GLIBA/LVNTA - GCI Liberty

[Foreign Tuffett]

Has anyone looked at the exchangeable debentures attributed to Liberty Ventures? I'd like to understand the actual advantage they hold from a cash flow and PV of asset/liability perspective and additionally they're trading between 50-60 cents on the dollar yielding around 10% which makes them seem pretty cheap. Does anyone know why this is the case?

 

Thanks

 

The purpose (from Ventures' perspective) of the exchangeable debentures is to push all tax liabilities as far into the future as possible. The debentures allow for tax deductions over and above their actual cash coupons every year, but upon maturity this reverses and results in a massive tax liability for Ventures.

 

It is unclear to me what the tax implications of these would be for the holder.

 

 

[namo]

Has anyone "participated" in the split-off? It's my first split-off, so I could be mistaken, but I thought the point was to exchange shares of LVNTA with shares of the new Liberty Expedia.

 

However, I don't think my broker (Interactive Brokers) had any corresponding Corporate Action going on (I admit I forgot to double-check before Friday, which might have been the deadline).

 

If someone more experienced with split-off cares to enlighten, I'd appreciate it.

 

edit: OK, it seems like a mandatory corporate action, so everybody gets the new shares in proportion... That's what I initially thought.

[scorpioncapital]

I see something LVNTA.OLD at IB. Probably the distribution into LVNTA/LEXEA will occur soon but don't see it today.

 

 

[chesko182]

does anyone have a sense of how the split off turned out?

 

I don't see anything reflected in my account, which I think should take a couple of days. But I did notice LVNTA trading down 5% at 37 and LEXEA trading around 42. Shouldn't have LVNTA sold off by 40% to adjust for the splitoff? If not value realization will be spectacular here.

 

Let me know your thoughts.

 

[scorpioncapital]

There's no free lunch, only a discounted lunch :)

Look at the share outstanding of each entity, my theory is they did it this way to maintain roughly similar prices to before because they didn't like the large few day drops when people who had no clue just saw a big drop and sold knee-jerk (this is just a theory though).

 

 

[Shooter MacGavin]

LVNTA seems to be a good way to own a levered bet on (already levered) CHTR, and although I know team Liberty will continue to defer taxes on every holding as long as possible, i'm trying to figure out how much of the current NAV discount is due to accrued tax liabilities and how much is other structural reasons?

 

anyone have a sense for what the accumulated deferred tax liabilities at LINTA is for the various sub-holdings?  I don't think it's very clear from the LINTA 10-q and 10-k's to me.

 

1) LBRDA/K ,  - is it current price ($73) - $56.23 at 35%? 

2) CHTR - (exchange of TWC ..which was from a long time ago, so what's the cost basis here? I tried going back)

 

and then at LBRDA/K?  They initially bought CHTR around 2011 at a very low cost base, and then issued stock to LINTA to buy $2.4B more.  Anyone know what the associated deferred tax liability is?  (Is it as simple as just figuring out the average cost basis and taxing it at 35%)

 

Also they've spoken about the structure for the exchangeable debentures providing them tax deductions over the 1.75% coupon.  Is this basically from the implied cost of the $750 value of CHTR when it converts at $342 minus the cost at the time of issue? Can someone familiar with this please explain it to me?

 

How do you guys think about the deferred tax liabilities generally? Team Liberty never seems to address deferred tax liabilities in their NAV calcs, and I know they'll try to defer it forever...but I think as investors we need to think about them when deciding between owning CHTR directly (or Sirius or whatever) and LBRDK or LVNTA for example. 

 

Thanks for your insights!

[thefatbaboon]

shooter,

 

have you looked through the recent investor day slides?  If not, you should.

[Shooter MacGavin]

shooter,

 

have you looked through the recent investor day slides?  If not, you should.

 

I did yes.  I don't think they subtract the deferred tax liabilities from their NAV.  Presumably they are operating under the assumption that they will always figure out a way to defer taxes.  But if I were to choose between buying Charter outright or some proxy for it through broadband or ventures (let's ignore the leverage at LVNTA for the moment), then I would naturally discount the proxy if it had an associated deferred tax liability with it.

 

if I'm thinking about it incorrectly, please let me know. 

 

 

[thefatbaboon]

I meant that the presentation and appendices would help with your understanding of the exchangeables. 

 

On the capital gains...In forty years Malone has not done something like that...and if he wasn't tempted to do it with Trip or Expedia it would be simply incredible if he did it with Charter and Broadband.  Either way, if you probability weight the DTL of the cap gains it's going to be immaterial to a valuation.

 

So, I'd respectfully suggest you focus on the exchangeables because improving your understanding and then deciding on your valuation of them can have a very big value swing. Then decide if you are going to look through LBRD to ascribe a proportionate % of LBRD's CHTR shares to LVNT instead of LBRDK. All the other assets and liabilities are fairly simple/small. 

[ABM]

Any thoughts/speculations on why they did not repurchase any stock in Q4 or in January 2017? 

 

Most I can guess is a pending need for the cash to fund M&A or they believe the underlying assets are expensive (e.g. CHTR) even when considering the substantial discount to NAV using fair value approach for assets. 

 

On the CHTR being expensive argument, you can find support in the fact they collared about 1/3 or their economic exposure through a exchangable bond offering in Q3/Q4 '16 timeframe. 

 

At current levels, I still see low double digit returns to CHTR's equity over the next 5 years using relatively modest growth assumptions of 6% for EBITDA, a normalization of the cash tax rate to 38%, and 4 turns of debt along the way.  Seems compelling enough to buy more given the discount to NAV at LVNTA. 

 

I am guessing they have a higher expected return project to fund on the horizon. 

[jay21]

 

 

On the CHTR being expensive argument, you can find support in the fact they collared about 1/3 or their economic exposure through a exchangable bond offering in Q3/Q4 '16 timeframe. 

 

 

 

Are you sure it wasnt just rolling old TWC exposure into CHTR post acquisition?

[ABM]

 

I thought it was more of a maturity than a roll but not sure. 

[thefatbaboon]

Any thoughts/speculations on why they did not repurchase any stock in Q4 or in January 2017? 

 

Most I can guess is a pending need for the cash to fund M&A or they believe the underlying assets are expensive (e.g. CHTR) even when considering the substantial discount to NAV using fair value approach for assets. 

 

On the CHTR being expensive argument, you can find support in the fact they collared about 1/3 or their economic exposure through a exchangable bond offering in Q3/Q4 '16 timeframe. 

 

At current levels, I still see low double digit returns to CHTR's equity over the next 5 years using relatively modest growth assumptions of 6% for EBITDA, a normalization of the cash tax rate to 38%, and 4 turns of debt along the way.  Seems compelling enough to buy more given the discount to NAV at LVNTA. 

 

I am guessing they have a higher expected return project to fund on the horizon.

 

I was surprised by this also and had assumed that quickly buying in 20% of the LVNTA float (taking advantage of the high post-splitoff volume) had been the reason for selling the new $750m CHTR convertible struck at $341.  Seemed ingenious & would have been like selling CHTR forward at $341 and using the money to simultaneously buy back CHTR at effectively less than $200 per share.

 

Perhaps as you say they are not thinking like this, and they are looking at the LVNTA balance sheet as a source of funds for new ventures.  Personally I'd prefer they didn't.  There is too much CHTR in LVNTA to be diversified away meaningfully and it make more sense to just accept that LVNTA is now a CHTR vehicle and maximize the value on that basis.

 

There's another possibility, that they thought it inappropriate to repurchase stock when such a significant split-off had been effected mid quarter and LVNTA had not reported any results on an ex-Expedia basis.

 

 

[Jurgis]

I haven't looked at this in depth recently. Does LVNTA have higher discount to underlying CHTR value than LBRDA?

[thefatbaboon]

I haven't looked at this in depth recently. Does LVNTA have higher discount to underlying CHTR value than LBRDA?

 

Yes

[ABM]

Any thoughts/speculations on why they did not repurchase any stock in Q4 or in January 2017? 

 

Most I can guess is a pending need for the cash to fund M&A or they believe the underlying assets are expensive (e.g. CHTR) even when considering the substantial discount to NAV using fair value approach for assets. 

 

On the CHTR being expensive argument, you can find support in the fact they collared about 1/3 or their economic exposure through a exchangable bond offering in Q3/Q4 '16 timeframe. 

 

At current levels, I still see low double digit returns to CHTR's equity over the next 5 years using relatively modest growth assumptions of 6% for EBITDA, a normalization of the cash tax rate to 38%, and 4 turns of debt along the way.  Seems compelling enough to buy more given the discount to NAV at LVNTA. 

 

I am guessing they have a higher expected return project to fund on the horizon.

 

I was surprised by this also and had assumed that quickly buying in 20% of the LVNTA float (taking advantage of the high post-splitoff volume) had been the reason for selling the new $750m CHTR convertible struck at $341.  Seemed ingenious & would have been like selling CHTR forward at $341 and using the money to simultaneously buy back CHTR at effectively less than $200 per share.

 

Perhaps as you say they are not thinking like this, and they are looking at the LVNTA balance sheet as a source of funds for new ventures.  Personally I'd prefer they didn't.  There is too much CHTR in LVNTA to be diversified away meaningfully and it make more sense to just accept that LVNTA is now a CHTR vehicle and maximize the value on that basis.

 

There's another possibility, that they thought it inappropriate to repurchase stock when such a significant split-off had been effected mid quarter and LVNTA had not reported any results on an ex-Expedia basis.

 

Very interesting theory and it is right up Malone's alley so only leaves me more perplexed.  I consider LVNTA one of the better values in US listed equities and by all accounts Malone has not reinforced my opninion through utilizing the large cash balance. 

 

Another theory could be they may be view LVNTA's as a source of liquidity for QVCA if things deterioate even further given the leverage levels at QVC.  I know it is complicated but Malone controls both entities so they could recollapse or QVC would issue shares to LVNTA to pay off some debt if things get out of hand.

[scorpioncapital]

I don't think QVCA or LVNTA are going to have any business dealings. If anything, LVNTA might be spun-off to protect it as a independent company rather than a tracker. But even that may be unlikely.

LVNTA also has some nice assets like TREE and ILG, a sort of Internet venture incubator alongside the main event of Charter. This makes it a tad more interesting than Charter.

[thefatbaboon]

Any thoughts/speculations on why they did not repurchase any stock in Q4 or in January 2017? 

 

Most I can guess is a pending need for the cash to fund M&A or they believe the underlying assets are expensive (e.g. CHTR) even when considering the substantial discount to NAV using fair value approach for assets. 

 

On the CHTR being expensive argument, you can find support in the fact they collared about 1/3 or their economic exposure through a exchangable bond offering in Q3/Q4 '16 timeframe. 

 

At current levels, I still see low double digit returns to CHTR's equity over the next 5 years using relatively modest growth assumptions of 6% for EBITDA, a normalization of the cash tax rate to 38%, and 4 turns of debt along the way.  Seems compelling enough to buy more given the discount to NAV at LVNTA. 

 

I am guessing they have a higher expected return project to fund on the horizon.

 

I was surprised by this also and had assumed that quickly buying in 20% of the LVNTA float (taking advantage of the high post-splitoff volume) had been the reason for selling the new $750m CHTR convertible struck at $341.  Seemed ingenious & would have been like selling CHTR forward at $341 and using the money to simultaneously buy back CHTR at effectively less than $200 per share.

 

Perhaps as you say they are not thinking like this, and they are looking at the LVNTA balance sheet as a source of funds for new ventures.  Personally I'd prefer they didn't.  There is too much CHTR in LVNTA to be diversified away meaningfully and it make more sense to just accept that LVNTA is now a CHTR vehicle and maximize the value on that basis.

 

There's another possibility, that they thought it inappropriate to repurchase stock when such a significant split-off had been effected mid quarter and LVNTA had not reported any results on an ex-Expedia basis.

 

Very interesting theory and it is right up Malone's alley so only leaves me more perplexed.  I consider LVNTA one of the better values in US listed equities and by all accounts Malone has not reinforced my opninion through utilizing the large cash balance. 

 

Another theory could be they may be view LVNTA's as a source of liquidity for QVCA if things deteriorate even further given the leverage levels at QVC.  I know it is complicated but Malone controls both entities so they could recollapse or QVC would issue shares to LVNTA to pay off some debt if things get out of hand.

 

While we are speculating....another theory concerns the uncertainty over the Republican tax reform and mooted changes to the deductibility of interest.  The situation where LVNTA is most undervalued is where one assumes the Exchangeables continue to create tax shield cash flow (and those cashflows earn a decent return between the time they are received and true-up with the IRS at the end).  If interest loses its deductibility then the best case disappears as a possibility.  And in a worst case scenario the tax law changes might cause some kind of disruption which forces early repurchase of the Exhangeables and early settlement of the existing DTL.

 

Along the line of what you guys mention...there's also the possibility that they want to retain some financial flexibility while they study a possible "smoosh" which might require buying out early or sweetening terms on some QVC or LVNTA debentures.  There was talk at the November meeting of how it would be logical to get the LBRDK/CHTR stake rationalized in a single entity and the process of doing this might require the use of QVC as an ATB.

 

[giofranchi]

Does anyone have a SOTP analysis of LVNTA? I have an hard time finding out what its NAV might be today. Thank you!

 

Cheers,

 

Gio

 

[yitech]

Liberty Interactive Enters into Agreement to Acquire General Communication, Inc., Combine with Liberty Ventures Group and Split-off Combined Company from Liberty Interactive

http://www.businesswire.com/news/home/20170404005774/en/

[Liberty]

Liberty Interactive will then effect a tax-free separation of its controlling interest in the combined company (to be named GCI Liberty, Inc. (“GCI Liberty”)) to the holders of Liberty Ventures common stock in full redemption of all outstanding shares of such stock. […]

This transaction will ultimately create a standalone Liberty Ventures, reducing the tracking stock discount and enabling an asset-backed QVC Group […]

“This transaction with Liberty Interactive brings GCI back full circle, as GCI was part of TCI until 1986. […]

Upon completion of the contribution of Liberty Interactive’s entire equity interests in Liberty Broadband, Charter, LendingTree, Inc., together with the Evite operating business and certain other assets and liabilities (including, subject to certain conditions, the FTD Companies, Inc. equity interest), Liberty Interactive will acquire a 77% undiluted equity interest and 84% undiluted voting interest in GCI Liberty. […]

The split-off of Liberty Interactive’s interest in GCI Liberty is expected to be completed by the first quarter of 2018.

[chesko182]

is anyone selling at these levels? and if so, what is the thought process? Is there any additional upside here from an NAV/catalyst standpoint?

[Jurgis]

Thanks thefatbaboon. I shifted from LBRDA to LVNTA last couple weeks.

 

Now will have to think what to do next.  8)

[scorpioncapital]

I notice some assets are going back to QVC from Ventures like IILG shares? Or is that a temporary move before the spin-off of Ventures as standalone?

[ABM]

I posted this in the GNMCA thread but it likely belongs here.  Apologies!

 

Some questions / thoughts on questions

 

1) After reading the K for GNCMA, I realized the "Wireless" segment is different then what many of you may think.  It is a wholesale business that sells capacity on its network to other carriers and notes Vz is its largest customer.  The "retail" wireless business is included in the Wireline segment.  That being said, look at the segment disclosures to see the margins in the Wireless segment (>60% EBITDA margins) while cap ex only consumers about 20%-30% of that EBITDA implying a very high FCF conversion for this business.  Diamond in the rough?

 

Btw, Company hasn't paid material cash taxes in about a decade and have $270M in NOLs.

 

I am trying to think about how this maybe a strategic asset given its the only network available in Alaska, apparently, so Vz and T have no choice but to lease space on their assets to service their own customers.  I realize there is some accounting noise here around deferred payments that are amortized on the P&L for cash received in prior periods while other contracts are rolling off but if this is strongly position asset then it may be used as leverage to negotiate with Vz in the US via CHTR.  Worth digging into to understand more, imo

 

3) Upside from improvement in capital efficiency and margins given the pivot away from growth to operations.  The CEO sounded almost exhausted on the call after recounting the decade long M&A boom so may be a lot of low hanging fruit as they shift to integration.

 

4) This is about as levered as it gets.  Round numbers, LVNTA paid 8.5x EBITDA and paid 5.6x of that with debt (including assumption and treating preferreds as debt).  This means they only put up about 35% of EV so even at a 3% or 4% FCF yield with 5% EBITDA growth will allow them to leverage that growth (remember target 5x debt target) delivering a mid to high single debt yield on such a small equity base.  I see a 14% IRR on the investment assuming 4% FCF yield +5% growth +5% yield from debt issuance spent on buybacks with a 8x exit and 5x of debt.  Trying to be conservative (irony appreciated given the leverage levels employed)

 

5) This appears to be a major tailwind for QVC as it now retains the interest tax shield on the exchangeables rather than paying it to LVNTA.  This could add $130M FCF in nearterm growing to $400M recurring in a few years.  On a base of say $950M FCF, this is significant for the IV of the business. 

 

3) I spoke with IR today and they implied a holistic approach was used to evaluate the merits of the transaction looking at total value created across LVNTA and QVCA.  So even if its dilutive to near term NAV/share at LVNTA it reduces complexity narrowing the discount and the leverage benefit to QVCA plus higher FCFs should create value over there.  In other words, sum of the parts vs premium paid for the acquisition justifies it. 

 

Some Math

LVNTA is now the nearly the most levered it has ever been as defined by tangible FMV assets / market cap, with pro-forma assets per share of $90 on a market PPS of $50 implying 1.8x leverage ratio. I asked the IR about this and they implied that growth in the underlying assets is considered  reliable so increasing leverage to benefit the equity makes sense. 

 

I expect the $500M raised from the LBRDK margin loan will be used to repurchase LVNTA stock combined along with the $600M in FCF and incremental debt that GNMCA should generate over the next 5 years.  If NAV discount remains 20% then we should see repurchases reduce the share count by about 20% leading to a high teens IRR on investment.  Ideally, and typical Malone, I would expect for them to exhaust all balance sheet capacity and shrink the equity before they work on collapsing the discount, which is likely a 3-5 year event (ex. a Vz bid) leading to >20% IRR due to LVNTA discount and LBRD discounts collapsing from CHTR merger.