LBRDA - Liberty Broadband

[peter1234]

"640KB RAM ought to be enough for anybody"

 

;)

[giofranchi]

"640KB RAM ought to be enough for anybody"

 

;)

 

Imo if you do not give something to people, they will not feel the need to have it.

If nobody builds a new infrastructure for the internet, nobody will feel the need to use it.

With RAM Intel and others kept giving us larger and larger products, because the return on the investment needed to do so was quite good. Basically, it was an intellectual effort… almost no capital required.

But to lay down thousands of miles of new fibers? Well, that’s another story…

No one is going to do that, if no good returns on their capital could be achieved… Therefore, no one will feel its need! ;)

 

Cheers,

 

Gio

 

[littlemiami]

This caught my eye the other day...

"The proposed order outlines a number of conditions that will directly benefit consumers by bringing more competition to the broadband marketplace. If the conditions are approved by my colleagues, 12.5 million customer locations will have access to a  competitive high-speed fiber connection. This additional build-out is about 10 times the size of AT&T’s current fiber-to-the-premise deployment, increases the entire nation’s residential fiber build by more than 40 percent, and more than triples the number of metropolitan areas AT&T has announced plans to serve."

 

A couple random thoughts -

I understand that the near-term "economics" don't make sense for fiber-to-the-premise buildouts. That said, did the "economics" make sense when the cable cos upgraded their networks in the 90s-00s? See quote below.

"So the Robertses took their cable systems digital and turned them into tomorrowland: 200 channels, high-speed Internet access, video on demand, the works. It cost $5 billion and severely tested the company. "We had to borrow every cent when we began the rebuild in 1995," says treasurer John Alchin."

 

One other question I'm trying to address is the margin and returns difference due to population density (i.e. are the tech-savvy, growing communities that AT&T is cherry picking some of the legacy cable cos highest return markets?).

[giofranchi]

I understand that the near-term "economics" don't make sense for fiber-to-the-premise buildouts. That said, did the "economics" make sense when the cable cos upgraded their networks in the 90s-00s? See quote below.

"So the Robertses took their cable systems digital and turned them into tomorrowland: 200 channels, high-speed Internet access, video on demand, the works. It cost $5 billion and severely tested the company. "We had to borrow every cent when we began the rebuild in 1995," says treasurer John Alchin."

 

Well, I guess when the time finally comes to build a new fiber infrastructure, Charter will be among the first ones to recognize the need and to seize the opportunity. If they truly are the outstanding operators I think they are, they won't be sleeping at the wheel.

Until then it might go on enjoying strong cash flow and growing through acquisitions.

 

We will see! ;)

 

Gio

 

[oddballstocks]

Not sure why the build cost is estimated to be so high for fiber.  Around here they didn't put it in the ground, they put it on telephone poles with all of the other cables.  The neighborhood was wired in a few days.  The cost would be two guys making $40/hr plus the cable itself.

 

Agreed with the 640k comment.  In 2006 we could have never imagined a use for LTE speeds, now they're saturated with people streaming music and video constantly.

 

What I'd LOVE to see is local townships eliminate their cable monopoly provisions.  That's a big issue, cable has a legal monopoly in many cities.  They inked these deals back in the 80s and they're still around.  The problem is consumers lose out because there's no choice.  Most consumers have a choice, a cable company or the telephone company, that's it.  These guys have an oligopoly, they "compete" but at a level that ensures both are profitable.

 

We are our own worst enemy here in the US: http://www.wired.com/2013/07/we-need-to-stop-focusing-on-just-cable-companies-and-blame-local-government-for-dismal-broadband-competition/

[ni-co]

Overview of the Malone cable and media empire, covers many of his companies (not just LBRDA):

 

http://www.jnvestor.com/malone/

 

Very good post! :)

 

+1!

I can only imagine the insane amount of research that went into this post and I particularly like Jules's writing style. I would go so far to say that this is the only post you need to read to invest in any of the Malone companies…

[giofranchi]

What I'd LOVE to see is local townships eliminate their cable monopoly provisions.  That's a big issue, cable has a legal monopoly in many cities.  They inked these deals back in the 80s and they're still around.  The problem is consumers lose out because there's no choice.  Most consumers have a choice, a cable company or the telephone company, that's it.  These guys have an oligopoly, they "compete" but at a level that ensures both are profitable.

 

As I was saying then, the biggest risk is a regulatory risk…

But I see Charter as a special situation investment: an investment in LBRDA now is a bet that the mergers with TWC and Bright House go through successfully. Period.

If this happens, later we could come back here and discuss about the future of the cable industry ;)… This is anyway what Malone had to write in his 2014 AL:

In closing, we are excited to see Liberty return to its ancestral roots, the US cable industry. We feel very fortunate that Liberty Broadband not only identified the “right horse to back” but also had the opportunity to acquire such a meaningful stake in May 2013. While the regulatory environment in which the US cable industry exists continues to evolve, we believe the fundamentals of the industry remain extremely favorable.

Emphasis mine.

 

Cheers,

 

Gio

 

[giofranchi]

I would go so far to say that this is the only post you need to read to invest in any of the Malone companies…

 

Probably, it has already been posted here (or in the Charter thread), but I am posting it again because I think it is the most exaustive write-up about Charter I have seen:

 

https://oraclefromomaha.wordpress.com/2015/06/10/charter-communications-time-warner-cable-betting-big-on-the-us-cable-industry/

 

Gio

[muscleman]

I would go so far to say that this is the only post you need to read to invest in any of the Malone companies…

 

Probably, it has already been posted here (or in the Charter thread), but I am posting it again because I think it is the most exaustive write-up about Charter I have seen:

 

https://oraclefromomaha.wordpress.com/2015/06/10/charter-communications-time-warner-cable-betting-big-on-the-us-cable-industry/

 

Gio

 

You have to take a grain of salt as usual with this guy's optimistic calculations. He was way off the mark when he wrote a bullish article about Auto Canada.

I think this guy's main flaw in this CHTR article is about the stock buyback. He assumed $210 per share to buyback all the shares from leveraging up the post merger company and says that the stock price would be $600 after the buyback in 3 years. That is nonsense. If the stock price will be $600 in 3 years, how can you possibly execute such a large buyback program at $210 right now?

[giofranchi]

You have to take a grain of salt as usual with this guy's optimistic calculations.

 

Of course you have to… But don’t miss the good in that write-up, because of some calculations which appear to be too optimistic! ;)

 

Cheers,

 

Gio

 

[folivera13]

It could easily take 2-3 years (depending where the stock is) for CHTR to begin a buyback program. Rutledge is gonna be investing heavily in the beginning.

[muscleman]

It could easily take 2-3 years (depending where the stock is) for CHTR to begin a buyback program. Rutledge is gonna be investing heavily in the beginning.

 

Yes. I totally agree with both of you and Gio.  :)

There will be no buybacks for quite a while. On the other hand, Comcast is one of the most hated companies in the US. If Rutledge can make CHTR's services better, I think they will be able to get a lot of customers from Comcast. That hasn't been in his analysis. But I just need to be approximately right to buy this.

[Liberty]

On the other hand, Comcast is one of the most hated companies in the US. If Rutledge can make CHTR's services better, I think they will be able to get a lot of customers from Comcast. That hasn't been in his analysis. But I just need to be approximately right to buy this.

 

What do you mean CHTR will get customers from Comcast? Cable companies don't have much overlap, and I don't think they'll go overbuild in comcast territory..

[Liberty]

Presentation on LBRDA:

 

http://valuexvail.com/presentations/#!mg_ld=1101

[Liberty]

Charter Q2:

 

http://finance.yahoo.com/news/charter-announces-second-quarter-2015-120000833.html

[EliG]

How do you guys decide what to own, LBRDA/K or CHTR?

 

Since the deal announcement on May 26, CHTR is +9.3%, LBRDA is +7.4%, LBRDK is +5.7%. Of course, two months is too short a period to draw any strong conclusions. But this seems to be a common theme. Liberty entities tend to underperform the underlying assets. I've seen a flurry of tweets on this subject in the last few days.

 

I own LBRDK and I'm having second thoughts. Is the extra complexity of LBRD worth it? I strongly believe in the KISS principle. Simplicity is a virtue. The logical follow-through would be to swap LBRDK for CHTR.

[Liberty]

How do you guys decide what to own, LBRDA/K or CHTR?

 

Since the deal announcement on May 26, CHTR is +9.3%, LBRDA is +7.4%, LBRDK is +5.7%. Of course, two months is too short a period to draw any strong conclusions. But this seems to be a common theme. Liberty entities tend to underperform the underlying assets. I've seen a flurry of tweets on this subject in the last few days.

 

I own LBRDK and I'm having second thoughts. Is the extra complexity of LBRD worth it? I strongly believe in the KISS principle. Simplicity is a virtue. The logical follow-through would be to swap LBRDK for CHTR.

 

The question you need to answer is: Do you believe that Malone can do some value-creating capital allocation/financial engineering on top of CHTR? If not, then you should own CHTR directly if that's what you want to own.

 

A couple months is too short to judge, as you pointed out.

[EliG]

The question you need to answer is: Do you believe that Malone can do some value-creating capital allocation/financial engineering on top of CHTR?

 

Right. What are your thoughts on this? :)

 

Do you see any real opportunities for value creation in LBRD? Or is it just blind faith in Malone?

[jay21]

How do you guys decide what to own, LBRDA/K or CHTR?

 

Since the deal announcement on May 26, CHTR is +9.3%, LBRDA is +7.4%, LBRDK is +5.7%. Of course, two months is too short a period to draw any strong conclusions. But this seems to be a common theme. Liberty entities tend to underperform the underlying assets. I've seen a flurry of tweets on this subject in the last few days.

 

I own LBRDK and I'm having second thoughts. Is the extra complexity of LBRD worth it? I strongly believe in the KISS principle. Simplicity is a virtue. The logical follow-through would be to swap LBRDK for CHTR.

 

The question you need to answer is: Do you believe that Malone can do some value-creating capital allocation/financial engineering on top of CHTR? If not, then you should own CHTR directly if that's what you want to own.

 

A couple months is too short to judge, as you pointed out.

 

That's one part of it (and he's done it twice now already in the few months since issuance). Second is there's a certain pt where the discount is going to be too wide and won't widen further.

 

Basically, you are saying that the discount to NAV widened and you want to sell because it's a worse value? It's actually a better value.

[giofranchi]

Or is it just blind faith in Malone?

 

I take this one! ;)

 

Cheers,

 

Gio

[Liberty]

The question you need to answer is: Do you believe that Malone can do some value-creating capital allocation/financial engineering on top of CHTR?

 

Right. What are your thoughts on this? :)

 

Do you see any real opportunities for value creation in LBRD? Or is it just blind faith in Malone?

 

I think there's a difference between having faith in him and blind faith in him :)

 

He's got the track record and he's talking about his strategy enough that the faith doesn't have to be blind ;)

 

The way I see it, if the NAV discount gets too big he'll borrow money cheaply and do buybacks or something like that. I don't expect it to be a problem long term.

[fa21212]

Liberty Broadband is superior to Charter in that you will eventually capture the discount. If you look at Malone's previous history with DirecTV and Discovery, he spun off the underlying shares in a tax efficient manner. Similarly, what will likely happen with Liberty Broadband is it will get acquired for shares at NAV from Charter so you will effectively receive Charter shares for your Liberty Broadband shares. The reason it hasn't happened yet is because there's usually a 2 year cooling off for tax purposes. In effect, if Charter acquired the company today, it would be a taxable event for Liberty shareholders. In contrast, if they acquire two years after the November spin date, it's tax free. In essence, if you believe Charter can compound at 20% a year over the next 5 years, with Liberty Broadband you may end up getting a 30% return year 1 (given that you capture the discount) and then thereafter you get your 20% a year with Charter shares. Liberty Broadband should actually outperform Charter given the discount but also given a margin loan of roughly $300 million that you're paying a small Libor spread for. In this case given the hard catalyst in about a year or so, a bigger discount definitely makes the investment a lot more juicy than a smaller discount.

[folivera13]

Also- I find it hard to believe that Coatue, JANA and Soroban would invest at NAV in the C shares without the eventual prospect of exiting the investment at NAV (probably via swap for CHTR shares).  Maybe they were out-negotiated by Maffei and Malone, but I think all shareholders in Broadband will eventually realize the NAV via the share swap.

[jay21]

Also- I find it hard to believe that Coatue, JANA and Soroban would invest at NAV in the C shares without the eventual prospect of exiting the investment at NAV (probably via swap for CHTR shares).  Maybe they were out-negotiated by Maffei and Malone, but I think all shareholders in Broadband will eventually realize the NAV via the share swap.

 

You don't need to exit at NAV to realize a return greater than CHTR. It's a headwind for sure, but one that can be overcome. I would be surprised if their time frame was medium term (3-5 years) and they didn't consider a NAV discount at exit.

[fa21212]

You're right. Coatue, JANA, and Soroban aren't stupid. They didn't have to invest in the entity. The only way they could invest meaningful sums in a potential combined entity with no deal risk was in this structure. Malone wins because he effectively continues to retain control since the C shares don't have any voting power. The hedge funds win because they can invest hundreds of millions of dollars at capital at high rates of return with no deal risk (this would not be available simply by buying Charter since you would be taking on deal risk and this was pre-deal so there was also the risk that Charter's stock price would pop and you wouldn't be able to invest at the price they were getting with Liberty Broadband. Given how much dollars these guys are investing, the limited float and liquidity of Liberty Broadband makes it uninvestable).