DTV - Directv

[cmattporter]

I couldn't find DTV on the board so I posted anyways.

 

DTV has intrigued my curiosity for a noticeable, but hard to grasp reason. Taking a step back, earnings seem straight forward and continue to show growth. The kicker is in the balance sheet and cash flow statement. The equity has taken a nose dive. $-4.3B as of June 2012, $-3.1B for 2011, and $-200M for 2010. Attempting to analyze what the hell has grabbed BRK's attention, the cash flow might help. DTV is buying back quite a bit of shares and issuing a smaller proportion of bonds. I'll admit this is over my head. I can only assume DTV is buying back it's shares to make the equity look so bad.

 

My question to anyone knowledgeable enough is to explain what is going on. Possibly in a numerical calculation to end at the now stated $-4.3B in DTV's equity.

 

Thanks,

 

CMP

[cayale]

As I see it the US business is all about retention and cash flow management, the Mexico and Central/South America business is growing like crazy and appears to be competitively advantaged (~20% of the total business today, if I remember correctly, but growing 40%+) and it trades at about 11x this year's FCF.  The negative equity is a result of buying back shares and they use and manage debt leverage to do this.  To me the ex-US business is the gem, the question is if and how much of a decline rate is there in the US going forward.  I like what I have read from management, but had trouble pulling the trigger in the low-40s.

[finetrader]

this can happen when you have a high ROE and you do lots of buyback

[LC]

They also issued quite a bit of debt from 2010 to 2011:

 

http://i.imgur.com/K4Hbf.png

[Gopinath]

Basically you don't need equity to run this business. The business makes so much money on total capital invested, they borrow all cash from bond holders & managing negative working capital. After the interest payment, the money is invested in growing revenue streams(latin america) & buying back stocks. The only question we have to ask is how likely they are able to make out sized returns on capital invested in the future. If the answer is very likely, this is an easy investment. Some intelligent people think that is very likely. Berkshire owns more than 1.5B worth & Long leaf owns 600M worth of DTV.

[Munger_Disciple]

What do you think of the effect of "chord-cutters" on DTV's future? Young people watch everything on the internet. DTV currently does not offer broadband unlike cable.

[cayale]

What do you think of the effect of "chord-cutters" on DTV's future? Young people watch everything on the internet. DTV currently does not offer broadband unlike cable.

 

I think it's an ongoing issue in the US. People like dtv for the sports content (nfl package, etc.) but the price of that content is ever-rising forcing up the cost for consumers, making cord-cutting an ever more feasible proposition. And they don't sell much of a broadband solution. Dtv seems uniquely adept at segmenting and delighting their customers. Again, I think the question is how well can they manage the US while the rest of the world starts to become a significant part of the business.

[Munger_Disciple]

If cord-cutting becomes a problem in the US, it may also become a problem in Latin America a few years later if the cost of content keeps rising. It seems to me that if DTV needs to offer broadband, it may mean more capex in the future. I recall they used to offer AT&T DSL bundle with Directv, but DSL is too slow for most people. Also, AT&T and Verizon have their own interactive digital video services now (U-Verse and FIOS).

[ItsAValueTrap]

Technology may be a huge factor here?  Technology will dramatically improve what you can do with coaxial cables.  We're going to see that companies will be able to push more and more stuff over those coaxial cables, whether it's Internet traffic or digital television.  Eventually we will hit a point where it's feasible to stream high quality television over cable.  Or perhaps people will like having a lot of digital television channels being pushed into their homes.  Or perhaps people will prefer to spend more time online (e.g. Youtube, social networking) versus watching television.

 

In any scenario, I think this highly favours the owners of coaxial cables over satellite.  DSL will come along for the ride too but usually DSL doesn't have as much bandwidth as cable.

 

2- These guys are also competing against fibre to the home.  I think John Malone was saying that the cap rates don't make any sense for that (at least in the US where population density is low)... but companies like Verizon are doing it anyways and this will present problems for everybody else in the TV/Internet business.

 

3- The Internet and things like Youtube could put a huge dent into the TV business, much like what airplanes did to railroads.  (???)

 

So if you look at John Malone, who has a very good track record at investing in content producers and cable companies and in DTV, you will see that he is not so hot on DTV as he collared the DTV shares (it's a way of selling the shares through derivatives without triggering taxes; the net effect is very similar to selling the shares outright, though not entirely the same).

 

[DCG]

I used to work for Directv in their corporate office, and think the analysis in this thread is pretty spot on. Don't have a lot of time to post right now, but this is a well-run company with a lot of very smart people in top positions. Their latin america business is growing strongly, but not having an internet access offering is a downside for customers. They have a stronghold on the B2B market, due to their sports offerings. Their NFL contract ends in 2014, and not renewing that contract could have a negative effect on their business (on the other site, renewing it could be a strong catalyst or the stock).

[val740]

So if you look at John Malone, who has a very good track record at investing in content producers and cable companies and in DTV, you will see that he is not so hot on DTV as he collared the DTV shares (it's a way of selling the shares through derivatives without triggering taxes; the net effect is very similar to selling the shares outright, though not entirely the same).

 

ItsAValueTrap,

 

Can you give more info/detail on how and when Malone collared his DTV shares? My understanding is that he holds 3% of the equity. (http://www.gabelli.com/images/blog/JohnMalone.pdf)

 

Thanks.

[ItsAValueTrap]

Hmm actually I'm not sure how John Malone feels about DirecTV.

 

A "long" time ago, they used the equity collar to buy more shares of DTV.  (Not as a way of selling them as I suggested.)

http://ir.libertymedia.com/releasedetail.cfm?ReleaseID=576412

 

Sometime after that:

- Malone gave up trying to have control of DTV.  He left DTV's board (along with Maffei).  Sometimes investors leave the board of directors because they plan on selling their shares.  If they were there for the long term, they usually want to be on the board so that the company doesn't do anything stupid.  Cable Cowboy details Malone's exasperation with AT&T as he did not like what the CEO was doing but he had no control over AT&T and saw his AT&T shares plummet in value.

- B shares in DTV were swapped for A shares, at a premium.  (LMDIA / Liberty Media owned B shares in DTV.)  Again, giving up control.

- DTV shares were spunoff from Liberty Media (LMDIA).  So LMDIA became Liberty Starz (LSTZA) and shares of DTV.

 

[Yours Truly]

Anyone have a position in this company?

 

It's my biggest position currently due solely on the share buyback history, management competency and Latin American growth.  Also, it also helps that Ted Weschler is a champion of DTV where had 25% of his portfolio previously in the company and is now doing the same at Berkshire.

 

The big key is the Latin American growth where the infrastructure for traditional fiber cable isn't there and will not be in the future due to sheer cost.  The catalyst also comes in 2014/2016 where Brazil will be hosting the World Cup and Olympics respectively. 

 

Management has been able to leverage the balance sheet by borrowing at low long-term rates in favour of purchasing shares at the tune of $100 mil shares a week.  Its a great strategy in taking advantage of the persistent low rates which will hold to at least 2014.  Since 2006, overall share count has been reduced by 55%!

 

Saturation in the US market, threat of cable cutters and highly leveraged balance sheet are the perceived negatives hence the low current P/E multiple. 

 

Like Buffett says, I hope the share price keeps going down so that the company can accumulate shares hand over fist as a net-buyer.

[ItsAValueTrap]

VIC has various writeups on DTV:

http://www.valueinvestorsclub.com/value2/Idea/ViewIdea/74496

 

2- Maybe this is a good long... I may be mistaken for thinking otherwise.

 

3- Some of the call options look cheap.  Even more so considering how leveraged this company is.

[Guest rimm_never_sleeps]

Malone didn't own enough to have defacto control. and there is also this.

http://paidcontent.org/2010/04/07/419-libertys-malone-out-as-directv-chairman-maffei-leaving-board-too/

 

so I would not read anything into it when Malone gave up control. it was pretty much mandated by fcc due to a conflict with his other company, Liberty Global in Puerto Rico. Malone loved DTV. He also got to handpick the CEO. They have pretty much followed the Malone playbook of shrinking the market cap as long as it sells under PMV. dtv is probably under leveraged for the kind of business it is at between 2 and 3 times net debt/ebitda. The one thing Malone would have done different is he might have turned DTV LA into a tracking stock with the ultimate goal to spin it off. that would have made reg DTV a very attractive acquisition candidate for someone like ATT.

[Guest hellsten]

Weitz Funds on DTV:

https://www.weitzfunds.com/resources/documents/Literature_and_Publications/About/News/Analyst%20Corner%209.30.12.pdf

 

What’s Old is New Again

Long time shareholders will recall our previous ownership of DIRECTV as part of our long history of investing

in pay TV providers.  We have long found the economics of the industry to be attractive: customers pay

monthly for a service they are extremely reluctant to terminate (even in difficult economic environments),

creating a predictable and growing stream of cash flows.  Adding incremental subscribers to a network

requires little extra investment and it is largely success-based (e.g. set top boxes for a newly acquired

customer).  As one of the largest providers in the U.S., DIRECTV has a better bargaining position than most

when it comes to securing content for its customers, and by utilizing a consistent technology platform

across all the Americas, it possesses superior equipment purchasing power.

 

Business value of roughly $70…

[Yours Truly]

Weitz Funds on DTV:

https://www.weitzfunds.com/resources/documents/Literature_and_Publications/About/News/Analyst%20Corner%209.30.12.pdf

 

What’s Old is New Again

Long time shareholders will recall our previous ownership of DIRECTV as part of our long history of investing

in pay TV providers.  We have long found the economics of the industry to be attractive: customers pay

monthly for a service they are extremely reluctant to terminate (even in difficult economic environments),

creating a predictable and growing stream of cash flows.  Adding incremental subscribers to a network

requires little extra investment and it is largely success-based (e.g. set top boxes for a newly acquired

customer).  As one of the largest providers in the U.S., DIRECTV has a better bargaining position than most

when it comes to securing content for its customers, and by utilizing a consistent technology platform

across all the Americas, it possesses superior equipment purchasing power.

 

Business value of roughly $70…

 

Latin America is chugging along with double-digit growth while US segment's ARPU is steadily rising to compensate for the cost of programming.. Their also looking at Vivendi's Brazilian assets which would be a huge bonus if they were to attain it..

 

Brazil alone has 200 million population which is an absolute huge market for DTV where fiber cable is simply not possible

 

 

[constructive]

http://www.smartmoney.com/news/on/?story=on-20130224-000203&cid=1244&

 

Brazil Gives Informal Assent to Vivendi's Sale of GVT

 

"Vivendi is seeking 19 billion Brazilian reais ($9.63 billion) for the firm, and may have to accept a share swap as part of a deal, the report said. DirecTV has offered around BRL15 billion, the report said."

 

This sounds like Vivendi is leaning towards DTV's offer - a share swap with the private equity consortium seems unlikely.  But given how much DTV likes their stock, they probably want to do an all cash deal.

[Yours Truly]

http://www.smartmoney.com/news/on/?story=on-20130224-000203&cid=1244&

 

Brazil Gives Informal Assent to Vivendi's Sale of GVT

 

"Vivendi is seeking 19 billion Brazilian reais ($9.63 billion) for the firm, and may have to accept a share swap as part of a deal, the report said. DirecTV has offered around BRL15 billion, the report said."

 

This sounds like Vivendi is leaning towards DTV's offer - a share swap with the private equity consortium seems unlikely.  But given how much DTV likes their stock, they probably want to do an all cash deal.

 

Judging from the last conference call, GVT's a nice to have, not necessarily a must-have and only if the price is right..

 

Hopefully management makes the right decision if the price is too high and walk away.. I would love for them to continue their share repurchasing especially with the share price lagging around the $45-55 range..

[constructive]

I agree on GVT and management's commitment to share repurchases.

 

You mentioned cord-cutting in the US a couple of posts ago. It's interesting that they have been less affected than cable companies.

 

While cable and satellite have fought each other to a standstill, my theory is that FTTH and VOIP will continue to take share from cable, not satellite. Fiber because it's expensive to roll out, VOIP because a substantial amount of DTV users are on slower DSL connections. I'd be interested to see numbers on DTV consumers' internet access.

[Yours Truly]

A shoutout to DTV in BRK's latest letter:

 

"One point about the composition of this list deserves mention. In Berkshire’s past annual reports, every

stock itemized in this space has been bought by me, in the sense that I made the decision to buy it for Berkshire. But

starting with this list, any investment made by Todd Combs or Ted Weschler – or a combined purchase by them –

that meets the dollar threshold for the list ($1 billion this year) will be included. Above is the first such stock,

DIRECTV, which both Todd and Ted hold in their portfolios and whose combined holdings at the end of 2012 were

valued at the $1.15 billion shown.

 

Todd and Ted also manage the pension funds of certain Berkshire subsidiaries, while others, for regulatory

reasons, are managed by outside advisers. We do not include holdings of the pension funds in our annual report

tabulations, though their portfolios often overlap Berkshire’s."

[enoch01]

I like the financial discipline here:

 

http://www.reuters.com/article/2013/03/15/gm-directv-gvt-idUSL1N0C6GL220130315?feedType=RSS&feedName=industrialsSector&rpc=43

[tombgrt]

Yes, very nice enoch01. Seems like it helped the stock reaching a new 52-week high.

 

I'm wondering what we will happen with the level of buying back shares once the debt starts maturing in a few years?

 

And what will FCF from the US do in the next 5 years? And is it likely that Latin America keeps growing at it's current pace for the next few years? If it does, FCF could even keep up even if the US business goes to a fraction of what it is now!

 

A market correction could both provide a possible decent entry point for an investor and increase IV as the company buys back huge amounts of stock at discounted prices.

 

 

---

 

Just some random thoughts to spur discussion in this thread. Imo this one needs more attention!

[enoch01]

I think once Latin America growth slows down then they will begin reducing leverage.  Of course if they still don't need to retain earnings at that point (strong enough moat), then that changes and they may still keep debt ratios high.

 

I expect cash flow from American ops to stay stable.  They do a lot of right things by staying tightly focused on their target customer, and not doing dumb things to get new ones.  It shows up in the acquisition costs and their revenue per customer.

 

What I would really like is a better idea of the spend it would take by Latin American cable cos to get the same reach as dtv.  Would represent some of the advantage they have in that market.

 

The nice thing about today's price is that it gives no credit to Latin American growth, or smart capital allocation.  I finally went long last week.

[jay21]

I think once Latin America growth slows down then they will begin reducing leverage.  Of course if they still don't need to retain earnings at that point (strong enough moat), then that changes and they may still keep debt ratios high.

 

What moat do you think they have?

 

The way I see this company is as a content provider (people are paying for the content, not the service).  Does DTV have the right to distribute exclusive content?  If the answer is no, the moat would be lowest cost and/or switching costs.  I'll have to look into those.  I think this thesis needs to consider the competitive landscape of the LatAm assets because I think that they are expecting to grow share.  The growing overall market is more obvious to me.

 

I also have some questions on CapEx, but am just getting started researching.  Will post some thoughts later.