GHC - Graham Holdings

[dwy000]

dey000 - good question regarding revenues.

For SocialCode they report revenue on a net revenue basis.  Per the 10-K, "In certain cases, the Company is considered the agent, and the Company records revenue equal to the net amount retained when the fee is earned."  While they don't explicity cite SocialCode here, I believe everyone reads this as relating to SocialCode.  Also, the Washington Post article on December 7, 2014 states "the company has gross billings of more than $300 million, according to several sources familiar with the finances."  In his 2013 annual letter Don Graham mentions they are a leader in a market where firms often are valued in the hundreds of millions.  So even if the revenues are off, I think it is fair to say that the value of SocialCode isn't materially lower than $300 million.  Thanks.

 

Thanks Lowlight.  As the article points out, the $300M of billings is probably more like $75M of revenues for SocialCode itself.  It's certainly growing rapidly and appears to be a valuable business but $300M might be a stretch (although who knows given today's overvalued startups).  Doesn't move the needle much for today's valuation but I'm struggling to figure out the strategy and value of all these "other" businesses that will be increasingly important as the cable business (and it's wonderful cash flows) gets spun out.

[usdtor05]

best to think  of socialcode as an option, you don't need it to get to a good value but could be awesome to the stub if its material.

[Lowlight]

dey000 - good question regarding revenues.

For SocialCode they report revenue on a net revenue basis.  Per the 10-K, "In certain cases, the Company is considered the agent, and the Company records revenue equal to the net amount retained when the fee is earned."  While they don't explicity cite SocialCode here, I believe everyone reads this as relating to SocialCode.  Also, the Washington Post article on December 7, 2014 states "the company has gross billings of more than $300 million, according to several sources familiar with the finances."  In his 2013 annual letter Don Graham mentions they are a leader in a market where firms often are valued in the hundreds of millions.  So even if the revenues are off, I think it is fair to say that the value of SocialCode isn't materially lower than $300 million.  Thanks.

 

Thanks Lowlight.  As the article points out, the $300M of billings is probably more like $75M of revenues for SocialCode itself.  It's certainly growing rapidly and appears to be a valuable business but $300M might be a stretch (although who knows given today's overvalued startups).  Doesn't move the needle much for today's valuation but I'm struggling to figure out the strategy and value of all these "other" businesses that will be increasingly important as the cable business (and it's wonderful cash flows) gets spun out.

 

I completely agree that there is no simple way to get to a valuation on the other businesses, including SocialCode.  Perhaps they have a meaningful value well north of book value and perhaps some of them were poor investments (some of the money invested in Kaplan was invested poorly, even without the regulatory issues).  I'm not able to say one way or the other, but I like the fact that management is trying to unlock value by spinning Cable One, selling the Kaplan campuses and buying in/retiring shares when appropriate.  It seems to me these actions indicate they will move to monetize the pension asset at some point (which is heavily discounted in everyone's valuation calculation) and perhaps will spin out Kaplan or SocialCode at some point.  None of these actions have to take place to create downside protection, but they could be huge in an upside scenario.  Probabilistically speaking, I like the range of outcomes given that SocialCode could have a value in the billions one day.  As usdtor05 says, it is a free option at this point. 

 

With time and patience I think this one works out very well.  Added to my position today. 

[sleepydragon]

I bought a small position today.

There is some videos of Graham and his son in law on youtube. I must say i feel they doesnt appear to me like impressive business man. But i bought because i agree with the liquidations are unlocking values.

[sleepydragon]

One concern I have with this position is : why Buffet wanted/initiated the deal of stock swap? Maybe he's not happy that the Posts is gone? and more importantly, does he think Graham has a poor track record of capital allocation?

The best businesses to own is good business paid at fair price. But this ones is more like a cigar-butt trade. So what's the end game after all these spin offs? Is what remaining good business? Is the son-in-law a better capital allocator than Graham or is he just another dot-com entrepreneur?

I think if this is a liquidation/asset play, there's a lot of stocks like this trading a huge discount.

 

[Lowlight]

One concern I have with this position is : why Buffet wanted/initiated the deal of stock swap? Maybe he's not happy that the Posts is gone? and more importantly, does he think Graham has a poor track record of capital allocation?

The best businesses to own is good business paid at fair price. But this ones is more like a cigar-butt trade. So what's the end game after all these spin offs? Is what remaining good business? Is the son-in-law a better capital allocator than Graham or is he just another dot-com entrepreneur?

I think if this is a liquidation/asset play, there's a lot of stocks like this trading a huge discount.

 

I think these are good assets at a good price, but not quite great assets at a good price.  In my mind, it isn't a cigar butt style investment because all of these assets would trade very quickly to a strategic buyer at reasonable multiples of cash flow.  No one has to worry about valuing the assets in a liquidation or run-off scenario (except potentially KHE).  As for Buffett, he traded stock he bought for $10 million for assets worth $1.6 billion so I am certain the tax advantages of the swap were of more importance than any belief in or issues with Graham's capital allocation. 

[magno111]

new buyback for 10% of the market cap

 

http://www.finances.com/company-news/96379-graham-holdings-company-declares-regular-quarterly-dividend-announces-increased-stock-repurchase-authorization.htm

 

 

[bantrader]

new buyback for 10% of the market cap

 

http://www.finances.com/company-news/96379-graham-holdings-company-declares-regular-quarterly-dividend-announces-increased-stock-repurchase-authorization.htm

 

 

Good news, less downside risk for the special sit :-)

[Lowlight]

new buyback for 10% of the market cap

 

http://www.finances.com/company-news/96379-graham-holdings-company-declares-regular-quarterly-dividend-announces-increased-stock-repurchase-authorization.htm

 

 

Good news, less downside risk for the special sit :-)

 

On a stub basis this is more like 12.5 - 15% of market cap and significantly more when netting cash out of the stub.  It seems like they continue to focus on enhancing shareholder value.  Spin of CableOne is planned for 7/1 so we should see value realization sooner rather than later. 

[Grahamfan2]

10% buyback is authorized.  That doesn't meet they will actually buy the shares.  Don Graham says they will only buy shares only if they see a price "significantly below intrinsic value".  While I think the company is trading for less than intrinsic value, it may not trade "significantly below".  Prior share repurchases have been at much lower prices, though they may not have been able to do some buybacks because of asset sales / Buffett discussions

[usdtor05]

where do you see cable one spinoff planned for 7/1?

[RuleOneInvestor]

The 2015 annual shareholder meeting notes state, "We will change further as the Cable ONE spin-off occurs later this year, probably this summer. While this may change, the date we are aiming to give effect to the spin-off is July 1. We've remained on schedule so far."

[usdtor05]

wonderful thank you.

[dwy000]

Sure hope the spinout of the cable business isn't affected by the potential change in spinout rules by the IRS (that hurt Yahoo today)

 

http://finance.yahoo.com/news/yahoo-shares-fall-worries-possible-010825262.html

[Alex.N.B]

some valuation info based on recent news/transactions:

 

Altice Deal Pegs Suddenlink at 9.8x Ebitda, 27% Above Recent M&A

 

European telecom operator Altice's 70% stake in Suddenlink values the private U.S. cable operator at $9.1 billion or 9.8x 2015 Ebitda, assuming a 5% growth from last year's Ebitda of $888 million. The deal marks a 27% premium to cable M&A transactions in 2014 which averaged 7.7x forward Ebitda.

 

The premium falls to 18% when compared with Comcast's proposed and abandoned 8.3x Ebitda deal for Time Warner Cable in 2014. Suddenlink, the seventh-largest cable company, has 1.13 million video

subscribers across the U.S" - source Bloomberg

 

 

I believe CableOne is currently the 10th largest cable system operator in the US.

 

 

[bantrader]

some valuation info based on recent news/transactions:

 

Altice Deal Pegs Suddenlink at 9.8x Ebitda, 27% Above Recent M&A

 

European telecom operator Altice's 70% stake in Suddenlink values the private U.S. cable operator at $9.1 billion or 9.8x 2015 Ebitda, assuming a 5% growth from last year's Ebitda of $888 million. The deal marks a 27% premium to cable M&A transactions in 2014 which averaged 7.7x forward Ebitda.

 

The premium falls to 18% when compared with Comcast's proposed and abandoned 8.3x Ebitda deal for Time Warner Cable in 2014. Suddenlink, the seventh-largest cable company, has 1.13 million video

subscribers across the U.S" - source Bloomberg

 

 

I believe CableOne is currently the 10th largest cable system operator in the US.

 

So good news, thanks for sharing @Alex.N.B

 

I would be satisfied with a valuation 8.5x Ebitda for Cable One ,

 

$300M * 8.5 = 2.55 billion or $440/share

 

[Gamecock-YT]

9.8x is pretty rich. The Charter/Brighthouse deal was 7.6x. But always good to have more players in the space.

[Homestead31]

Sure hope the spinout of the cable business isn't affected by the potential change in spinout rules by the IRS (that hurt Yahoo today)

 

http://finance.yahoo.com/news/yahoo-shares-fall-worries-possible-010825262.html

 

shouldn't be a problem as cable one is a real operating company.  the potential problem with YHOO is that they are really spinning off an equity position, not an operating company that they own.  The law says that tax free spins are intended for operating companies, so typically what is done is that the parent co attaches some inconsequential op co the equity position and that has been enough to qualify historically.  The recent news is focused on attaching a "hot dog stand" aka inconsequential op co to an equity position.  That is a potential problem for YHOO, but not for CableOne.

[Alex.N.B]

article from bloomberg today:

 

Drahi Said to Seek Smaller U.S. Deals After Missing Time Warner

By Manuel Baigorri, Dinesh Nair and Marie Mawad

(Bloomberg) -- He may have lost out to John Malone in the race for Time Warner Cable Inc., but telecommunications billionaire Patrick Drahi’s foray into the U.S. market is far from over.

After Malone’s Charter Communications Inc. agreed to buy the second-largest U.S. cable company Time Warner Cable for about $55 billion, Drahi plans to instead build his U.S. footprint by seeking to acquire smaller cable operators, according to people with knowledge of the matter.

He’s already made his first move. Altice SA, the French-Israeli tycoon’s holding company, agreed to acquire control of Suddenlink Communications on May 20 in a surprise deal worth $9.1 billion. Chief Executive Officer Dexter Goei said during an analyst call to discuss the purchase that everything in the U.S. “below Comcast effectively is in consolidation mode.”

Altice could also pick up any assets that Time Warner Cable and Charter may have to sell to alleviate regulatory concerns, the people said, asking not to be identified as the discussions are private. Altice has said it ultimately aims to have the U.S. contribute to half of the company’s business.

Smaller cable operators in the U.S. include Cox Communications Inc., Cablevision Systems Corp. and MediaCom Communications Corp.

A spokesman for Altice declined to comment.

Charter will pay $195.71 a share for Time Warner Cable -- 14 percent above the New York-based company’s Friday close -- with options of $100 and $115 in cash and the remainder in its own stock. Bright House Networks, a smaller cable company that Charter previously agreed to buy, will also be merged into the combined entity.

Bidding War

While Drahi has already shown he’s hungry for U.S. acquisitions, he’s unlikely to enter a bidding war over Time Warner Cable as the Charter offer is seen as too high for Altice to beat, according to two people with knowledge of the matter.

Drahi, 51, made a move into the U.S. last week by agreeing to acquire control of Suddenlink, the seventh-largest cable company in the U.S. While in the country, he also met with Time Warner Cable Chief Executive Officer Rob Marcus, according to a person with knowledge of the matter.

Though Altice had financing from banks lined up for an acquisition of Time Warner Cable, it did not make a formal offer for the company, one of the people said. Trying to beat Charter’s $195.71-a-share offer would require Altice to increase its leverage ratio significantly and carry out a large capital increase to fund the purchase, diluting Drahi’s stake in Altice, two people said.

Altice made the right decision, even though it may have a better regulatory shot at buying Time Warner Cable, ING analyst Emmanuel Carlier said. Altice would control 15 percent of the U.S. broadband market if it bought Time Warner Cable, while Charter would control 20 percent, he said in a note to clients.

“It shows that Altice wants to grow but not at any price, which is a wise thing for Drahi to do,” he added in a phone interview.

Drahi will likely brush off the defeat. While Altice was seriously considering a bid for Time Warner Cable and banks were keen to provide financing, it was not a top priority after the successful Suddenlink deal, two people with knowledge of the matter said.

“There’s still room for more consolidation in the cable industry both in the U.S. and in Europe,” said Yvan Desmedt, a partner at law firm Jones Day in Amsterdam. “What Altice has done over the past few years is quite remarkable, but it’s one thing to move into the U.S. market and a different one to succeed in such a competitive landscape.”

European Assets

Beyond the U.S., Drahi is likely to continue seeking out European assets to grow his telecommunications and cable empire that already stretches from France, Israel and Portugal to the Caribbean. In Belgium, where Drahi also lost out to Malone last month over Royal KPN NV’s Base unit, the government may sell its stake in Belgacom, while KPN itself may become a target, according to people familiar with the matter.

He may even turn his attention back to Bouygues Telecom, one of the people said. Altice has examined the financial and regulatory obstacles to a transaction with France’s third-largest wireless provider, Bloomberg reported in February.

A Bouygues spokesman declined to comment. He referred to Martin Bouygues’s letter to Investir published over the weekend, in which the CEO of Bouygues SA said he has decided against selling its mobile phone business, and to his comments at the company’s AGM in which he said the unit isn’t for sale.

After last week’s Suddenlink deal, Goei said Altice will be “right in the middle” of the wave of U.S. cable mergers and acquisitions. He also said that the transaction “doesn’t, in any shape or form, affect or impact our European ambitions for continued expansion.”

 

[Gamecock-YT]

The 2015 annual shareholder meeting notes state, "We will change further as the Cable ONE spin-off occurs later this year, probably this summer. While this may change, the date we are aiming to give effect to the spin-off is July 1. We've remained on schedule so far."

 

Updated Form 10 today:

 

If you are a record holder of Graham Class A Common Stock or Graham Class B Common Stock as of the close of business on June 15, 2015, which is the record date for the distribution, you will be entitled to receive one share of Cable ONE common stock for every one share of Graham Class A Common Stock or Graham Class B Common Stock you hold, in the aggregate, on that date (subject to any vesting or forfeiture terms, in the case of restricted shares of Graham Class B Common Stock, or “restricted shares”). Graham will distribute the shares of Cable ONE common stock in book-entry form, which means that we will not issue physical stock certificates.

 

The distribution will be effective as of 12:01 a.m., New York City time, on July 1, 2015. Immediately after the distribution becomes effective, Cable ONE will be an independent, publicly traded company.

[Lowlight]

The 2015 annual shareholder meeting notes state, "We will change further as the Cable ONE spin-off occurs later this year, probably this summer. While this may change, the date we are aiming to give effect to the spin-off is July 1. We've remained on schedule so far."

 

Updated Form 10 today:

 

If you are a record holder of Graham Class A Common Stock or Graham Class B Common Stock as of the close of business on June 15, 2015, which is the record date for the distribution, you will be entitled to receive one share of Cable ONE common stock for every one share of Graham Class A Common Stock or Graham Class B Common Stock you hold, in the aggregate, on that date (subject to any vesting or forfeiture terms, in the case of restricted shares of Graham Class B Common Stock, or “restricted shares”). Graham will distribute the shares of Cable ONE common stock in book-entry form, which means that we will not issue physical stock certificates.

 

The distribution will be effective as of 12:01 a.m., New York City time, on July 1, 2015. Immediately after the distribution becomes effective, Cable ONE will be an independent, publicly traded company.

 

Thanks for posting.  Looks like CABO shares will trade on a "when-issued" basis beginning June 11.  Cable One's $450 million debt issue closed this week (proceeds being paid as a dividend to GHC).  Stub GHC should have between $1.2B and $1.5B in cash after the spin. 

[Lowlight]

The last few day's price decline in GHC make no sense to me.  Instead of harping on my past song and dance as to why this makes sense, I think it is easier to show how punitive the market is treating the company.  Below are their assets in approximate order of liquidity.  Per share amounts based on 5.8 million shares.  For comparison, go back through the thread and read Coho's SOTP valuation.  If you have access to VIC, read the comments on the WPO (old Washington Post) thread.  After doing that, if you have any interest in GHC, today's price of ~$985/share looks like a great entry point.

 

Company/Asset - Metric - Implied Value by Market

- Cash/Mar. Sec. - $865M ($150/share) - Value: $150/share

- Cable One - EBITDA - $300M - Value: 6x or $310/share (Cable One spinoff occurring in 2015)

- Broadcasting Stations - Blended EBITDA - $175M - Value: 8x or $244/share

- Kaplan Division (Higher Ed, Test Prep and International) - EBITDA - $126M - Value: 4x or $87/share (note EBITDA improves significantly with sale of campuses to ECA)

- Preferred Equity stake in Education Corp of America (in exchange for Corp Campuses of KHE) - Value: $0

- SocialCode - $300M Revenue - Value: 1x Rev. or $52/share (revenue growth rate of 300% in 2014 and estimated gross margins of 25%)

- $1.15 Billion overfunded pension plan ($198/share) - $112/share

- A collection of smaller businesses - Book Value of $400M+ ($69/share) - Value: $30/share

- A management team with > 22% ownership in the company who aggressively repurchased GHC stock over the last 5 years - Value: $0

 

I'm still not sold on the exact upside here, but I am dead certain there is zero downside at today's prices.

Looking back at my previous post regarding the punitive nature of the market's recent high $900's price on GHC shares.  In it I assumed the market was valuing Cable One at $310/share.  CABO began trading on a when-issued basis today, and though volume was understandably light, it traded for about $400/share.  Additionally, CABO paid a $450 million dividend to GHC pre-spin.  So in total, this is about $475/share of GHC's current $1,085 price.  Obviously now is not quite as attractive of an entry point in stub GHC but you now have a little more clarity on what you are paying for the remaining assets.  On a stub basis, they are coming about $65/share cheaper than when I posted earlier.  Depending on your valuation of the broadcast business and Kaplan, this can still be a very attractive investment from here.  And given all of the recent shareholder friendly moves by management, I don't expect CABO to be the last spin.

[Sunrider]

Thanks Low, very helpful.

The last few day's price decline in GHC make no sense to me.  Instead of harping on my past song and dance as to why this makes sense, I think it is easier to show how punitive the market is treating the company.  Below are their assets in approximate order of liquidity.  Per share amounts based on 5.8 million shares.  For comparison, go back through the thread and read Coho's SOTP valuation.  If you have access to VIC, read the comments on the WPO (old Washington Post) thread.  After doing that, if you have any interest in GHC, today's price of ~$985/share looks like a great entry point.

 

Company/Asset - Metric - Implied Value by Market

- Cash/Mar. Sec. - $865M ($150/share) - Value: $150/share

- Cable One - EBITDA - $300M - Value: 6x or $310/share (Cable One spinoff occurring in 2015)

- Broadcasting Stations - Blended EBITDA - $175M - Value: 8x or $244/share

- Kaplan Division (Higher Ed, Test Prep and International) - EBITDA - $126M - Value: 4x or $87/share (note EBITDA improves significantly with sale of campuses to ECA)

- Preferred Equity stake in Education Corp of America (in exchange for Corp Campuses of KHE) - Value: $0

- SocialCode - $300M Revenue - Value: 1x Rev. or $52/share (revenue growth rate of 300% in 2014 and estimated gross margins of 25%)

- $1.15 Billion overfunded pension plan ($198/share) - $112/share

- A collection of smaller businesses - Book Value of $400M+ ($69/share) - Value: $30/share

- A management team with > 22% ownership in the company who aggressively repurchased GHC stock over the last 5 years - Value: $0

 

I'm still not sold on the exact upside here, but I am dead certain there is zero downside at today's prices.

Looking back at my previous post regarding the punitive nature of the market's recent high $900's price on GHC shares.  In it I assumed the market was valuing Cable One at $310/share.  CABO began trading on a when-issued basis today, and though volume was understandably light, it traded for about $400/share.  Additionally, CABO paid a $450 million dividend to GHC pre-spin.  So in total, this is about $475/share of GHC's current $1,085 price.  Obviously now is not quite as attractive of an entry point in stub GHC but you now have a little more clarity on what you are paying for the remaining assets.  On a stub basis, they are coming about $65/share cheaper than when I posted earlier.  Depending on your valuation of the broadcast business and Kaplan, this can still be a very attractive investment from here.  And given all of the recent shareholder friendly moves by management, I don't expect CABO to be the last spin.

[prevalou]

Socialcode revenue seems inaccurate at 300 $m. In its 10 K GHC writes its "other business revenues", including Socialcode, Forney, healthcare, etc. are 212 $m

[usdtor05]

$300 is gross billings, they collect a portion of that, say 10-20%.