CHTR - Charter Communications

[Liberty]

Posted some highlights form the call here:

 

[vince]

5-min Malone interview about CHTR, CMCSA, Sky..

 

https://www.cnbc.com/video/2018/11/14/liberty-media-john-malone-on-comcast-verizon-and-charter.html

 

Here's the full 55-min thing:

 

https://www.cnbc.com/video/2018/11/14/watch-cnbcs-full-exclusive-interview-with-liberty-media-chairman-john-malone.html

 

I watched the interview again, and I got the impression Malone has quite some criticism on Rutledge.

cfr. min 43:00 where he makes the story about the 2 cookies and concludes : spending all your cash on supporting your stock is eating that cookie.

 

Anyone agrees with this, or did I misinterpret what I heard?

 

You're right.  The issue is about using CHTR capital to shrink the enterprise value, but drive up the stock price, instead of reinvesting to compete against Verizon and Google and ATT and Netflix etc by retaining the capital.  Tom is pretty exasperated with the Time Warner cable acquisition.  Probably is a lot of work and he didn't want to be involved in another merger or sale while all those talks were flowing (Verizon, Softbank overtures etc).  In effect its easier for Malone (and us as investors) to tell Charter to integrate with a telco, but it basically means more stuff for Rutledge to deal with on top of still righting the ship with TWC. "eating the cookie, is taking up the stock price today with cash by shrinking the denominator..."delaying gratification is investing for future growth - playing defense against Verizon and others".. that's my interpretation of the whole thing.  Tom effectively drove the board to not pursue another transaction when the overtures came.

 

you are spot on with this interpretation imo

 

Based on the interviews with Malone, and possibly some with Winfrey or Zinterhofer (?, can't remember), it seems to me like the M&A overtures were all flawed in many ways. Softbank wanted to pay in Sprint shares at a valuation that wasn't that great, and Verizon's number probably wasn't high enough. I doubt that Rutledge would just kill a favorable deal because he doesn't want to bother with another integration; he could just take the money and let someone else be CEO. I think he really thought that he would do better by being patient and finishing the integration and letting FCF go up when all is done.

 

Everything u say is correct  but the fact that Rutledge didn't even want to entertain any offers or counter is what frustrated Malone, hence the cookie comment.  U must also remember that Rutledge's personal best option is to have the stock reach mid 500 levels, that's where his interests lie.  He definitely believes that he can create the value without merger.  One last point that's been on my mind.  Malone is already filthy rich and has evolved into favoring diversification over concentration.  He has also stated that the game has changed due to rapid technological disruption and consumer behavior.  I have seen signs of his evolution in other assets he owns as well.  Like it or not, Malone followers will likely have to settle for lower returns going forward but with some added safety.  That's my take anyway

[vince]

So we can assume they think it's worth at least the 500 offered before casually. Another 50 percent to go? )

 

Well I think it's highly likely we are looking at a business that will generate 50 billion in revenue within 3 years.  40-42 percent ebitda margins are within reach so we have 20-21 billion in ebitda. subtract 7 billion in capex (stated in the call) and 4 billion in interest leaves u with 10 billion in cash flow before taxes.  On the call they said " not a significant taxpayer until 2021 at the earliest ".  Slap a multiple on 8-10 billion and if things unfold reasonably normal dont forget to value some growth and margin from there.  Lastly, dont forget to spread the earning power over a lower number of shares.  I think 450 is on the low end in 3 years time.

[vince]

i come up with 220 million shares left outstanding after 3 years (ironically, the lower the price in the interim the better the stock price eventually cause of buybacks), so looks like about 40 dollars per share in earnings.  I believe I was conservative on every line but am not conservative or aggressive with the margin rate.  And I am even more optomistic about the margins another few years out based on everything thats been said on the calls of Comcast, Altice and Charter. 

[Liberty]

Everything u say is correct  but the fact that Rutledge didn't even want to entertain any offers or counter is what frustrated Malone, hence the cookie comment.  U must also remember that Rutledge's personal best option is to have the stock reach mid 500 levels, that's where his interests lie.  He definitely believes that he can create the value without merger.  One last point that's been on my mind.  Malone is already filthy rich and has evolved into favoring diversification over concentration.  He has also stated that the game has changed due to rapid technological disruption and consumer behavior.  I have seen signs of his evolution in other assets he owns as well.  Like it or not, Malone followers will likely have to settle for lower returns going forward but with some added safety.  That's my take anyway

 

Maybe my memory's failing me, but what is the source of Rutledge not even wanting to entertain any offers?

 

I seem to remember Malone making a comment about people coming to him for M&A, and he had to decide if it was serious enough to bring to the board (implying maybe he didn't on some offer(s)?), but I don't remember that part about Rutledge being somehow closed to the idea.

[marazul]

 

Think what happened was: Malone/Charter got offers. None of them were enough to win support. What Malone would have wanted was for Charter to try to get Verizon to offer something a bit higher. In order to get this, he needed support from the board and from management. If he didn´t get support from management but still went through, then that would break the relationship. Probably management was not interested in engaging and "blocked" this process, so Malone figured he was not going to get into a fight with Management. Maybe it was not worth it...

[WayWardCloud]

Vince, could you elaborate on this please?

One last point that's been on my mind.  Malone is already filthy rich and has evolved into favoring diversification over concentration.  He has also stated that the game has changed due to rapid technological disruption and consumer behavior.  I have seen signs of his evolution in other assets he owns as well.  Like it or not, Malone followers will likely have to settle for lower returns going forward but with some added safety.  That's my take anyway

[khturbo]

Everything u say is correct  but the fact that Rutledge didn't even want to entertain any offers or counter is what frustrated Malone, hence the cookie comment.  U must also remember that Rutledge's personal best option is to have the stock reach mid 500 levels, that's where his interests lie.  He definitely believes that he can create the value without merger.  One last point that's been on my mind.  Malone is already filthy rich and has evolved into favoring diversification over concentration.  He has also stated that the game has changed due to rapid technological disruption and consumer behavior.  I have seen signs of his evolution in other assets he owns as well.  Like it or not, Malone followers will likely have to settle for lower returns going forward but with some added safety.  That's my take anyway

 

Maybe me memory's failing me, but what is the source of Rutledge not even wanting to entertain any offers?

 

I seem to remember Malone making a comment about people coming to him for M&A, and he had to decide if it was serious enough to bring to the board (implying maybe he didn't on some offer(s)?), but I don't remember that part about Rutledge being somehow closed to the idea.

 

In that interview with Faber, Malone said that they got some offers but Rutledge wasn't super interested. As I recall, he basically said that Rutledge wanted to keep operating the asset for a few years so that the full earnings power of the company could be revealed. From that, I took it that they'll operate it for a few years, get the margin profile to 40%+, get capex / revenue down to its run-rate, then maybe look to sell or combine at that point. It just seems a little silly to sell it when all of your earnings numbers are weak.

[Liberty]

In that interview with Faber, Malone said that they got some offers but Rutledge wasn't super interested. As I recall, he basically said that Rutledge wanted to keep operating the asset for a few years so that the full earnings power of the company could be revealed. From that, I took it that they'll operate it for a few years, get the margin profile to 40%+, get capex / revenue down to its run-rate, then maybe look to sell or combine at that point. It just seems a little silly to sell it when all of your earnings numbers are weak.

 

That was my understanding of the situation too. The offers weren't good enough, probably because they included a discount for the uncertainty of whether the asset could actually be shown to perform as well as they've been saying it could (on top of being in currency that they didn't want, in the case of Masa). So they thought the value would be higher if they actually ate that uncertainty themselves and brought it across the finish line on the integration to reduce that uncertainty and then either get a better price from a third party, or just keep operating it.

[cameronfen]

In that interview with Faber, Malone said that they got some offers but Rutledge wasn't super interested. As I recall, he basically said that Rutledge wanted to keep operating the asset for a few years so that the full earnings power of the company could be revealed. From that, I took it that they'll operate it for a few years, get the margin profile to 40%+, get capex / revenue down to its run-rate, then maybe look to sell or combine at that point. It just seems a little silly to sell it when all of your earnings numbers are weak.

 

that was my understanding of the situation too. The offers weren't good enough, probably because the included a discount for the uncertainty of whether the asset could actually be shown to perform as well as they've been saying it could. So they thought the value would be higher if they actually ate that uncertainty themselves and brought it across the finish line on the integration to reduce that uncertainty and then either get a better price from a third party, or just keep operating it.

 

However, if you are unsure about the impact of 5G it still may make sense to sell to take money off the table.  Especially because most are in agreement at least that combined telco+cable is the future and perhaps you could get left out. 

[scorpioncapital]

My feeling is US cable is an island globally. I don't predict even Europe or UK will do as well at global. There is something about US allowing these giant duopolies. And also pricing power. To me it is insane that internet alone should cost 100 usd a month. I can do almost 80% of my work including streaming on adsl or 4g lte costing like 10 bucks a month outside north america. 3 cheers for US cable investors but i'm not sure about how this develops.

[Spekulatius]

My feeling is US cable is an island globally. I don't predict even Europe or UK will do as well at global. There is something about US allowing these giant duopolies. And also pricing power. To me it is insane that internet alone should cost 100 usd a month. I can do almost 80% of my work including streaming on adsl or 4g lte costing like 10 bucks a month outside north america. 3 cheers for US cable investors but i'm not sure about how this develops.

 

I believe this is correct. Same with cable/ satellite TV and wireless/ smartphone though. That’s why LILA and LBTYA aren’t doing as well than their US counterparts. I think even Malone missed this when he went global.

[rogermunibond]

What's the situation with cable/broadband in say South Korea or Japan where broadband speeds and penetration are really high?  Are these government regulated monopolies?

[Foreign Tuffett]

My feeling is US cable is an island globally. I don't predict even Europe or UK will do as well at global. There is something about US allowing these giant duopolies. And also pricing power. To me it is insane that internet alone should cost 100 usd a month. I can do almost 80% of my work including streaming on adsl or 4g lte costing like 10 bucks a month outside north america. 3 cheers for US cable investors but i'm not sure about how this develops.

 

The US' much lower population density than South Korea/Japan/UK/Germany/France/etc almost certainly plays a role.

 

http://statisticstimes.com/demographics/countries-by-population-density.php

 

IMO it's more useful to talk about local monopolies (ala regulated utilities) than "giant duopolies" when discussing US cable industry. Cable companies aren't generally directly competing with each other like Coke and Pepsi are.

[Liberty]

However, if you are unsure about the impact of 5G it still may make sense to sell to take money off the table.  Especially because most are in agreement at least that combined telco+cable is the future and perhaps you could get left out.

 

They seem pretty confident vs 5G. Either that they can compete directly, or that if a telco wants to, they have to buy an existing backhaul like CHTR's, as it would just be too expensive and long to build it all from scratch.

[cameronfen]

However, if you are unsure about the impact of 5G it still may make sense to sell to take money off the table.  Especially because most are in agreement at least that combined telco+cable is the future and perhaps you could get left out.

 

They seem pretty confident vs 5G. Either that they can compete directly, or that if a telco wants to, they have to buy an existing backhaul like CHTR's, as it would just be too expensive and long to build it all from scratch.

 

I cant speak to Charter, but Liberty Global and Liberty Latam seem to be executing on a strategy of trying to buy telcos (Milicom) where they have cable or selling cable (Germany) to telcos when they dont.  Both businesses now have growing teleco operations even with the failed milicom deal.  Maybe Rutledge is confident with his mvno, but Malone is at least hedging (not to mention that many in the industry both cable and telco seem to be trying there darndest to offer all four services). 

[vince]

Everything u say is correct  but the fact that Rutledge didn't even want to entertain any offers or counter is what frustrated Malone, hence the cookie comment.  U must also remember that Rutledge's personal best option is to have the stock reach mid 500 levels, that's where his interests lie.  He definitely believes that he can create the value without merger.  One last point that's been on my mind.  Malone is already filthy rich and has evolved into favoring diversification over concentration.  He has also stated that the game has changed due to rapid technological disruption and consumer behavior.  I have seen signs of his evolution in other assets he owns as well.  Like it or not, Malone followers will likely have to settle for lower returns going forward but with some added safety.  That's my take anyway

 

Maybe my memory's failing me, but what is the source of Rutledge not even wanting to entertain any offers?

 

I seem to remember Malone making a comment about people coming to him for M&A, and he had to decide if it was serious enough to bring to the board (implying maybe he didn't on some offer(s)?), but I don't remember that part about Rutledge being somehow closed to the idea.

 

Hey Liberty, my interpretation stems from the interview.  It was clear to me (maybe I'm wrong) that Rutledge is the pushback.  At one point Malone specifically says that Tom is singularly focused on executing his plan and then after that he will be open to different ideas and that if he didnt do that (go forward with original plan) then no matter what they did wouldn't be ideal.  Now imo, Malone tried to pre-soften the statements...obviously he doesnt want to show the world that the board is divided on future direction....by saying the deals werent good enough and that he didnt want to bring an inferior offer to the board etc.  I dont mean this in an argumentative way at all but did u watch the whole interview in one sitting?  I find it hard to believe that anyone could come to a drastically different conclusion but I would love a good counter perspective.  This whole exchange is going to push me to watch it again, lol!

[Liberty]

I cant speak to Charter, but Liberty Global and Liberty Latam seem to be executing on a strategy of trying to buy telcos (Milicom) where they have cable or selling cable (Germany) to telcos when they dont.  Both businesses now have growing teleco operations even with the failed milicom deal.  Maybe Rutledge is confident with his mvno, but Malone is at least hedging (not to mention that many in the industry both cable and telco seem to be trying there darndest to offer all four services).

 

They probably can't be too picky in the region, as it's more important to build scale in a fragmented patchwork of small markets. The US is different, they already have lots of scale and great assets, and have launched a mobile offering through MVNO.

[Liberty]

Hey Liberty, my interpretation stems from the interview.  It was clear to me (maybe I'm wrong) that Rutledge is the pushback.  At one point Malone specifically says that Tom is singularly focused on executing his plan and then after that he will be open to different ideas and that if he didnt do that (go forward with original plan) then no matter what they did wouldn't be ideal.  Now imo, Malone tried to pre-soften the statements...obviously he doesnt want to show the world that the board is divided on future direction....by saying the deals werent good enough and that he didnt want to bring an inferior offer to the board etc.  I dont mean this in an argumentative way at all but did u watch the whole interview in one sitting?  I find it hard to believe that anyone could come to a drastically different conclusion but I would love a good counter perspective.  This whole exchange is going to push me to watch it again, lol!

 

I did watch it all, but that was a while ago and a lot of water has passed under the bridge since, so obviously it's not fresh in memory. You might be right, but it's also possible that he was ambiguous and we just interpreted it differently based on our own context and understanding of the situation. Or maybe I'm wrong ¯\_(ツ)_/¯

[vince]

 

Think what happened was: Malone/Charter got offers. None of them were enough to win support. What Malone would have wanted was for Charter to try to get Verizon to offer something a bit higher. In order to get this, he needed support from the board and from management. If he didn´t get support from management but still went through, then that would break the relationship. Probably management was not interested in engaging and "blocked" this process, so Malone figured he was not going to get into a fight with Management. Maybe it was not worth it...

 

Just to be clear, this is basically what I think, but I think it was Tom more than anything else that either paused Malone from digging further or maybe Tom outright shot him down.  Why in the world wouldn't they just engage and see if they could get a favorable deal from any of the 4 offers?  That kind of behavior shows that there was strong resistance.  I didnt mean to say that Rutledge was against ANY and ALL offers no matter what, that was too strong a wording, but I was trying to say it was him more than anyone else, because of his optimism in his plan, and his interests, why no further discussion happened. And I am slightly more in his camp, I think he has a better chance to create more value even compared to getting 400 plus at that time.  Not a huge favorite, but a favorite nontheless.

[vince]

Hey Liberty, my interpretation stems from the interview.  It was clear to me (maybe I'm wrong) that Rutledge is the pushback.  At one point Malone specifically says that Tom is singularly focused on executing his plan and then after that he will be open to different ideas and that if he didnt do that (go forward with original plan) then no matter what they did wouldn't be ideal.  Now imo, Malone tried to pre-soften the statements...obviously he doesnt want to show the world that the board is divided on future direction....by saying the deals werent good enough and that he didnt want to bring an inferior offer to the board etc.  I dont mean this in an argumentative way at all but did u watch the whole interview in one sitting?  I find it hard to believe that anyone could come to a drastically different conclusion but I would love a good counter perspective.  This whole exchange is going to push me to watch it again, lol!

 

 

I did watch it all, but that was a while ago and a lot of water has passed under the bridge since, so obviously it's not fresh in memory. You might be right, but it's also possible that he was ambiguous and we just interpreted it differently based on our own context and understanding of the situation. Or maybe I'm wrong ¯\_(ツ)_/¯

 

Absolutely agree. 

[wabuffo]

FWIW - my impression from watching that Malone interview was that the offers for CHTR were problematic - ie, disagreement over the value from Malone/Rutledge's POV vs the potential acquiror (Softbank/Sprint or Verizon).  It sounded like Malone/Rutledge were more or less aligned in their view.

 

The only disagreement was over Rutledge's buyback program.  Malone seemed to imply with his "one cookie now vs two cookies later" comment that he (Malone) would've preferred that CHTR's cash flows were directed at debt reduction rather than share repurchases. 

 

In contrast, Malone was more praiseworthy towards Discovery's CEO Zaslav, who has suspended buybacks after the merger with Scripps in favor of aggressive debt reduction for a couple of years.

 

Just my 2-cents.

 

wabuffo

[cameronfen]

I cant speak to Charter, but Liberty Global and Liberty Latam seem to be executing on a strategy of trying to buy telcos (Milicom) where they have cable or selling cable (Germany) to telcos when they dont.  Both businesses now have growing teleco operations even with the failed milicom deal.  Maybe Rutledge is confident with his mvno, but Malone is at least hedging (not to mention that many in the industry both cable and telco seem to be trying there darndest to offer all four services).

 

They probably can't be too picky in the region, as it's more important to build scale in a fragmented patchwork of small markets. The US is different, they already have lots of scale and great assets, and have launched a mobile offering through MVNO.

 

Just testing a thesis vs a smart person who disagrees: 

 

Liberty Global (not including Latam) has 45 million RGUs and Charter has 49 million in the US which has much lower population density.  I don't think being subscale is the whole story (although likely part of it).  Latam has more issues with being subscale especially in comparison to the massive telcos in Latin America, it's true.  Telcos have always wanted to acquire cable companies it seems, but up until recently, cable companies couldn't be bothered to acquire telco assets, until now.  Why?  The IRR hasn't seemed to improve for Telcos which have always been worse than cable. 

 

IMO the MVNO unless it catches fire, is not going to do anything to help Charter achieve scale in mobile unless they make an acquisition--therefore the admittedly snarky comment about Rutledge being confident in his MVNO. 

[Spekulatius]

My feeling is US cable is an island globally. I don't predict even Europe or UK will do as well at global. There is something about US allowing these giant duopolies. And also pricing power. To me it is insane that internet alone should cost 100 usd a month. I can do almost 80% of my work including streaming on adsl or 4g lte costing like 10 bucks a month outside north america. 3 cheers for US cable investors but i'm not sure about how this develops.

 

The US' much lower population density than South Korea/Japan/UK/Germany/France/etc almost certainly plays a role.

 

http://statisticstimes.com/demographics/countries-by-population-density.php

 

IMO it's more useful to talk about local monopolies (ala regulated utilities) than "giant duopolies" when discussing US cable industry. Cable companies aren't generally directly competing with each other like Coke and Pepsi are.

 

The anecdotal evidence seems to suggest that the lack of competition is in major population centers like NYC. Again, I lived in 3 location during the last few years and in each suburban location there were 2-3 competitors for high speed Internet connection.

 

I can also attest that there are rural locations in Germany for example that are still underserved. I believe the reason for the divergence in the US vs Europe is that each European country had a former state Telecom covering 100% of the country and pretty much any service (fixed phone, wireless, internet) for a fairly low price and its difficult to compete against those.  The US had a patchwork of local telecoms after the ATT breakup.

[Liberty]

FWIW - my impression from watching that Malone interview was that the offers for CHTR were problematic - ie, disagreement over the value from Malone/Rutledge's POV vs the potential acquiror (Softbank/Sprint or Verizon).  It sounded like Malone/Rutledge were more or less aligned in their view.

 

The only disagreement was over Rutledge's buyback program.  Malone seemed to imply with his "one cookie now vs two cookies later" comment that he (Malone) would've preferred that CHTR's cash flows were directed at debt reduction rather than share repurchases. 

 

In contrast, Malone was more praiseworthy towards Discovery's CEO Zaslav, who has suspended buybacks after the merger with Scripps in favor of aggressive debt reduction for a couple of years.

 

Just my 2-cents.

 

wabuffo

 

I doubt Malone was in favor of debt reduction at CHTR except maybe temporarily because he thought the stock might have gotten ahead of itself on the M&A rumors. Malone tends to prefer higher leverage on cable assets than Rutledge, from what I've understood of the situation. Seemed to me like it was more about the execution of the buyback rather than the magnitude and leverage.