CHTR - Charter Communications

[Liberty]

https://www.prnewswire.com/news-releases/charter-comcast-and-cox-to-form-new-group-to-sell-national-advanced-advertising-solutions-300624134.html

[walkie518]

Hey Walkie,

 

lots of good points on wireless but not a material part of my valuation.  Dont really know how verizon squeezes them, they have a mvno agreement.  my understanding is our mvno usage based costs will be minimal because most of bits on wifi anyway.  in addition, it is not going to be a material profit source when viewed as a sole business,  but will lower churn (which would be material).  in my mind, if it is successful, it will drive consolidation on terms favaorable to cable.  but i have to admit i havent spent lots of time on the wireless opportunity.  if it disappeared tomorrow it wouldnt change my valuation

 

I don't know how others on this forum feel, but convergence and its synergies at (better) scale are key parts to my Charter thesis. 

 

Spectrum serves my office, which pays double for nearly the same service I have at home.  Spectrum has been moving business from annual to month/month contracts with teaser rates. 

 

What happens when Spectrum wants to lock-in pricing?  What happens when Spectrum wants to hike prices by 10%?  They will certainly get it, but is this short-term thinking?

 

How hard will it be when business customers have broadband and mobile devices with Spectrum (voice and video being less important) to leave?  What happens to those month/month agreements and how much additional revenues will be generated?  How well does Charter reduce churn with these offerings?

 

The MVNO with Verizon will juice cash flow b/c the pipes are the same, but new revenue is funneled to Charter instead of Verizon.  It's likely Charter undercuts Verizon's pricing, but I speculate that over time they come in line. 

 

On the other hand, building the infrastructure that Charter already has for 5G seems like a waste for many wireless carriers?  Maybe there will be increasing numbers of these kinds of agreements among the other cable providers. 

 

In the least, the next few years will be very interesting for cable and wireless companies. 

 

 

[walkie518]

Charter prices $2.5B in debt to roll over Time Warner Cable notes https://seekingalpha.com/news/3343745?source=ansh $CHTR

 

Clear positive...

[BG2008]

$800mm of 20 year debt at slightly higher yield than 5.375% and $1.7bn of 30 year debt at slight higher than 5.75% replacing $2b in 6.75% due 2018.  Wow. 

[gokou3]

I find it interesting that the TWC yields fluctuate so much over a short span around the GFC..

[BG2008]

I find it interesting that the TWC yields fluctuate so much over a short span around the GFC..

 

I think late 2008 and early 2009 were peak pessimism.  Capital market were essentially closed. 

[Spekulatius]

I find it interesting that the TWC yields fluctuate so much over a short span around the GFC..

 

These times were crazy. You could by lower investment grade bonds for mid teens yields, if you looked around. Also, the financing side is one of the issues with Malone, he runs hothead entities he controls with fairly high leverage and not very “creditor friendly” with this assets shifting around and deals. Few people care now, but when credit gets tight, the remaining bond buyers will, IMO.

[atbed]

I had some massive problems with our phone service with one of the cable guys this week. Every time we lose cable internet service, we lose home phone service. I'm not picking on CHTR here specifically (just choosing to post here), because it probably applies to all cable providers.

 

IMO VOIP phone service through one of the cable providers is a complete rip-off. We are in the process of portering over our phone number from a cable provider to google voice (with a pit stop through T-Mobile). Combining phone/internet just seems like a marketing play to juice pricing.

 

Not sure how material this is. But curious what other board members think.

[Spekulatius]

I had some massive problems with our phone service with one of the cable guys this week. Every time we lose cable internet service, we lose home phone service. I'm not picking on CHTR here specifically (just choosing to post here), because it probably applies to all cable providers.

 

IMO VOIP phone service through one of the cable providers is a complete rip-off. We are in the process of portering over our phone number from a cable provider to google voice (with a pit stop through T-Mobile). Combining phone/internet just seems like a marketing play to juice pricing.

 

Not sure how material this is. But curious what other board members think.

 

You don’t really pay for phone it’s cable providers, in my case the tripple play offering (with phone) was cheaper than the double play after the rebates. We never used the phone since we were happy with Ooma and didn’t feel like changing.

[vince]

Chtr being offered at very good prices on CURRENT ebitda where current ebitda is not representative of potential future ebitda.  Said another way, current multiple is basically a good cash on cash return with no growth.  That is a very nice margin of safety IMO.  Wish they had more capacity to take out more equity at these prices

[vince]

Not seeing sec filing with Advance Newhouse leads me to believe AN is not selling anymore shares back to Chtr

[Spekulatius]

Chtr being offered at very good prices on CURRENT ebitda where current ebitda is not representative of potential future ebitda.  Said another way, current multiple is basically a good cash on cash return with no growth.  That is a very nice margin of safety IMO.  Wish they had more capacity to take out more equity at these prices

 

What makes you believe that CHTR current EBITDA is not representative of future EBITDA? I expect to see mid single digit EBITDA, Sam than with CMCSA, which trades at lower multiples. I prefer CMCSA because of lower leverage and lower valuation at this point.

[Liberty]

Chtr being offered at very good prices on CURRENT ebitda where current ebitda is not representative of potential future ebitda.  Said another way, current multiple is basically a good cash on cash return with no growth.  That is a very nice margin of safety IMO.  Wish they had more capacity to take out more equity at these prices

 

What makes you believe that CHTR current EBITDA is not representative to future EBITDA? I expect to see mid single digit EBITDA, Sam than with CMCSA, which trades at lower multiples. I prefer CMCSA because of lower leverage and lower valuation at this point.

 

Because they are going through a huge integration/transition process that is depressing margins and likely growth.

[vince]

Ebitda growth rate with legacy charter footprint was high single to low double digits once the upgrades to the plant were largely complete and the product and pricing strategy was implemented.  I think it's also important to consider the fact that business was performing very much in line with what management was predicting.  Mr Rutledge was confident that once the plant was upgraded consumers would see that the cable product is superior to satellite and chtr would begin to claw back video customers.  Without the drag from video losses and conservative estimates of further broadband penetration you could see very good growth. Mgmt is now predicting, with this latest integration, even better relative performance all factors considered.  And they are backing up that conviction buying back large chuncks of equity at 350 a share.  As the integration recently passed the halfway mark, the biggest risks are behind them and value is increasing as the stock heads south.  Remember, 3 different companies were looking to acquire them and it was publicly stated that there was an offer for 540.  Of course the market overreacts to some lumpiness in their results, which by the way mgmt stated was obviously going to happen due to the sheer scale and complexity of the acquisition.  Lets assume though that you are right and they get mid single digit ebitda growth (which is what I use anyway for valuation), the returns will be fantastic.  And that was my original point.  But I also think one could pencil in 10 percent (or more) growth for the next few years (what I meant when I said not representative of potential future ebitda) which obviously greatly enhances returns.  The cfo was asked at recent conference whether he still felt low double digit growth was in the cards.  He said absolutely and that he is more confident now than ever.

[vince]

Thanks Liberty for saying basically what I said with my long post which for some reason I think was a waste of time in terms of getting anywhere with the extra effort.

[dutchman]

Can someone direct me to some material which explains why 5g and cord cutting isn't a threat to charter. The market seems to be freaking out of over this, and therein lies the opportunity i guess.  I get that they'll just keep raising the price of broadband if ppl cord cut, and 5g requires many more cells where cable can maybe play a role. Trying to understand the conviction that many of you, whom I respect, have.

[Liberty]

Can someone direct me to some material which explains why 5g and cord cutting isn't a threat to charter. The market seems to be freaking out of over this, and therein lies the opportunity i guess.  I get that they'll just keep raising the price of broadband if ppl cord cut, and 5g requires many more cells where cable can maybe play a role. Trying to understand the conviction that many of you, whom I respect, have.

 

Rutledge touches on this in his March 5 presentation. I suggest you check out his comments.

[Gamecock-YT]

Not seeing sec filing with Advance Newhouse leads me to believe AN is not selling anymore shares back to Chtr

a day early

 

https://www.sec.gov/Archives/edgar/data/914545/000089924318010177/xslF345X03/doc4.xml

[LongTermView]

Charter breaks down capex on page 48 of the 2017 10-K:

in millions:

$3,385 Customer premise equipment [CPE] (a)

$2,007 Scalable infrastructure (b)

$1,176 Line extensions ©

  $572 Upgrade/rebuild (d)

$1,541 Support capital (e)

--------

$8,681 Total capital expenditures

 

(a) Customer premise equipment includes costs incurred at the customer residence to secure new customers and revenue generating units. It also includes customer installation costs and customer premise equipment (e.g., set-top boxes and cable modems).

(b) Scalable infrastructure includes costs not related to customer premise equipment, to secure growth of new customers and revenue generating units, or provide service enhancements (e.g., headend equipment).

© Line extensions include network costs associated with entering new service areas (e.g., fiber/coaxial cable, amplifiers, electronic equipment, make-ready and design engineering).

(d) Upgrade/rebuild includes costs to modify or replace existing fiber/coaxial cable networks, including betterments.

(e) Support capital includes costs associated with the replacement or enhancement of non-network assets due to technological and physical obsolescence (e.g., non-network equipment, land, buildings and vehicles).

 

We know 2017 and 2018 are heavy in terms of growth capex due to the all-digital initiative. What is the breakdown between maintenance capex and growth capex for the above?

 

A similar question was answered in October 2014 but I'd like to continue exploring the blurry areas:

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.

[Astrea]

Just to get back to Dutchman re cord cutting/5G risks. These are my high level thoughts:

 

The disruption caused to the cable video distribution model is real but cable operators still own the infrastructure (i.e. the pipe to the home) over which both traditional and over-the-top video services are delivered to customers. In other words, cable owns the toll road and gets to set the toll charge and so there should be other ways it can make up for what it loses in video. Bundle economics should also continue to make sense and offer value to customers and I think that with the proliferation of OTT services in addition to linear TV, cable can continue to be an aggregator of content and offer value to the customer through bundling even if what's in the bundle changes.

 

No one has all the answers re 5G but as the technology sorts out, cable seems to lend itself to answering the questions better than others. Cable’s existing architecture comprises many of the building-blocks needed to compete in a 5G world, including an existing fibre network for backhaul and high capacity wireless connectivity in homes and businesses (i.e. wifi). By contrast, wireless carriers will almost certainly need to build dense physical networks (fibre and small cell radios) down from the macro-cell towers into the neighbourhoods with all the cost, time and overbuild risk that carries. On that basis, 5G may well be more of an opportunity for cable than a threat. At least that's what Charter is saying. VZ is saying that existing cable assets aren't quite good enough for a 5G world and so they are building their own networks in selected markets. How much of that is tactical ahead of some form of convergence with cable, I don't know.

 

It's worth following what's happening in Europe with the JV between Vodafone and Liberty Global. If that works out, then it further validates the merits of convergence between wireless and wireline operators. That JV valued Liberty Global's cable assets at around 11x EBITDA if I recall correctly.

[Spekulatius]

I agree convergence and consolidation between wireline and wireless is the most likely path going forward. Verizon has already a dense fiber network in the Northeast and ATT in CA, some areas in the Midwest and South, but each operator needs to cover most of the US to give the consumer the best experience.

 

It seems that in the mid term future, wireless and fiber will start to supplement and compete with each other.

[vince]

Imo, wireless and wireline will consolidate on valuations favorable to cable based on Zig-Vod merger and the various wireless companies looking at Chtr assets.  Things could change so not a time for overconfidence but its no secret the wireline currently has the advantage and Malone is the last person that will allow that "advantage value" to be transferred without being compensated.  In fact, one of my worries is that he wont take a fair price when offered which could come back to bite later.  I would have taken 540, (assuming currency was decent, or even if lots of it was cash) because that 540 NOW in my hands is worth a good bit more in 3-4 years.  By turning it down now (not saying that he did) you must be very confident of 700-800 or more in 3-4 years, again assuming currency was solid.

[Liberty]

Imo, wireless and wireline will consolidate on valuations favorable to cable based on Zig-Vod merger and the various wireless companies looking at Chtr assets.  Things could change so not a time for overconfidence but its no secret the wireline currently has the advantage and Malone is the last person that will allow that "advantage value" to be transferred without being compensated.  In fact, one of my worries is that he wont take a fair price when offered which could come back to bite later.  I would have taken 540, (assuming currency was decent, or even if lots of it was cash) because that 540 NOW in my hands is worth a good bit more in 3-4 years.  By turning it down now (not saying that he did) you must be very confident of 700-800 or more in 3-4 years, again assuming currency was solid.

 

Malone mentioned this in interview with Faber about the offer (which I don't think was confirmed as 540, but as "something with a 5 in front" or something like that), and Malone basically said "I didn't see a check for that amount, show me the check". Meaning that he didn't want to swap CHTR stock for Softbank stock or whatever and be stuck with it with no control, repeating his AT&T mistake.

[Happy]

In the interview, it sounded to me as if part of the offer was in Sprint shares and Son wanted to value those shares significantly above their market value for the deal (because he considered them undervalued). That's obviously a far more dubious proposition than receiving $540 in cash.

[vince]

I agree with both of you, I saw the interview.  But whats your thoughts on first part of my post?