DISCA/DISCK - Discovery Communications

[dwy000]

The market definitely saw it as bullish.

 

https://finance.yahoo.com/news/discovery-eyes-streaming-future-john-214152768.html

[Munger_Disciple]

The market definitely saw it as bullish.

 

https://finance.yahoo.com/news/discovery-eyes-streaming-future-john-214152768.html

 

As noted, it is very mildly bullish with a small b. This article is along the lines of "Buffett buys RH". Very poor description of the actual transaction.

[wabuffo]

CNBC's David Faber will be interviewing Malone tomorrow at 9am and will likely ask about the transaction (including options).  So maybe we'll hear the mechanics/rationale for it straight from the man himself.

 

wabuffo

[Shooter MacGavin]

Recently, John Malone did something interesting with his discovery shares.  He purchased 2.6M more but he also entered into a zero-strike collar locking his upside at $35 and his downside at $25 for 3.6M shares, with about 350k shares in a collar at anyone time.  My guess is he's planning on selling that many shares periodically over the next 8 or so years and wants to make sure he gets at least $25 for it.

 

 

Here's the filing.

 

https://www.sec.gov/Archives/edgar/data/937797/000120919119056842/0001209191-19-056842-index.htm

 

Anyone else want to speculate why he would both purchase stock and enter into this zero-cost collar position? 

 

[undervalued]

There is some discussion of this topic located at https://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/discadisck/170/

[Shooter MacGavin]

There is some discussion of this topic located at https://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/discadisck/170/

 

Thanks!  I didn't realize there was a DISCK thread!

[wabuffo]

I can't find a video link for the specific CNBC David Faber interview segment of Malone (though I'm sure eventually the video of the entire Malone interview will make its way on-line) - but Malone gave his rationale for the DISCK purchase.

 

"...they (Discovery) are dramatically undervalued right now"

"... cheapest thing on the screen"

 

It was an edited clip that got cut right when it appeared they may talk about the options (cashless collar) portion of his trade.  Perhaps when the full interview is aired, we'll hear that part.

 

Overall, Malone is in fine form and very willing to call the winners and losers of the media world (and outside the media world) as he sees it.  Well worth listening to.

 

wabuffo

[Munger_Disciple]

I can't find a video link for the specific CNBC David Faber interview segment of Malone (though I'm sure eventually the video of the entire Malone interview will make its way on-line) - but Malone gave his rationale for the DISCK purchase.

 

"...they (Discovery) are dramatically undervalued right now"

"... cheapest thing on the screen"

 

It was an edited clip that got cut right when it appeared they may talk about the options (cashless collar) portion of his trade.  Perhaps when the full interview is aired, we'll hear that part.

 

Overall, Malone is in fine form and very willing to call the winners and losers of the media world (and outside the media world) as he sees it.  Well worth listening to.

 

wabuffo

 

+1

 

waiting for the full interview to be posted....

[scorpioncapital]

Didn't he also say it's cheap like last year at 16 or something? How can it be cheap at 16 and 30. Maybe he's talking his book to get a better bid for a sale of the company?

[wabuffo]

Other things I picked up from the various Malone snippets.

 

- doesn't like HBO's chances in the streaming wars.

- thinks Netflix/Disney are the two "sure things"

- Amazon and Apple will be fine (even without the deep content libraries) because they hold the "customer credit cards" (ie direct link to consumers) and already have global consumer scale.  They can recalibrate their strategies over time depending on take-up rates and whether they prefer to be aggregators (rather than content creators).

- the cable companies are realizing that as they lose video subscribers they are becoming more profitable, less capital intensive, more free cash flow...they can also offer streaming in the internet-only bundle (eg Netflix, others...)

- can't count how many times he talks to Patrick (Altice) about a deal...but Patrick prefers control.  That could mean Patrick buys CHTR but his biz is too small to buy CHTR.

- didn't take a direct swipe at Masa (Softbank) other than to say he took many big "swings" ...and "nobody can figure out his balance sheet"

- doesn't think much of Uber's biz model and was surprised Dara took that CEO job.

 

There's probably more - but these were the highlights that I got out of the 3-4 snippets I've seen so far...  There's more to come - live interview with CHTR CEO is later this afternoon.

 

wabuffo

[wabuffo]

Didn't he also say it's cheap like last year at 16 or something? How can it be cheap at 16 and 30. Maybe he's talking his book to get a better bid for a sale of the company?

 

Well back then (in 2017), everything was pro-forma due to the merger and they had announced that they were cancelling their repurchase program to pay down debt (which caused some investors to flee the stock).  Sentiment was also pretty negative about the content companies (and even the cablecos) because of heightened concerns about an acceleration of cord-cutting.

 

Right now - DISCK produces $3B per year of free cash flow and has paid down some debt over the last 2 years.  Its a ~7 PE and a 6-7 EV/EBITDA multiple.  More importantly they have restarted their repurchase program and bot $300m of shares in the latest Q.

 

I don't think its a coincidence that the repurchase program re-starting and Malone buying happened around the same time.

 

wabuffo

[peridotcapital]

Didn't he also say it's cheap like last year at 16 or something? How can it be cheap at 16 and 30. Maybe he's talking his book to get a better bid for a sale of the company?

 

2017 FCF per share was $2.50 so at $16 the multiple was 6.4x. 2020 FCF should be $4.50 per share so at $28 the multiple was 6.2x. I'd say quite cheap in both instances!

[undervalued]

Didn't he also say it's cheap like last year at 16 or something? How can it be cheap at 16 and 30. Maybe he's talking his book to get a better bid for a sale of the company?

 

2017 FCF per share was $2.50 so at $16 the multiple was 6.4x. 2020 FCF should be $4.50 per share so at $28 the multiple was 6.2x. I'd say quite cheap in both instances!

 

The question is why would he bought collar options if it's cheap and limit his upside? It's less than 20% upside from 30 to 35.

[wabuffo]

2017 FCF per share was $2.50 so at $16 the multiple was 6.4x.

 

Yes but 2017 TTM FCF was Discovery standalone mostly.  Comparing 2017 financials and 2019 financials is comparing apples and rutabagas.  Very late in 2017, they purchased Scripps (HGTV, Food Network, Cooking Channel, Travel Channel, etc).  That tripled free cash flow from $1B per year to $3B per year.  Malone bought right after the deal closed in late 2017.  The 2017 FCF doesn't really matter because Malone's purchase was a stamp of approval that this business combination made strategic sense.

 

Essentially, Malone argued that these two networks coming together gave both networks increased scale that was important in the streaming wars.  Also Discovery was more global than Scripps and Malone believed that taking Scripps global was going to be another positive in the merger.  He believed that reality TV insulated them a bit from the scripted content cost explosion that was afflicting AMC, FX, Turner/HBO and offered better odds for maintaining good margins.

 

I think he's been largely proven right (at least so far into 2019).  More importantly, Discovery is now once again repurchasing aggressively its common shares at a time that they are very cheap.  Malone thinks its a no-brainer and basically said so to Faber today.

 

wabuffo

[dwy000]

interview is posted: https://www.cnbc.com/2019/11/21/john-malone-says-apple-may-be-a-surprise-winner-in-the-streaming-wars-getting-large-numbers-fast.html

[scorpioncapital]

I agree that what they said has happened over the last 2 years, but the fears regarding content I still see as there. Anyway I was wrong as I followed Maffei's line that content has no future while delivery has all of it (hence I invested in broadband instead at a 3:1 ratio to content cos). While that has done ok in the USA (not so well outside), it seems Discovery has done pretty good too. I have no idea but it could be a roll up to a bigger fish or it could be getting risky over time. As they say, time will tell.

 

 

[mwtorock]

global scale and distribution, non scripted (unique) content ownership, cashflow generation... Malone clearly sees the prospects getting better. And figuring out a direct to consumer strategy would be next leap for DISCA.

[gurpaul88]

I think the end game here is to sell to a bigger co.

[wabuffo]

I think the end game here is to sell to a bigger co.

 

Not necessarily.  Malone said some interesting things about bundles this year.  While streaming is unraveling the cable bundle, streaming seems to be creating a churn problem for the standalone streamers.  Malone used the word "glue" as a new strategic term in his discussion with Faber - I don't recall that term in past years' discussions.  He always talked about global scale, "owning the customer credit card", etc - but this year he used "glue" a few times in the context of various media companies.

 

I think what he means by this is that bundling creates a stickier subscriber.  A la carte services, he thinks will find churn to be a real problem.  While cable companies may no longer be the "bundlers" of the future, as they were in the past, he thinks there will be new 'bundlers' in the future.  The likely candidates are Apple and Amazon. (though its hard to not to think Google and Facebook will not want a piece of this action).  Malone's theory is that even Disney will find it in their best interest to offer their Disney+ service within someone's bundle (even giving up a small cut) than to be standalone, because he thinks that they will benefit from less churn and greater, steadier revenues.

 

If Malone is correct, I believe he is saying that Discovery can have a role to play in this new world if it has global scale and a strong consumer franchise.  Streaming is exciting and it has unleashed an explosion of new content, but Malone believes the ecosystem is inherently unstable. In the here and now, no one is making any money in streaming.  The industry will shake-out and modulate its content spend but Malone believes it will have to re-bundle in order for the new ecosystem to be once again profitable for all the remaining players.  Malone wants to ensure that Discovery gets through this shakeout and is around in five years or so when everything stabilizes.  He also thinks the cable companies could still be bundlers too, but not in size.

 

As always, there is no one better at strategically dissecting the media business environment than Malone.  He is a deep thinker.

 

Just my interpretation - I could be wrong about what Malone is thinking.

 

wabuffo

 

[Spekulatius]

I am guessing this is the full interview posted on YouTube (sign of the times ):

 

Edit: It’s great way to get a feel for the lay of the land for media and especially the Malone companies Discovery, but also Netflix, Disney, CBS/ Viacom.

[argonaut]

I don’t see or hear anything in the video/transcript about the option collar.. Did Faber ask or are there any other sources where Malone addresses why he did the collar?

[Happy]

I don’t see or hear anything in the video/transcript about the option collar.. Did Faber ask or are there any other sources where Malone addresses why he did the collar?

No, they didn't talk about the option collar.

[Shooter MacGavin]

I don’t see or hear anything in the video/transcript about the option collar.. Did Faber ask or are there any other sources where Malone addresses why he did the collar?

 

I was at the meeting.  He addressed it during Q&A.  Look at the transcript for the day session.  I didn't quite understand it. I've been meaning to go back over it.

 

"Well, I'll take you on my discovery. I essentially increased my exposure on the upside of the discovery by $75 million by buying $75 million worth of discovery stock. The car I put on was a 7-year state planning hedge, right, that only -- that essentially didn't reduce my upside opportunity in discovery, except on a very large up, right? So I mean, for the confusion that doing that transaction represented because I'm an insider, right? I have a great deal of difficulty in accumulating shares in a company because I have to basically say, 2 days, I booked some shares, right? When I've done that historically, when I announced that first purchase, the stock goes up, and then I'm chasing my tail. So what I find is -- better is to go do a transaction with a counterparty, in which they put the collar on, it's a very long-term collar, right, and I then turn around and bought a delta. I use the shares that, that counterparty is selling into the market. In order to hedge their exposure, I buy that delta for cash.

 

So I increase my exposure, but I'm able to do a 1-day transaction, right? Otherwise, if you're an insider and you try and put a collar on, but you get hosed by the counterparty..."

 

 

 

Well, I would -- let me follow up on that question. Because if you're looking at me specifically, don't misinterpret. A lot of the transactions that I engage in are estate planning. They're not -- they don't represent a lack of love for the individual asset. They represent kicking a tax event down the road after this step-up in basis, okay? So you've got to be a little careful interpreting. On discovery, I bought stock straight up at -- in the mid-teens after the Scripps deal was announced. I thought it was cheap. I bought it fairly heavily in the low 20s when I thought -- and now I bought a bunch more at $28.03, which was actually the price on the deal. So I'm a believer in that particular -- there are other businesses that I have personally exited because I cease to be a believer, but those are typically businesses in which I have no longer retained a Board or control position.

[maybe4less]

I don’t see or hear anything in the video/transcript about the option collar.. Did Faber ask or are there any other sources where Malone addresses why he did the collar?

 

I was at the meeting.  He addressed it during Q&A.  Look at the transcript for the day session.  I didn't quite understand it. I've been meaning to go back over it.

 

"Well, I'll take you on my discovery. I essentially increased my exposure on the upside of the discovery by $75 million by buying $75 million worth of discovery stock. The car I put on was a 7-year state planning hedge, right, that only -- that essentially didn't reduce my upside opportunity in discovery, except on a very large up, right? So I mean, for the confusion that doing that transaction represented because I'm an insider, right? I have a great deal of difficulty in accumulating shares in a company because I have to basically say, 2 days, I booked some shares, right? When I've done that historically, when I announced that first purchase, the stock goes up, and then I'm chasing my tail. So what I find is -- better is to go do a transaction with a counterparty, in which they put the collar on, it's a very long-term collar, right, and I then turn around and bought a delta. I use the shares that, that counterparty is selling into the market. In order to hedge their exposure, I buy that delta for cash.

 

So I increase my exposure, but I'm able to do a 1-day transaction, right? Otherwise, if you're an insider and you try and put a collar on, but you get hosed by the counterparty..."

 

 

 

Well, I would -- let me follow up on that question. Because if you're looking at me specifically, don't misinterpret. A lot of the transactions that I engage in are estate planning. They're not -- they don't represent a lack of love for the individual asset. They represent kicking a tax event down the road after this step-up in basis, okay? So you've got to be a little careful interpreting. On discovery, I bought stock straight up at -- in the mid-teens after the Scripps deal was announced. I thought it was cheap. I bought it fairly heavily in the low 20s when I thought -- and now I bought a bunch more at $28.03, which was actually the price on the deal. So I'm a believer in that particular -- there are other businesses that I have personally exited because I cease to be a believer, but those are typically businesses in which I have no longer retained a Board or control position.

 

Malone's counterparty sold him a put and bought a call from him. So the counterparty has a synthetic long position. In order to hedge that position, the counterparty has to sell some shares short. Malone wants the shares, so he buys them from the counterparty. Malone is saying this way he can get as many shares as he wants at once without having to buy them in the open market and, importantly, getting them all before he has to file a form 4.

[sleepydragon]

So he caped his upside at 35, only 16% from current level?