LMCA - Liberty Media

[ItsAValueTrap]

1- I think that the spinoffs are largely a distraction.  On one level it's largely just paper shuffling.  I think that more attention should be paid to the quality of the businesses.

 

2- Let's take the easy route and look at Malone's insider trading.

 

http://biz.yahoo.com/t/38/221.html

 

His most recent LMCA trade (Dec 23 2013) is a share swap with Bennett as described in his SEC filing:

http://www.sec.gov/Archives/edgar/data/1119603/000110465913092863/a13-27215_2sc13da.htm

 

Let's call that one a wash.

 

He's mostly selling DISCA, LINTA, LBTYA.  He bought a small amount of LMCA.  I think because of the LVNTA rights offering, he had to buy a little LVNTA.

[ItsAValueTrap]

Here's my guess as to what's happening with the proposed spinoff.

 

You can think of the spinoff as having different parts to it:

A- A rights offering.

B- Splitting up the company into two different complicated parts.

 

1- The rights offering:

This draws more capital into LMCA.  To some degree, this is bad for shareholders because size is an anchor on performance.  It also doesn't make a lot of sense because a rights offering raises capital; share repurchases unraise capital.

 

So why do this?

 

a- Not everybody will exercise their rights (even though they make easy arbitrage profits if they do).  I don't think that this is the real reason.

b- It will encourage people to sell their shares.  This will deflate Liberty's share price and allow Liberty to buy back more shares at depressed prices.  I think this is the real reason.

 

2- The spinoff:

I think that both the parent and the spinoff will be complicated.  Liberty Broadband won't be a pure play on cable assets.  If Malone wanted Liberty Broadband to fetch a premium valuation, he would have simplified it into just Charter shares or Charter and TWC shares (possibly with debt to LMCA).

 

I think that the reason for doing the spinoff is to create more "opportunities" for shareholders to trade the stock at silly prices.  This will allow Malone (or LMCA or Liberty Broadband) to repurchase shares at lower prices, or to use the stock as acquisition currency (a subtle form of selling shares at expensive prices).

 

Because both parts are complicated, I think Malone is hoping that the complication will depress the share prices of both parts.  In the LINTA/LVNTA spin, the original idea was that LVNTA would be this ridiculously leveraged vehicle with barely any book value.  The book value would be deceptively low due to the way that tax liabilities are accounted for.  So Liberty Broadband might fall into that mold.

[jay21]

IMO, this can be the creation of a new currency, broadband group.  I think this may be the easier of the two to look at/value because it should be Charter and TimeWarner primarily and have a lower discount.  The Media stock will still have a controlling interest in Sirius, which will be consolidated and I think have more complicated FS and have a higher discount.

 

So he is creating a currency and loading it with capital to do more acquisitions with the potentially less discounted stock.  Therefore, he avoids potential dilution of the more heavily discounted Media stock.

 

1- The rights offering:

This draws more capital into LMCA.  To some degree, this is bad for shareholders because size is an anchor on performance.  It also doesn't make a lot of sense because a rights offering raises capital; share repurchases unraise capital.

 

The rights offering is for broadband:

 

"The subscription rights are being issued to raise capital for general corporate purposes of the Liberty Broadband Group, including investment in new business opportunities to be attributed to that group. The subscription rights will:

 

• Enable the holders to acquire shares of the applicable series of Liberty Broadband tracking stock at a 20% discount to the 20-trading day volume weighted average trading price of Liberty Broadband tracking stock following the closing of the Distribution.

 

• Become publicly traded, once the exercise price has been established.

 

• Expire forty trading days following the closing of the Distribution."

[Kiltacular]

Here's my guess as to what's happening with the proposed spinoff.

 

You can think of the spinoff as having different parts to it:

A- A rights offering.

B- Splitting up the company into two different complicated parts.

 

1- The rights offering:

This draws more capital into LMCA.  To some degree, this is bad for shareholders because size is an anchor on performance.  It also doesn't make a lot of sense because a rights offering raises capital; share repurchases unraise capital.

 

So why do this?

 

a- Not everybody will exercise their rights (even though they make easy arbitrage profits if they do).  I don't think that this is the real reason.

b- It will encourage people to sell their shares.  This will deflate Liberty's share price and allow Liberty to buy back more shares at depressed prices.  I think this is the real reason.

 

2- The spinoff:

I think that both the parent and the spinoff will be complicated.  Liberty Broadband won't be a pure play on cable assets.  If Malone wanted Liberty Broadband to fetch a premium valuation, he would have simplified it into just Charter shares or Charter and TWC shares (possibly with debt to LMCA).

 

I think that the reason for doing the spinoff is to create more "opportunities" for shareholders to trade the stock at silly prices.  This will allow Malone (or LMCA or Liberty Broadband) to repurchase shares at lower prices, or to use the stock as acquisition currency (a subtle form of selling shares at expensive prices).

 

Because both parts are complicated, I think Malone is hoping that the complication will depress the share prices of both parts.  In the LINTA/LVNTA spin, the original idea was that LVNTA would be this ridiculously leveraged vehicle with barely any book value.  The book value would be deceptively low due to the way that tax liabilities are accounted for.  So Liberty Broadband might fall into that mold.

 

Thanks Trap and Jay...updates appreciated.

[jay21]

Thanks Trap and Jay...updates appreciated.

 

I'll keep thinking on this one and probably have a few more updates.  Hopefully, they add value to the thread. 

 

I am trying to put myself in Malone's shoes.  He just tried to do two acquisitions that failed.  TWC failed because of price.  Sirius failed because of price, but also a common criticism was that Sirius stock holders will now hold an interest in a conglomerate and their interest will not be in a pure play Sirius but also in a potential cable roll up.  Therefore, Malone makes a pure play Broadband and Sirius tracker and gives a vague statement such as:

 

"In light of the tracking stock distribution, our offer for SiriusXM is no longer applicable. Depending on market conditions, we look forward to further discussions with the SiriusXM Special Committee. We remain enthusiastic owners of 53% of SiriusXM."

 

So, is the Sirius deal killed?  Maybe for now.  He now has the flexibility of acquiring Sirius with Media stock and alleviating the pure play criticism.  Meanwhile, Sirius still will be buying back stock, increasing Malone's interest.  Additionally, Malone will sell back some of his stock, giving Media cash to buy back its own stock, which will likely trade at a discount.

 

In terms of Broadband, I believe the capital raise is gun loading and he is at a minimum going after the Comcast/TWC assets that will be sold off and as mentioned before, he can use the stock to do acquisitions without diluting his most likely higher discounted interest in Sirius. 

 

So the 2 minute pitch/thesis:

 

Media - Sirius continues its buybacks, some of which Malone will participate in, which gives him cash to buy back discounted Media stock.  Or acquire Sirius with Media stock if there is no discount.

 

Broadband - Load the gun and go after deals.

 

This is the way I see it now. More ruminating for me to do.

[ItsAValueTrap]

But Media isn't a pure play.  It's a weird mismash of stuff that Malone has accumulated over the years.  The pure play stuff got spun off into LINTA (kind of), STRZA, DISCA, LBTYA, etc.

 

Depending on market conditions, we look forward to further discussions with the SiriusXM Special Committee.

That seems like a face-saving statement.  He wants Sirius' share price to be high because Liberty is currently in the process of selling SIRI shares.

 

Until he puts his money where his mouth is, I wouldn't read too much into that statement.

 

2- The big picture is that Liberty and Charter will do well without any wheeling and dealing.  The underlying businesses are largely wonderful businesses (except for any stocks being sold via derivatives).  Sirius XM and Charter are gems.  Most of the shareholder returns will come from the businesses doing well.  Share repurchases will juice returns a little.

[Guest wellmont]

i don't think this is complicated. you just look at his playbook. he has complex structures of good assets that sell at a discount in the markets (intentional). he then takes advantage and buys back stock, increasing IV. when he is ready to do something strategic, he creates trackers. the trackers lead to real spin offs that create more value. this strategy has created enormous shareholder value (when implemented by malone and maffei).

 

I think malone has second and third level thinking applied to his strategy, that only becomes obvious during implementation. for example this spin off not only made LMCA go up, it made CHTR go up. that's because the spin off and RO will create capital (without dilution or new debt) for CHTR to grow and in turn, create value. when CHTR goes up LMCA asset value goes up, creating a positive feedback loop.

[ItsAValueTrap]

I don't think that he wanted LMCA stock to go up.

[Guest wellmont]

creating tracking stocks makes the stock go up. He knows that. He creates trackers when one of his stocks becomes close to fairly valued (lmca). one of the new stocks is inevitably a mess, and the market doesn't want it. at that point he decides to buy back that stock, which is usually a collection of good but disparate assets selling at a discount. so when this mishmash of stuff sells at a discount it allows him to buy back that tracking stock. this enables him to divide and conquer----execute on his plan to have assets sell at a discount so he can buy back the stock. this is exactly his blueprint at Linta. Nobody is going to want Liberty Digital Commerce. Except Malone.

[jay21]

"Separately, Sirius announced that it plans to restart share repurchases. The company previously suspended buybacks when Liberty Media made its acquisition proposal. Sirius is also maintaining its 2014 outlook for more than $4 billion in revenue and net subscriber additions of 1.25 million. Analysts polled by FactSet expect revenue of $4.14 billion."

 

 

http://finance.yahoo.com/news/liberty-media-drops-bid-buy-103339695.html

[undervalued]

I have read it, yes. But I won't invest only because Malone is good at what he does. All everyone says in this thread is "it's too hard, it's Malone". Fine, some people maybe want to invest (or pass) on those premises, but surely there has got to be someone who like me wants to try and understand? Just because he doesn't think like an analyst doesn't mean he doesn't do analysis. The numbers are the numbers, so if I'm missing something obvious (to someone smarter than me) I'd be very happy if someone could enlighten me.

 

alwaysinvert,

I understand your point. But, please consider:

FFH: I don’t understand BB, I don’t understand CPI-linked contracts, etc., yet I invest in FFH.

LRE: to say that I don’t understand the contracts Mr. Brindle & his team write would be an euphemism… yet I invest in LRE.

BAM: as I said in the BAM thread, not only I am not able to value an hydroelectric plant, I am not even able to ascertain its market price… yet I invest in BAM.

OAK: I invested in Oaktree… because I don’t understand the distressed and high yield bond market!

And the list goes on and on…

My point is that you almost never can invest based only on the numbers. Truly effective due diligence goes too much beyond the numbers you find on 10-ks and 10-qs. Imo, you should invest because 1) you like management, 2) you like the business, 3) you think you are not overpaying for what you like.

 

Trading, on the other hand, is a completely different beast: to buy into a bunch of statistically cheap stocks, and to sell them when they get to be fairly priced, is a very rewarding endeavour, and one to which numbers are extremely important and meaningful.

 

giofranchi

 

“As time goes on I get more and more convinced that the right method in investment is to put fairly large sums into enterprises which one thinks one knows something about and in the management of which one thoroughly believes. It is a mistake to think that one limits one’s risk by spreading too much between enterprises about which one knows little and has no reason for special confidence.” - John Maynard Keynes

 

I just joined this forum so forgive me for asking this if this has been answered before. So I invest in a similar manner but could you elaborate on what you do to find out whether you're overpaying or not?

 

For example, I do not have a position in LMCA and would like to build a position at what price point should I enter in? Is LMCA the right stock to buy (or other Liberty companies) and should I wait until the tracker stocks are distributed?

 

From Barron's "Liberty Wisely Creates Tracking Stocks" http://online.barrons.com/article/SB50001424053111904628504579439111506196916.html?mod=googlenews_barrons article:

 

After Thursday's closing, Liberty Media Corp . (ticker: LMCA) said it would reclassify its common stock into two tracking stocks, Liberty Media Group and Liberty Broadband Group, with shareholders getting one share of the former and four of the latter, along with subscription rights to acquire more shares. Liberty expects to complete the move in the third quarter.

 

In the same press release, Liberty said its offer to purchase Sirius XM (SIRI) "is no longer applicable," but that it is looking forward to "further discussions with the SiriusXM Special Committee," depending on market conditions. Liberty said it will sell some shares, but remains the "enthusiastic owners of 53% of SiriusXM."

 

Shares of Liberty, no stranger to complex stock structures, were 6.6% higher to $134.53 Friday morning, However, the strategy could bring more gains, as it gives Liberty a valuation boost and more options to raise cash.

 

Although Liberty deems the split a 'simplification,' it may seem that way to investors trying to decipher the move. But, as Maxim Group's John Tinker writes, it is effectively a spinoff of Charter Communications (CHTR), as that will comprise most of Liberty Broadband Group, along with Time Warner Cable (TWC) stock (plus options) and True Position. Tinker reiterated his Buy rating and $220 price target, noting that "the tracker may trade at a discount, but it may also be easier to raise capital via the proposed rights offering."

[Liberty]

Writeup on Liberty Global:

 

http://oraclefromomaha.wordpress.com/2014/03/09/liberty-global-deep-dive-into-media-companies-series-part-1/

[Liberty]

Glenn has a new post on Liberty:

 

http://glennchan.wordpress.com/2014/03/15/libertymalone-update/

[undervalued]

Thank you for the Glen update. Exactly the information I was looking for. I was trying to find out which company Malone is concentrating in.

[jay21]

Listened to Greg M present at a conference and here are some notes.  Basically, the elevator pitch of SIRI:

 

- 200m driving cars and SIRI currently has 26m subs

- Increase revenue of existing subs through elasticity and additional services

- Telematics provide upside and open up international markets

- Future 2 way connections will allow SIRI to provide more services

- There will be 70m - 100m cars with SIRI capability, but no services.  They will try to create customer relationships there (seems to be saying more flexible packaging and even potentially some free packages).

 

- On the SIRI acquisition: A person commented that LMCA already has control of SIRI so the offer is essentially a financial engineering maneuver, which will put a new asset on the balance sheet, which unlocks a new financing source. Greg M said that's perfect mental model for the offer.

 

- When asked about Digital, the first thing Greg mentioned was CommerceHub.

 

- Greg M mentioned he still owns DTV

[thefatbaboon]

This is from the filing that Charter just made advising TWC shareholders to reject the Comcast bid.  My attention was caught by the short calls that LMCA has against it's TWC shares struck in the low $90s.  I'm not sure from the phrasing if I've understood it right…but I've always been counting their stock position as a free trading asset in my valuations of LMCA (as do all the analysts like NAS etc).  Maybe I've misunderstood this but by the looks of things LMCA has "sold" any upside TWC has over $90.

 

 

 

Interests of Participants and Other Potential Participants

Charter is the beneficial owner and holder of record of 100 shares of TWC Common Stock.

Christopher L. Winfrey is the beneficial owner of 1,033 shares of TWC Common Stock, which are held in a revocable trust of which Mr. Winfrey is the trustee.

Liberty Interactive LLC, a wholly owned subsidiary of Liberty Interactive Corporation, is the beneficial owner and holder of record of 5,468,254 shares of TWC Common Stock. Liberty Interactive Corporation may be deemed to be the beneficial owner of the shares of TWC Common Stock held by Liberty Interactive LLC. Mr. Malone is the Chairman, and Mr. Maffei is the President and Chief Executive Officer, of Liberty Interactive Corporation.

Liberty Interactive LLC has issued and outstanding $850 million aggregate original principal amount of 0.75% Exchangeable Senior Debentures due 2043 (the “Debentures”). Each $1,000 original principal amount of Debentures is currently exchangeable for a basket of 6.3040 shares of TWC Common Stock and 5.1635 shares of common stock of Time Warner Inc. This basket of shares for which each Debenture in the original principal amount of $1,000 may be exchanged is referred to as the “Reference Shares” attributable to such Debenture. Each Debenture is exchangeable at the option of the holder at any time, upon which they will be entitled to receive the Reference Shares attributable to such Debenture or, at the election of Liberty Interactive LLC, cash or a combination of Reference Shares and cash having a value equal to such Reference Shares.

Communication Capital Corp. (now known as Communication Capital, LLC), a wholly owned subsidiary of Liberty Media Corporation (“Liberty”), is the beneficial owner and holder of record of 1,250,000 shares of TWC Common Stock. Communication Capital LLC, has entered into contracts to sell call options on the combined 1,250,000 shares of TWC Common Stock it owns since July 6, 2012, at various terms and with various counterparties. At expiration, Communication Capital LLC has elected to roll the contracts. The contracts described below represent the current obligations of Communication Capital LLC:

Contract #1

Option Seller: Communication Capital LLC Option Buyer: Wells Fargo

Trade Date: 11/19/2013

Final Expiration Date: 8/21/2014

# of Shares: 625,000

Call Strike: $90.8420

Contract #2

Option Seller: Communication Capital LLC Notice of Intent to Nominate and Propose Business Option Buyer: Credit Suisse

Trade Date: 8/21/2013

Final Expiration Date: 2/20/2014

# of Shares: 625,000

Call Strike: $91.6834

Liberty SIRI Marginco, LLC, a wholly owned subsidiary of Liberty, is the beneficial owner and holder of record of 1,114,753 shares of TWC Common Stock.

Liberty Programming Company LLC, a wholly owned subsidiary of Liberty, is the beneficial owner and holder of record of 203 shares of TWC Common Stock.

Liberty may be deemed to be the beneficial owner of the securities held by its wholly owned subsidiaries Communication Capital Corp., Liberty SIRI Marginco, LLC and Liberty Programming Company LLC. Mr. Malone is the Chairman, and Mr. Maffei is the President and Chief Executive Officer, of Liberty.

Each participant and its associates may beneficially, directly or indirectly own securities of TWC or any parents or subsidiaries of TWC through accounts of such participant managed by independent investment managers with respect to which the participant does not have voting or investment power with respect to such securities.

[loganc]

Selling those calls is interesting.  Not sure what to make of it. 

 

Just found the following recent interview with Maffei at the Churchill Club:

 

 

[ItsAValueTrap]

It looks like they sold deep-in-the-money calls?  Basically they are selling their shares via derivatives but they don't have to recognize the capital gains right away.

 

It's almost like they sold their shares.  The net position is that they have sold an out-of-the-money put on TWC.

[thefatbaboon]

It looks like they sold deep-in-the-money calls?  Basically they are selling their shares via derivatives but they don't have to recognize the capital gains right away.

 

It's almost like they sold their shares.  The net position is that they have sold an out-of-the-money put on TWC.

 

Weren't they sold originally in summer 2012 at the money when TWC was indeed in the 90s.  And since then they've "rolled".  Whatever that means - I'm guessing working with their broker to effectively buy in the old call thats gone against them and sell a new call.

 

I find it completely bizarre.  If I understand this right and they sell, short, collar, hedge or something along such a line in 2012 at $90 and then bid $130 a year later.

 

We need to get to the bottom of this because LMCA is full of stock positions that at the moment me and everyone else think are free-trading.

 

 

[ItsAValueTrap]

The "trade date" is presumably when they put on the position.

 

Trade Date: 11/19/2013 - $122.26 close versus $90.8420 strike

Trade Date: 8/21/2013 - $108.15 close versus $91.6834 strike

 

At both dates the calls were in the money.

 

2- Rolling the options likely means that the expiration date will be extended.  Presumably the strike price will stay the same so that the counterparty (Wells Fargo and CS) doesn't need to adjust its hedges.

 

I find it completely bizarre.

Some time ago, they basically "sold" their TWC position in a tax-efficient manner.

 

Liberty has actually held TWC for decades or something like that.  And they've been deferring the tax liability on the shares for a very long time.

 

What really happened is this:

Liberty ended up with shares of Time Warner.

Time Warner and AOL merged.  Many people today would say that the merger was a terrible idea.

Malone didn't like the new company.  So he "sold" his Time Warner shares in a tax-efficient manner.  He also sold a bunch of other stocks, most of which have done very poorly since the early 2000s.  Malone probably thought that valuations were ridiculous back then.

Since then, Time Warner split up into TWX, TWC, and AOL.

TWC stock did surprisingly well.

[thefatbaboon]

Read the paragraph above "Contract #1".  It says they started selling calls since July 6 2012.

[thefatbaboon]

Selling those calls is interesting.  Not sure what to make of it. 

 

Just found the following recent interview with Maffei at the Churchill Club:

 

 

thanks for the link!  nice legs  8)

[Hubris]

Ummmm... Loading the gun to buy TWC or any other MSO using the rights offering seems a bit farfetched. It is probably the least efficient way to do it. I'd do the math assuming some sort of liability to be attributed to Broadband. Depending on the liability assumptions you make I guess they are raising 300M - 500M through the RO. Hardly enough for any transaction.

[loganc]

Ummmm... Loading the gun to buy TWC or any other MSO using the rights offering seems a bit farfetched. It is probably the least efficient way to do it. I'd do the math assuming some sort of liability to be attributed to Broadband. Depending on the liability assumptions you make I guess they are raising 300M - 500M through the RO. Hardly enough for any transaction.

 

I believe the number is closer to 650MM.  Also, I think you can infer from the tracking stock move that Malone et al. are quite sure that the CMCSA-TWC deal will ultimately not be blown up by the government.  Given that scenario, raising a smaller amount of money may be sufficient for LMC to support CHTR in the acquisition of the assets that will be divested as part of the merger.  Additionally, given that the regulatory review will be a long process, one could imagine that CHTR will have de-levered by some amount at the time that the CMCSA assets are to be sold.  In summary, I believe the tracking stock move means that any sort of mega-merger for CHTR is off the table.

 

[txlaw]

Selling those calls is interesting.  Not sure what to make of it. 

 

Just found the following recent interview with Maffei at the Churchill Club:

 

 

Fantastic find.  Thank you for posting.