not to be distributed on Comcast.

[dwy000]

Can't argue with that.  I think the cable companies have 2 advantages.  a) they provide the broadband which is a massive margin business (much higher than cable because the costs are almost zero) and frankly a duopoly with the telcos;  b) they can aggregate content. 

 

I'd love to pick and choose my channels and only pay for the ones I watch but I don't want to pay 25 different providers a monthly fee like I pay Netflix today.  If someone packaged up the channels I wanted and it cost an extra $10/month for that service, I'm paying that all day long.  The cable/telcos are best positioned to do that since they already do it for cable and they are providing the broadband that allows the OTT services to reach me (so I'm paying them anyways).

 

At the end of the day the cablecos (and telcos) hold all the cards because they are the provider of the pipe through which all the content is delivered.  If they doubled the price tomorrow everyone would still pay it because they have no choice (forget that regulators would get involved). 

 

For HBO, right now they are unique in that they are one of the few a la carte channels out there.  And it's great for both HBO and cableco (with revenue share).  The move to offer OTT is great for HBO because it expands distribution but it can only be negative for cableco.  And given HBO is delivered by cableco (either through cable or broadband), why antagonize that relationship?  I get the short term drive for revenues but the long term impact is questionable.

[ItsAValueTrap]

Can't argue with that.  I think the cable companies have 2 advantages.  a) they provide the broadband which is a massive margin business (much higher than cable because the costs are almost zero) and frankly a duopoly with the telcos;  b) they can aggregate content. 

 

I'd love to pick and choose my channels and only pay for the ones I watch but I don't want to pay 25 different providers a monthly fee like I pay Netflix today.  If someone packaged up the channels I wanted and it cost an extra $10/month for that service, I'm paying that all day long.  The cable/telcos are best positioned to do that since they already do it for cable and they are providing the broadband that allows the OTT services to reach me (so I'm paying them anyways).

 

At the end of the day the cablecos (and telcos) hold all the cards because they are the provider of the pipe through which all the content is delivered.  If they doubled the price tomorrow everyone would still pay it because they have no choice (forget that regulators would get involved). 

 

For HBO, right now they are unique in that they are one of the few a la carte channels out there.  And it's great for both HBO and cableco (with revenue share).  The move to offer OTT is great for HBO because it expands distribution but it can only be negative for cableco.  And given HBO is delivered by cableco (either through cable or broadband), why antagonize that relationship?  I get the short term drive for revenues but the long term impact is questionable.

 

The Internet service provider / cable company might get some of that money back via interconnect fees.

[Wilson-TPC]

Just modeled out Charter for the next 5 years. I would love to hear some feedbacks. I'm not certain of the EBITDA margins will expand or not, anyone have any insights into this?

 

Thanks a ton.

[dwy000]

Just modeled out Charter for the next 5 years. I would love to hear some feedbacks. I'm not certain of the EBITDA margins will expand or not, anyone have any insights into this?

 

Thanks a ton.

 

Nice job Wilson.  What's the basis for the subscriber growth?  Seems very, very aggressive given the flat numbers for the industry as a whole.  Also, did you back solve for the operating expenses to get to a flat 36% EBITDA margin?

[Wilson-TPC]

Yes I did.

 

The sub number is based off what people think Tom can do to get the EBITDA pass through to Cable Vision level.

 

I'm just making a ballsy call on the sub numbers. It's currently not priced into any sell side reports, which is another reason why I would love to hear feedbacks.

[Guest JoelS]

If the deal with Comcast goes through, I believe that will get you to 4500bn ebitda in 2015.

- that doesn't include any improvement in underlying performance - i think that was the number given for 2014 assuming the transaction proceeds.

 

the analyst reports I have read don't know how to discount the deal into CHTR price. If it goes through I assume they will boost their price targets accordingly. If it doesn't, then TWC opens up for another bite. So I don't know how you model this on any steady state basis.

 

 

[dwy000]

Yes I did.

 

The sub number is based off what people think Tom can do to get the EBITDA pass through to Cable Vision level.

 

I'm just making a ballsy call on the sub numbers. It's currently not priced into any sell side reports, which is another reason why I would love to hear feedbacks.

 

Thanks Wilson.  I'd caution against comparing margins (EBITDA or FCF) to Cablevision.  CVc is a unique beast in the industry because they are so heavily concentrated on the NYC market. It is very, very dense which makes operating much more efficient (everything from head ends to customer visits are easier - especially due to having so many Apartment buildings) and there is only limited competition from DirecTV and Dish.  CVC margins have been the holy grail for everyone but nobody has come close.

 

Also, is there a basis for the 10x EBITDA multiple?  That's probably right for the pass thru EBITDA but the Spinco and Charter and Comcast are valuing transfers at 7.5x EBITDA.

[merkhet]

If the deal with Comcast goes through, I believe that will get you to 4500bn ebitda in 2015.

- that doesn't include any improvement in underlying performance - i think that was the number given for 2014 assuming the transaction proceeds.

 

the analyst reports I have read don't know how to discount the deal into CHTR price. If it goes through I assume they will boost their price targets accordingly. If it doesn't, then TWC opens up for another bite. So I don't know how you model this on any steady state basis.

 

Just a quick note that I think you meant 4500mn in EBITDA. Though if they did $4.5 trillion in EBITDA, this will be a home run! :P

[ItsAValueTrap]

Thanks Wilson.  I'd caution against comparing margins (EBITDA or FCF) to Cablevision.  CVc is a unique beast in the industry because they are so heavily concentrated on the NYC market. It is very, very dense which makes operating much more efficient (everything from head ends to customer visits are easier - especially due to having so many Apartment buildings) and there is only limited competition from DirecTV and Dish.  CVC margins have been the holy grail for everyone but nobody has come close.

 

I think I'd rather own rural assets with little competition from AT&T U-verse and Verizon and other high-speed DSL providers.  Monopoly economics on high-speed Internet are better than duopoly economics.

 

Charter should have fewer visits due to digital set-top box upgrades and encryption.  If somebody cancels their cable, the cableco doesn't have to send a tech to the grey box in their neighborhood to disconnect analog cable service by disconnecting the cable.  They can do this remotely.

[merkhet]

I actually think that they can get significantly higher than $4.5B EBITDA through the deal.

 

Let's think about it this way. They're currently at around $3 billion in EBITDA, right? And they're about to purchase about $1 billion of EBITDA for $7 billion or thereabouts, and they're picking up another $2.1 billion of equity value + about $200 million of revenue share in GreatLand for 16 million more shares of New Charter Co.

 

Now, that already gets you to $4.2 billion of EBITDA before you get to the fact that Charter gets to lay off costs relating to Costs to Service Customers, Marketing and Other, which amounts to almost $3 billion in current costs over a user base that is now about double what it used to be -- including the Customer Swap and the GreatLand servicing agreement.

 

I think that it won't take much to see Charter squeeze around $5 billion of EBITDA out of the deal with Comcast and GreatLand. If you figure out a free cash flow based on maintenance cap-ex and figure they refinance their debt down to a reasonable interest rate, then you're looking at a pretty steep discount to intrinsic value here. (And don't forget to add back in that they have $2.1 billion of equity value in GreatLand, which, depending on various assumptions, might itself be undervalued significantly.)

[merkhet]

Moreover, if you think about the 5x EBITDA target and I'm right that EBITDA is closer to $5 billion than $4.4 billion, then they would have another $3 billion of share repurchase capacity in addition to their yearly FCF.

 

I could foresee a scenario where, a year from closing the deal, they've bought back the 16 million shares they've issued for this deal and then some. Add in the possible layering of buybacks from Liberty Broadband, and it makes the heart quicken.

[yadayada]

What is your best guess on maintenance capex. 1.5 billion$? 700m$ interest? that is 5-2.2 = 2.8bn$. But I assume some taxes? another 800m$ in taxes, so about 2bn$ in FCF. then a 12x multiple on 92m shares is 260$ of value. Possibly 280-290$ with that greatland stake?

 

what is an appropriate cash flow multiple on these things. Since they do have a nice moat, and possibly some growth? So if you say a 15x multiple, then it gets interesting.

[merkhet]

Your interest is too low. They're going to have $22 billion of debt post-Comcast deal.

 

My guess is that $2 billion in FCF probably isn't out of the realm of possibility.

[Wilson-TPC]

I actually think that they can get significantly higher than $4.5B EBITDA through the deal.

 

Let's think about it this way. They're currently at around $3 billion in EBITDA, right? And they're about to purchase about $1 billion of EBITDA for $7 billion or thereabouts, and they're picking up another $2.1 billion of equity value + about $200 million of revenue share in GreatLand for 16 million more shares of New Charter Co.

 

Now, that already gets you to $4.2 billion of EBITDA before you get to the fact that Charter gets to lay off costs relating to Costs to Service Customers, Marketing and Other, which amounts to almost $3 billion in current costs over a user base that is now about double what it used to be -- including the Customer Swap and the GreatLand servicing agreement.

 

I think that it won't take much to see Charter squeeze around $5 billion of EBITDA out of the deal with Comcast and GreatLand. If you figure out a free cash flow based on maintenance cap-ex and figure they refinance their debt down to a reasonable interest rate, then you're looking at a pretty steep discount to intrinsic value here. (And don't forget to add back in that they have $2.1 billion of equity value in GreatLand, which, depending on various assumptions, might itself be undervalued significantly.)

 

Thanks for chiming in. It's great that we are all back of the napkin gunning this, but if you actually model out the numbers, it's not anywhere near the speed most people think. Even if Charter reaches 4.5 billion in EBITDA, it's EV is 45 billion. It's still trading at 10x EBITDA. No change in valuation.

 

What's important here is understanding the organic growth rather than the additional add ons. Charter is using a 10x EBITDA stock to acquire a 7x EBITDA entity. It's automatically accretive, so I rather not think too much about future possible acquisitions, rather than focusing on the right metrics that Charter could do to organically grow the current business.

 

Is penetration rate increasing 300 basis points too much of an assumption? 

[Guest JoelS]

I actually think that they can get significantly higher than $4.5B EBITDA through the deal.

 

Let's think about it this way. They're currently at around $3 billion in EBITDA, right? And they're about to purchase about $1 billion of EBITDA for $7 billion or thereabouts, and they're picking up another $2.1 billion of equity value + about $200 million of revenue share in GreatLand for 16 million more shares of New Charter Co.

 

Now, that already gets you to $4.2 billion of EBITDA before you get to the fact that Charter gets to lay off costs relating to Costs to Service Customers, Marketing and Other, which amounts to almost $3 billion in current costs over a user base that is now about double what it used to be -- including the Customer Swap and the GreatLand servicing agreement.

 

I think that it won't take much to see Charter squeeze around $5 billion of EBITDA out of the deal with Comcast and GreatLand. If you figure out a free cash flow based on maintenance cap-ex and figure they refinance their debt down to a reasonable interest rate, then you're looking at a pretty steep discount to intrinsic value here. (And don't forget to add back in that they have $2.1 billion of equity value in GreatLand, which, depending on various assumptions, might itself be undervalued significantly.)

 

Thanks for chiming in. It's great that we are all back of the napkin gunning this, but if you actually model out the numbers, it's not anywhere near the speed most people think. Even if Charter reaches 4.5 billion in EBITDA, it's EV is 45 billion. It's still trading at 10x EBITDA. No change in valuation.

 

What's important here is understanding the organic growth rather than the additional add ons. Charter is using a 10x EBITDA stock to acquire a 7x EBITDA entity. It's automatically accretive, so I rather not think too much about future possible acquisitions, rather than focusing on the right metrics that Charter could do to organically grow the current business.

 

Is penetration rate increasing 300 basis points too much of an assumption?

 

 

my understanding is they will raise 8.4bn in debt leaving them with 22.4bn in debt. Market cap today is c 17bn. So EV is 39.4bn. If you think 10x EV/EBITDA on 4.5bn EBITDA is deserved, that means market cap has to rise 5.6bn or 33%.  With this you don't have to make any growth assumptions, that is all gravy (or goes someway to justifying the 10x EV/EBITDA)

[ItsAValueTrap]

What is your best guess on maintenance capex. 1.5 billion$? 700m$ interest? that is 5-2.2 = 2.8bn$. But I assume some taxes? another 800m$ in taxes, so about 2bn$ in FCF. then a 12x multiple on 92m shares is 260$ of value. Possibly 280-290$ with that greatland stake?

 

what is an appropriate cash flow multiple on these things. Since they do have a nice moat, and possibly some growth? So if you say a 15x multiple, then it gets interesting.

 

Look over the conference call transcripts.  Management provides some information on free cash flow, and how much of that is customer premise equipment (CPE).

 

Whenever Charter signs up a new customer, it needs to send out a set-top box that it will rent to that customer.  The CPE is growth capex.

Some of Charter's capex may get a little blurry.  If it improves its Internet infrastructure, some of that is maintenance and some of that would be growth.  It's hard to say what the right split is.  But in any case, Charter management doesn't break that out.

[merkhet]

I actually think that they can get significantly higher than $4.5B EBITDA through the deal.

 

Let's think about it this way. They're currently at around $3 billion in EBITDA, right? And they're about to purchase about $1 billion of EBITDA for $7 billion or thereabouts, and they're picking up another $2.1 billion of equity value + about $200 million of revenue share in GreatLand for 16 million more shares of New Charter Co.

 

Now, that already gets you to $4.2 billion of EBITDA before you get to the fact that Charter gets to lay off costs relating to Costs to Service Customers, Marketing and Other, which amounts to almost $3 billion in current costs over a user base that is now about double what it used to be -- including the Customer Swap and the GreatLand servicing agreement.

 

I think that it won't take much to see Charter squeeze around $5 billion of EBITDA out of the deal with Comcast and GreatLand. If you figure out a free cash flow based on maintenance cap-ex and figure they refinance their debt down to a reasonable interest rate, then you're looking at a pretty steep discount to intrinsic value here. (And don't forget to add back in that they have $2.1 billion of equity value in GreatLand, which, depending on various assumptions, might itself be undervalued significantly.)

 

Thanks for chiming in. It's great that we are all back of the napkin gunning this, but if you actually model out the numbers, it's not anywhere near the speed most people think. Even if Charter reaches 4.5 billion in EBITDA, it's EV is 45 billion. It's still trading at 10x EBITDA. No change in valuation.

 

What's important here is understanding the organic growth rather than the additional add ons. Charter is using a 10x EBITDA stock to acquire a 7x EBITDA entity. It's automatically accretive, so I rather not think too much about future possible acquisitions, rather than focusing on the right metrics that Charter could do to organically grow the current business.

 

Is penetration rate increasing 300 basis points too much of an assumption?

 

 

my understanding is they will raise 8.4bn in debt leaving them with 22.4bn in debt. Market cap today is c 17bn. So EV is 39.4bn. If you think 10x EV/EBITDA on 4.5bn EBITDA is deserved, that means market cap has to rise 5.6bn or 33%.  With this you don't have to make any growth assumptions, that is all gravy (or goes someway to justifying the 10x EV/EBITDA)

 

Wilson, I don't think you have to think about additional acquisitions outside of the Comcast deal (subscriber swap, customer purchase and GreatLand transaction) in order to get to more than $4.5 billion in EBITDA. I mean, think about it this way -- if they can squeeze $300 million in cost savings by doubling their user base, then they're @ $4.5 billion in EBITDA already.

 

Joel, don't forget that they're issuing equity for the GreatLand piece of the transaction. $17 billion in market cap does not include the equity issue.

[Liberty]

http://phx.corporate-ir.net/phoenix.zhtml?c=112298&p=irol-newsArticle&ID=1982904

 

Key highlights:

 

Third quarter revenues of $2.3 billion grew 8.0% as compared to the prior-year period, led by residential revenue growth of 6.7%, and commercial revenue growth of 17.7%.

 

Third quarter Adjusted EBITDA1 grew by 7.0% year-over-year. Net loss totaled $53 million in the third quarter of 2014, an improvement compared to a $70 million net loss in the year-ago period.

 

Total residential customer relationships grew by 4.9% over the last twelve months, with third quarter residential revenue per customer growing 2.0% compared to the prior-year period.

 

Residential customer relationships increased 68,000 during the third quarter, versus 46,000 during the third quarter of 2013. Residential primary service units ("PSUs") increased by 114,000 during the period, versus 100,000 in the year-ago quarter, including continued improvement in year-over-year Internet and video customer trends.

 

As of the end of the third quarter of 2014, Charter had completed over 80% of its all-digital initiative, having deployed over 2 million set top boxes since the start of Charter's all-digital transition in 2013. Charter remains on schedule to complete its all-digital initiative by year-end 2014.

[Guest JoelS]

Merkhet, yes you are correct, my mistake - so they will issue $US 2.1bn of Charter equity and get 33% of Greatland in return. But there is still some difference between the current market price and what 10x EV/Ebitda pro forma the transaction implies. Maybe that difference is justified given the length of time until the deal closes, if it does.

[merkhet]

To the extent that you think Charter comes out well on the other side, this downdraft in stock price will help Liberty Broadband once it secures some cash in the rights offering.