GHC - Graham Holdings

[prevalou]

Ok it includes the Facebook portion.

[usdtor05]

Right they always talk about GROSS billings. That being said if it continues to grow like that and you have Graham on the FB board, etc. it should work out nicely. The story of how it was built is pretty inspiring.

 

http://www.washingtonpost.com/business/capitalbusiness/graham-family-scion-built-socialcode-to-help-companies-build-brands-on-facebook/2014/12/05/a3733c6a-7aff-11e4-b821-503cc7efed9e_story.html

 

Will be interesting if Mr. Graham spins it out, retains a portion of the stock and provides some cash and let's his daughter build her own thing.

 

But who knows its a call option. Either way $300M of gross billings from scratch is impressive.

[bantrader]

Right they always talk about GROSS billings. That being said if it continues to grow like that and you have Graham on the FB board, etc. it should work out nicely. The story of how it was built is pretty inspiring.

 

http://www.washingtonpost.com/business/capitalbusiness/graham-family-scion-built-socialcode-to-help-companies-build-brands-on-facebook/2014/12/05/a3733c6a-7aff-11e4-b821-503cc7efed9e_story.html

 

Will be interesting if Mr. Graham spins it out, retains a portion of the stock and provides some cash and let's his daughter build her own thing.

 

But who knows its a call option. Either way $300M of gross billings from scratch is impressive.

 

Sorry @usdtor05 but i don´t find Graham on the FB board,

 

http://investor.fb.com/directors.cfm

 

 

[gfp]

Don Graham turns 70 this year and will not stand for reelection to Facebook's board of directors.  He has been lead independent director since 2009 and owns over a million shares that are pledged to DC charities after he leaves the board.

 

" In accordance with our corporate governance guidelines, Mr. Graham will have reached the mandatory retirement age of 70 by the time of the Annual Meeting and therefore is not being nominated for reelection to our board of directors at the Annual Meeting."

 

Right they always talk about GROSS billings. That being said if it continues to grow like that and you have Graham on the FB board, etc. it should work out nicely. The story of how it was built is pretty inspiring.

 

http://www.washingtonpost.com/business/capitalbusiness/graham-family-scion-built-socialcode-to-help-companies-build-brands-on-facebook/2014/12/05/a3733c6a-7aff-11e4-b821-503cc7efed9e_story.html

 

Will be interesting if Mr. Graham spins it out, retains a portion of the stock and provides some cash and let's his daughter build her own thing.

 

But who knows its a call option. Either way $300M of gross billings from scratch is impressive.

 

Sorry @usdtor05 but i don´t find Graham on the FB board,

 

http://investor.fb.com/directors.cfm

[Lowlight]

A friend of mine pointed this out to me based on my last post.  Below is another way to allocate the purchase price for the assets assuming an 11x EBITDA valuation for the broadcasting segment (blended EBIDTA to account for election years).

 

GHC Stub Valuation assuming $1,060/share stock price

 

Purchase Price                     $1,060

- Cash post-spin                       $227

- CABO stock                       $400

= GHC Stub Price (net of cash)  $433

+ Debt ($400 million)                 $69

= Enterprise Value of GHC stub  $502

 

Broadcasting at 11x EBITDA $332

Other Assets at Book                   $69

Total Broadcasting & Other         $401

 

Assets for $101/share ($586 million)

Kaplan International, Test Prep and KHE

SocialCode

Pension Asset ($1.15 billion overfunded)

Real Estate

 

It is interesting to note that at $960/share a few weeks back the market was valuing all of these residual assets at $0 (assuming you can get to 11x EBITDA for the Broadcasting segment).  It remains possible that CABO is snapped up in the near future at a price above $400/share (but it is hard for me to make the case for a valuation much above $450/share).  The residual assets probably have a minimum value of $250/share and likely a significantly higher value if the pension can be utilized.  It doesn't take heroic assumptions to get to $400/share on these assets, in which case there is ~67% upside from today's stub GHC price, with virtually no chance of permanent loss.  With a $500 million buy back in place, and given management's knowledge of the likely offers on Broadcasting assets, SocialCode and Kaplan international, I expect that they would consider stub GHC to be selling at a significant discount to intrinsic value.  I suspect they might be in the market aggressively in 3Q15 if stub-GHC trades in the mid-$600/share or lower. 

 

[Lowlight]

Cable One presentation link below.  Interesting to note Gayner and Weitz on Board.  CABO plans to authorize share repurchases post spin and indicates 3.0x leverage as the optimal level (currently 1.8x).

 

http://www.sec.gov/Archives/edgar/data/1632127/000095015715000573/ex99-1.htm

[folivera13]

CABO is trading at aroung 9.6x LTM EBITDA.  Little margin of safety.  At these prices they should use the debt capacity for M&A, not buybacks.  Cable M&A deals have usually been completed around 7.5-8.5x EBITDA.

[Nassau]

Altice buying Suddenlink for 10.3x LTM Reported EBITDA.  These 8-8.5x deals are after buyer synergies, not before.

 

Cable One shares are worth close to $500 before taking accretive buybacks and future free cash flow into account.

[folivera13]

You would have to bet on an Altice takeover at a high multiple which very well may happen...but offers little margin of safety.  I don't believe Charter (if they were even allowed to make more acquisitions) would pay over 10x for CABO.  They paid 9x for TWC pre-synergies and 7.6x BHN pre-synergies.  No doubt that CABO has the chance to create significant value if they can do some deals before being acquired but at these prices- it is not a "no-brainer".

[Nassau]

Buyer could be any of several companies, and CABO is unusually attractive given the lack of fiber competition in its markets and low current penetration rates. 

 

I also read on page 19 of their investor presentation (http://www.snl.com/Cache/1001199131.PDF?O=PDF&T=&Y=&D=&FID=1001199131&iid=4137149) that CABO has the lowest pricing by far at $1.86/Mbps vs. Suddenlink's $2.88/Mbps.  In other words, it appears they can raise pricing a lot and drop 100% of that additional revenue to the EBITDA line.

 

No reason EBITDA can't go pretty quickly to $350mm on a standalone basis, and 10x that is a $525 stock.

 

Additionally, CABO has a pretty significant slug of owned real estate in downtown Phoenix that is probably given no value by investors.

 

Looks to me like risk/reward is very attractive here for this scarce property.

[dwy000]

Revenues have been flat for the past 4+ years and EBITDA hovering around $300m.  This is same management and same business plan for the past decade so it's unlikely to expect anything different than the current state. 

 

The business model is rather interesting and unlike the Charters and Comcasts of the world.  They see no future in video and are willing to let those customers switch off in droves.  Video sub decline has been remarkable.  They even dropped all the Viacom channels back in 2014 as too expensive and replaced them with some second rate channels with the view that if people want to quit so be it.

 

They state in the presentation that they don't see the value in consolidation so growth thru acquisitions is highly unlikely.  And they can't sell out for two years so it's pretty much status quo for a couple of years and hope that EBITDA and multiples hold up until someone can buy them.

 

That said, they have a great board (Wally Weitz is a John Malone disciple so he may differ with the management strategy) and a very shareholder friendly plan for cash so I have no problem sitting on it for a while

[Lowlight]

Revenues have been flat for the past 4+ years and EBITDA hovering around $300m.  This is same management and same business plan for the past decade so it's unlikely to expect anything different than the current state. 

 

The business model is rather interesting and unlike the Charters and Comcasts of the world.  They see no future in video and are willing to let those customers switch off in droves.  Video sub decline has been remarkable.  They even dropped all the Viacom channels back in 2014 as too expensive and replaced them with some second rate channels with the view that if people want to quit so be it.

 

They state in the presentation that they don't see the value in consolidation so growth thru acquisitions is highly unlikely.  And they can't sell out for two years so it's pretty much status quo for a couple of years and hope that EBITDA and multiples hold up until someone can buy them.

 

That said, they have a great board (Wally Weitz is a John Malone disciple so he may differ with the management strategy) and a very shareholder friendly plan for cash so I have no problem sitting on it for a while

 

I agree with many of your thoughts but would point out that they can probably sell any time after the spin.  The two year window is only applicable if they have been in discussions with an acquirer pre-spin.  Knowing that they planned to spin the business, I believe they did not accept calls from possible candidates.  From a strategic standpoint they may want to execute their business plan and that may cause them to remain independent for longer than two years but I don't believe it will be because they would risk losing the tax free status if they sold earlier. IMO.

[Nassau]

Lowlight is correct.

[dwy000]

I was taking it straight from the filing:

 

"The Tax Matters Agreement imposes certain restrictions on Cable One (including restrictions on share issuances and repurchases, business combinations, an election to be treated as a real estate investment trust, sales of assets and similar transactions) to preserve the tax-free nature of the Spin-off. These restrictions apply for the two-year period after the Spin-off. Cable One will be able to engage in an otherwise restricted action if Cable One obtains an opinion from counsel satisfactory to Graham, a ruling from the Internal Revenue Service or consent from Graham. "

 

While they may be able to argue around it, I'm not sure what buyer would want to take on that risk/liability at a full purchase price.

[merkhet]

I was taking it straight from the filing:

 

"The Tax Matters Agreement imposes certain restrictions on Cable One (including restrictions on share issuances and repurchases, business combinations, an election to be treated as a real estate investment trust, sales of assets and similar transactions) to preserve the tax-free nature of the Spin-off. These restrictions apply for the two-year period after the Spin-off. Cable One will be able to engage in an otherwise restricted action if Cable One obtains an opinion from counsel satisfactory to Graham, a ruling from the Internal Revenue Service or consent from Graham. "

 

While they may be able to argue around it, I'm not sure what buyer would want to take on that risk/liability at a full purchase price.

 

lowlight is correct. The tax rule is either two year post-spinoff (the upper bound) or two years since any discussion of a transaction. (It currently eludes me whether this is a rule that's based on individuals or broader. In other words, if Company A had talks 1.5 years ago, does that keep Company B from buying it now.)

 

The Tax Matters Agreement is merely there to preserve the tax free characteristic of the spin -- so Graham can make sure no one effs up on the sale.

[dwy000]

Not to belabor the point but the Tax Matters Agreement directly prohibits them from selling for 2 years unless they get a specific ruling from the IRS or approval from Graham (who obviously has no incentive to provide it anymore since they would be the ones on the hook for the taxes). 

 

Now they may be able to get that ruling from the IRS based upon the no-discussions concept but it does seem like a high hurdle.

[Nassau]

Nope, not a high hurdle.  It's called "Super Safe Harbor."  It is a bright line test that is easily proven, and it is highly unlikely that GHC has been in any negotiations to sell Cable One, because GHC is incredibly tax sensitive and an outright sale of Cable One would have resulted in a large tax bill.

 

They probably sell company in next 12 months after buying back a lot of stock and pulling a few other levers for value creation first (i.e. raising internet prices), maximizing pro forma profitability.

 

Cable One is not a company that will be "sold" - it will be "bought" by an aggressive acquirer that submits an aggressive unsolicited bid, I suspect.

[dwy000]

Nope, not a high hurdle.  It's called "Super Safe Harbor."  It is a bright line test that is easily proven, and it is highly unlikely that GHC has been in any negotiations to sell Cable One, because GHC is incredibly tax sensitive and an outright sale of Cable One would have resulted in a large tax bill.

 

They probably sell company in next 12 months after buying back a lot of stock and pulling a few other levers for value creation first (i.e. raising internet prices), maximizing pro forma profitability.

 

Cable One is not a company that will be "sold" - it will be "bought" by an aggressive acquirer that submits an aggressive unsolicited bid, I suspect.

 

Thanks Nassau.  Can you point me to any examples where you've seen this has happened or worked?  I'd love to see this get acquired but I'm not sure I want to hold out 2 years for an acquisition premium if an acquirer (or Graham) doesn't want to tackle the issue.

[Nassau]

This article mentions a couple examples:  http://www.forbes.com/sites/joecornell/2014/06/02/hillshire-brands-in-the-middle-of-a-food-fight/

 

1.  Cendant spun Realogy in Aug 2006 and announced to be acquired by Dec 2006

2.  First Data spun Western Union in Oct 2006 and announced to be acquired in Apr 2007

 

In addition, EBAY/PayPal is expected by many to also successfully claim AMT exemption under super safe harbor.

[misterkrusty]

Sell CABO to buy more GHC?

 

I figure that GHC today is worth roughly $1,100.  This is based on a $1,500 valuation for GHC pre-spin (reasonably close to the other valuations I've seen on this thread).  That would imply that GHC shares are trading around 60-65% of fair value.

 

On the other hand, CABO at $380 is trading at 8.7x LTM EBITDA.  The highest multiple I've seen any on any decent comp is the 9.8x that Altice paid for SuddenLink recently.  At 9.8x, CABO shares would be worth $440.  380/440 = 86% 

 

So my question is, why shouldn't I sell my CABO to buy more GHC?  The only reason I can think of is that maybe there are unusually large M&A synergies with CABO.  A giant cable company could probably cut a better deal on programming costs, boosting EBITDA and making the effective multiple lower than 8.7x.  But would the synergies really be that much larger for CABO vs SuddenLink? 

 

As for SG&A, I would imagine Don Graham already got this about as low as it could go, right?

 

Thoughts?

[Grahamfan2]

Given CABO's recent upgrade to higher speeds, they should have some pricing power.  Any price increase would drop straight to the bottom line.  The company has said that they have $100mm at hand to spend for buybacks in the near term and they have lots more - at the right price - for buybacks or acquisitions down the road

 

Social Code is having an Open House in NYC in a couple of weeks.  The valuation of SC probably has the greatest variation among  GHC shareholders so you may want to go to the OH to form your own opinion.

[CSP2014]

Buyer could be any of several companies, and CABO is unusually attractive given the lack of fiber competition in its markets and low current penetration rates. 

 

I also read on page 19 of their investor presentation (http://www.snl.com/Cache/1001199131.PDF?O=PDF&T=&Y=&D=&FID=1001199131&iid=4137149) that CABO has the lowest pricing by far at $1.86/Mbps vs. Suddenlink's $2.88/Mbps.  In other words, it appears they can raise pricing a lot and drop 100% of that additional revenue to the EBITDA line.

 

No reason EBITDA can't go pretty quickly to $350mm on a standalone basis, and 10x that is a $525 stock.

 

Additionally, CABO has a pretty significant slug of owned real estate in downtown Phoenix that is probably given no value by investors.

 

Looks to me like risk/reward is very attractive here for this scarce property.

 

What do you mean by a "pretty significant slug of owned real estate in downtown Phoenix." I know they own their HQ.. but any sense for how much that and any other real estate is worth? Haven't seen that number anywhere.

 

Thanks!

[zippy1]

Q3 results.

http://finance.yahoo.com/news/graham-holdings-company-reports-third-231300674.html

Graham Holdings Company (GHC) today reported a loss from continuing operations attributable to common shares of $231.2 million ($40.32 per share) for the third quarter of 2015, compared to income of $10.1 million ($1.73 per share) for the third quarter of 2014. Net loss attributable to common shares was $230.8 million ($40.25 per share) for the third quarter ended September 30, 2015, compared to income of $76.4 million ($13.12 per share) for the third quarter of last year. Net (loss) income includes $0.4 million ($0.07 per share) and $66.2 million ($11.39 per share) in income from discontinued operations for the third quarter of 2015 and 2014, respectively.

[Grahamfan2]

Tim O'Shaughnessy was just promoted to CEO.  What's the consequence of this?  He hasn't been at the company very long.  Don Graham is a very vigorous 70 year old.

[prevalou]

At present they have to deal with Valeant