LMCA - Liberty Media

[Ross812]

why does he need to take it over? he controls it. he can control their capital allocation and cap structure. they just keep buying back stock and he owns a bigger %. he also can buy back stock at liberty so he can win 2 ways. the end game is he creates a stock like ltripa and gives siri to shareholders. malone is not not in the habit of paying premiums.

 

He offered $3.68 six months ago... 

[Guest wellmont]

why does he need to take it over? he controls it. he can control their capital allocation and cap structure. they just keep buying back stock and he owns a bigger %. he also can buy back stock at liberty so he can win 2 ways. the end game is he creates a stock like ltripa and gives siri to shareholders. malone is not not in the habit of paying premiums.

 

He offered $3.68 six months ago...

yep and it didn't get done. all i am saying is he gets a good result even if he doesn't buy them out.

[Guest JoelS]

It's an interesting thought.. But how would you play the cards if you were Malone. They know they have to pay a premium to take over what they don't own. So they can wait it out and let Sirius increase their ownership by 3% a quarter with the buyback.. or they can buy what they don't already own. I reckon they will lie in wait, let Siri eat up the stock and when the price is right, mop up the minority they don't own. This is because they have control over the price by playing their cards close to their chest and not letting their intentions be known. Either way I wouldn't want to be on the other side of a Malone bear hug since you know his ultimate motive is to get the highest IRR on his capital - and that implies not overpaying for assets. Just my 2c. 

[jay21]

It's an interesting thought.. But how would you play the cards if you were Malone. They know they have to pay a premium to take over what they don't own. So they can wait it out and let Sirius increase their ownership by 3% a quarter with the buyback.. or they can buy what they don't already own. I reckon they will lie in wait, let Siri eat up the stock and when the price is right, mop up the minority they don't own. This is because they have control over the price by playing their cards close to their chest and not letting their intentions be known. Either way I wouldn't want to be on the other side of a Malone bear hug since you know his ultimate motive is to get the highest IRR on his capital - and that implies not overpaying for assets. Just my 2c.

 

The reason for the SIRI offer was to raise capital to go after cable deals.  The probability of a SIRI takeout increases as Malone's need/want for capital increases.

[wbr]

I think it should be pretty clear that Malone will not pay any significant premium for SIRI. He tried and was rejected, but he sent a clear message to SIRI shareholders: Don't expect me to give you free money.

 

This creates a very interesting situation: I think investors who are interested in SIRI prefer to buy LMCA (especially after LBRD spin), because there is no benefit to owning Sirius directly since there will not be a take over premium and the company will eventually just buy most of the non-Liberty stock. Now because SIRI stock is not very attractive it might stay at these levels for some time, because people know that other people know that this is the case. It creates a self-fullfilling prophecy. If the stock price was too high for buybacks the situation would be different, but as it stands SIRI is compounding and the stock price is flat. And this also means that Liberty is becoming cheaper since it will move pretty much parallel to SIRI which makes buybacks on the LMCA level attractive as well.

[Liberty]

This creates a very interesting situation: I think investors who are interested in SIRI prefer to buy LMCA (especially after LBRD spin), because there is no benefit to owning Sirius directly since there will not be a take over premium and the company will eventually just buy most of the non-Liberty stock. Now because SIRI stock is not very attractive it might stay at these levels for some time, because people know that other people know that this is the case. It creates a self-fullfilling prophecy. If the stock price was too high for buybacks the situation would be different, but as it stands SIRI is compounding and the stock price is flat. And this also means that Liberty is becoming cheaper since it will move pretty much parallel to SIRI which makes buybacks on the LMCA level attractive as well.

 

I think that's a very astute read on the dynamics at play. Thanks for sharing.

[dwy000]

It's an interesting thought.. But how would you play the cards if you were Malone. They know they have to pay a premium to take over what they don't own. So they can wait it out and let Sirius increase their ownership by 3% a quarter with the buyback.. or they can buy what they don't already own. I reckon they will lie in wait, let Siri eat up the stock and when the price is right, mop up the minority they don't own. This is because they have control over the price by playing their cards close to their chest and not letting their intentions be known. Either way I wouldn't want to be on the other side of a Malone bear hug since you know his ultimate motive is to get the highest IRR on his capital - and that implies not overpaying for assets. Just my 2c.

 

Interesting take.  But if people are buying LMCA (or LMCK) instead of SIRI, at some point Liberty trades at a premium to its SIRI investment and then it's cheaper to buy SIRI directly.  So wouldn't there be a sort of self-correcting mechanism in there.

 

As SIRI continues to buy back stock, at some point there's going to be a decent squeeze in play and the price has to rise.  If SIRI is sitting there buying everything in sight at $3.35, at some point you run out of sellers (esp since LMCA owns 58% of the shares outstanding) and it has to start running up.  The question will be whether SIRI continues to buy if the price goes up to $3.75 or so - anything above where LMCA was willing to acquire the company.  At some point it's a poor investment for the company to repurchase its own stock.  Then it will get interesting because it will be accreting cash and have nothing to do with it.  Maybe they'll start acquiring Charter shares!!

[Guest JoelS]

I dont disagree with what you've said.. I guess there are many permutations and combinations but in the end Malone will do what makes sense given the circumstances. As Gio said once, it might be "brain damage" to try to figure it out! Wbr said what I was trying to get across in a much more elegant way.

 

Re the Siri price running up as they buy back stock, I am now going to contradict myself.. I do have a small existing position directly in Siri, and a larger % in LMCA/LMCK because I'm not smart enough to know what will happen.. I shouldn't have said that I wouldn't want to be on the other side,.. its just i'm not sure that Liberty will pay me a fair price going forward so I've kept the position small. Relative to alternative investments, Siri has some optionality that I'm reasonably familiar with.

 

 

[wbr]

It's an interesting thought.. But how would you play the cards if you were Malone. They know they have to pay a premium to take over what they don't own. So they can wait it out and let Sirius increase their ownership by 3% a quarter with the buyback.. or they can buy what they don't already own. I reckon they will lie in wait, let Siri eat up the stock and when the price is right, mop up the minority they don't own. This is because they have control over the price by playing their cards close to their chest and not letting their intentions be known. Either way I wouldn't want to be on the other side of a Malone bear hug since you know his ultimate motive is to get the highest IRR on his capital - and that implies not overpaying for assets. Just my 2c.

 

Interesting take.  But if people are buying LMCA (or LMCK) instead of SIRI, at some point Liberty trades at a premium to its SIRI investment and then it's cheaper to buy SIRI directly.  So wouldn't there be a sort of self-correcting mechanism in there.

 

As SIRI continues to buy back stock, at some point there's going to be a decent squeeze in play and the price has to rise.  If SIRI is sitting there buying everything in sight at $3.35, at some point you run out of sellers (esp since LMCA owns 58% of the shares outstanding) and it has to start running up.  The question will be whether SIRI continues to buy if the price goes up to $3.75 or so - anything above where LMCA was willing to acquire the company.  At some point it's a poor investment for the company to repurchase its own stock.  Then it will get interesting because it will be accreting cash and have nothing to do with it.  Maybe they'll start acquiring Charter shares!!

 

I agree that at some point the price of SIRI might go up if some investors keep holding on to their shares and LMCA becomes relatively less attractive when the price approaches NAV. But at the moment the market action tells a different story. Aggregate 13F holdings were down about 100M shares in Q2 compared to Q1. I'm interested to see how it developed in Q3.

A lot of people are impatient and don't want to own "dead money", they want to own stocks that go up. You basically have to be willing to commit to this for 3+ years until Liberty owns all of it (and potentially spins it off). Then the market will assign a proper valuation to the company and you will be rewarded. Until then your capital gains expectations have to be modest. Not everybody has the attitude and the time horizon to do that. They rather buy something that might be expensive and risky, but has performed well recently.

[dwy000]

That's absolutely right.  SIRI is the perfect example of where long term value runs into the need for quarterly performance targets of institutional managers.

 

Didn't Greg say that they couldn't go beyond 80% ownership at LMCA without triggering tax implications? At current buy back rates and dwindling public availability of shares that limit may come into play sooner rather than later.

 

 

[giofranchi]

I have read the latest discussion about a swap from LMCA shares to SIRI shares with great interest.

 

Yet, I would also like to know what board members think about LMCA vs. LBRDA. Would you sell LBRDA, after exercising the rights offering, to buy more LMCA? Or, vice versa, would you sell LMCA to buy more LBRDA? Or would you hold both and do nothing?

 

Yesterday I talked to a friend of mine who is worried about the future of cable, because of the obvious threat the internet poses… maybe not immediately, but surely in a few years…

 

LMCA seems to me a vehicle less tied to a specific technology than LBRDA: SIRI is satellite radio and has nothing to with cable. After the SIRI investment will have played itself out like Malone has in mind, he will move on to something new like he has always done… And he will choose the technology most promising at that specific period of time in the future.

 

LBRDA, instead, seems univocally tied to cable… If every content creator starts distributing its stuff independently through the internet, cable is bound to slowly decline, isn’t it?

 

Malone is 73, and my only plan / hope is to stay in his company for the next 10 years. To do so, what would you choose? LMCA? LBRDA? Or both? And why?

 

Thank you! :)

 

Gio

 

[ItsAValueTrap]

LBRDA, instead, seems univocally tied to cable… If every content creator starts distributing its stuff independently through the internet, cable is bound to slowly decline, isn’t it?

 

1- The value of the content going over a coaxial cable will go up over time thanks to Internet-based delivery.  So, overall EBITDA per customer might go up.  This may attract more competition though.  Hopefully it won't turn out like airlines where value creation doesn't translate into profits.  Because of the economics of the various technologies, rural areas will see the weakest competition.

 

The future economics will be affected by net neutrality.  If ISPs are allowed to extort Netflix and HBO and Amazon and companies like Level3, then scale will be an advantage.  The bigger scale players will be able to extort more revenue per user for not-slow connections to consumers.

 

Cable is fine.  I think cable has a bright future ahead of it.  6% revenue growth with fixed-cost leverage and lots of debt would translate into much higher free cash flow growth.

 

2- Sirius is not as well positioned.  They will definitely lose music customers to streaming music companies.  The market share loss will depend on music royalty rates, the amount of wireless Internet infrastructure spending, and the cost of data for the consumer.

 

However, Sirius continues to rapidly grow.

[dwy000]

I would tend to agree with Value Trap.  Cable companies have a very favorable future - although not necessarily in "cable". 

 

The emergence of over-the-top internet channels is big and will grow.  But at the end of the day it requires a key component - access to the internet.  And most people get that from their cable company.  It's very, very high margin business for cable companies because it's got nearly zero variable cost (where cable requires massive payments to the content providers).

 

And then if you take it to the next step, it's doubtful that people will want to pay 20 different over the top providers in 20 different payments every month.  So the natural solution to that is for someone to provide a convenient bundle of those "channels" in one package at a cheaper price than paying for them all separately.  And who better to do that than the company who provides your internet in the first place and has relationships with all those channels - and knows how to bundle.  So it all comes full circle that you are getting a bundle of content channels from your cable company, they are just providing over the internet instead of traditional cable.  The downside is that the cable company doesn't get to charge you 2x (once for cable and once for internet) but I'm willing to bet that they will still earn huge and growing fees on the internet access and bundling.

[wbr]

I like all of them:

 

- Cable is not about content, it's about broadband. The amount of data capacity and speed that is needed is already high and it will go up even further. Today most of the streaming content is already 1080p and I have ran across some 1080p/60fps videos or even 4k HD videos on youtube. In a couple of years this will be standard. The revenue mix of the cable companies changes, but the economics of the business are still very good.

 

That being said I think Charter is overfollwed and overowned by a lot of funds, so I will probably keep LBRDA but not add to it and monetize my rights.

 

- Sirius faces competition from streaming services, but they are the king of the hill. They can offer the most value to customers with exclusive content competitive pricing (streaming services don't have the deep pockets to compete here) and to artists (since their distribution is pretty low cost they can generate fat margins and still pay their fair share to the content creators). I use Spotify and it's good, but really nothing special. Very often you can't get songs upon release or not at all. It's more of a commodity whereas Sirius is more exclusive and a real service. I believe a lot of people are willing to pay up for a good service even though there is a free generic alternative.

 

I only recently bought LMCA, because the price actually looks pretty good imo. I like SIRI and I relly like LYV which is kind of hidden and underestimated. Also any potential new "Malone moves" will likely happen in LMCA which is a bonus. The bottom line is: I prefer to own a sizeable position in the motheship and wait for a cheaper opportunity to add to LBRD.

[Liberty]

http://25iq.com/2014/11/02/a-dozen-things-ive-learned-from-john-malone/

[Guest JoelS]

I prefer LBRDA to LMCA today, simply because I think the underlying asset of Charter is more interesting and has better prospects, given the price of Charter today. Monetising Siri and putting the proceeds into something new is also interesting so I'm keeping both. But I am under the impression that Charter hasn't reached the "discovery" phase whereas Siri is a bit pricey with free cash flow of 1.1bn and a market cap of 20bn (18x).

 

The fact that so many people think cable companies are suffering is exactly what provides the opportunity in LBRDA. Cable gets more revenue from the video product, but gets more cash flow from the broadband product. For the year to July 31st 2014, Charter grew video revenue by 5%, and internet by 15%.

 

I think the second major reason that the opportunity exists in Charter is because the cash is not flowing yet. We are yet to see the effect of Tom Rutledge's efforts at Charter.

 

Third, the deal with Comcast is confusing and uncertain, so Charter will probably tread water until there is some certainty in the second quarter of next year.

 

Fourth, is Charter really expensive? It's not cheap but if you adjust for the Comcast transaction, it's trading on an EV/EBITDA of about 9x using 2014 EBITDA. If you impute the present value of the NOL's, then Charter is below 8x EV/EBITDA. If you think they can do $5bn in EBITDA in 2015 + NOL's, its trading at about 7x 2015 EV/EBITDA. Also, if you think there's a long runway of acquisitions in the cable system industry, then the stock price being high for acquisitions is ok, so long as this isn't taken to an illogical extreme. By my rough estimates, Charter should be able to apply free cash and incremental debt in 2015 and 2016, for stock repurchase and acquisition, equal to over 40% of the market cap today.

 

wbr, which funds own Charter? The ones I know of are Berkshire, Teton (ancient art) capital, and the tiger cub Nehal Chopra's fund. I am really interested in sentiment here because when I go through Dataroma, I don't see any names that own it (not sure if a good sign or bad sign), apart from Berkshire. Thank you in advance.

[Guest JoelS]

"LBRDA, instead, seems univocally tied to cable… If every content creator starts distributing its stuff independently through the internet, cable is bound to slowly decline, isn’t it?"

 

As Malone said in LMCA's recent call, when asked whether OTT will disrupt cable TV..

 

"The good thing is, in any of this, you need a high speed connection to participate"

 

[wbr]

 

wbr, which funds own Charter? The ones I know of are Berkshire, Teton (ancient art) capital, and the tiger cub Nehal Chopra's fund. I am really interested in sentiment here because when I go through Dataroma, I don't see any names that own it (not sure if a good sign or bad sign), apart from Berkshire. Thank you in advance.

 

+Tiger Global + Passport Capital + Blueridge + some other Tiger cubs

 

I think Charter is gonna do well, because of all the reasons brought up, but whenever something appears to be "obvious", because a lot of funds own it, Faber has been talking about it for more than 1 year on CNBC and the story is so well known I prefer to be careful when it comes to position sizing.

[giofranchi]

- Cable is not about content, it's about broadband.

 

Interesting. Could you please elaborate a bit further? I remember Charlie Ergen saying in an interview some time ago that he liked his business now, but it was not where he wanted to be in the future… If cable is such a safe proposition, what do you think Ergen was meaning?

 

Thank you,

 

Gio

 

[giofranchi]

http://25iq.com/2014/11/02/a-dozen-things-ive-learned-from-john-malone/

 

Thank you for this! Very useful! :)

 

Gio

[merkhet]

- Cable is not about content, it's about broadband.

 

Interesting. Could you please elaborate a bit further? I remember Charlie Ergen saying in an interview some time ago that he liked his business now, but it was not where he wanted to be in the future… If cable is such a safe proposition, what do you think Ergen was meaning?

 

Thank you,

 

Gio

 

Egren is in satellite not cable.

[giofranchi]

Egren is in satellite not cable.

 

Yeah! But the threat the internet poses is not the same? I mean that content creators won’t need distributors anymore?

 

Gio

 

[dwy000]

Egren is in satellite not cable.

 

Yeah! But the threat the internet poses is not the same? I mean that content creators won’t need distributors anymore?

 

Gio

Satellite can't provide broadband like the cable providers.  Cable providers can aggregate content over broadband like they do over cable (plus they provide the internet itself so control access and the customer).  Dish and Directv can't because they don't provide internet.

[giofranchi]

Satellite can't provide broadband like the cable providers.  Cable providers can aggregate content over broadband like they do over cable (plus they provide the internet itself so control access and the customer).  Dish and Directv can't because they don't provide internet.

 

Ok! Thank you! :)

 

Gio

[wbr]

Egren is in satellite not cable.

 

Yeah! But the threat the internet poses is not the same? I mean that content creators won’t need distributors anymore?

 

Gio

 

Ergen just argued that sattelite and cable companies can't sell bundles that cost >$100/month anymore, because ppl realize that they pay for a lot of things they don't even need. It just means that cable companies won't sell you video subscriptions anymore. "Unbundling" will lead to more content creators going over the top like HBO announced lately. Netflix & Co will always need distributors. They don't own the pipes to your house. That is why cable companies are still attractive.

 

But there is an interesting twist: I think broadband prices do not yet reflect the massive use of OTT services. In the past cable companies could sell you high speed broadband, but most people would not use its potential. Im not 100% familiar with the technological side, but as far as I know you don't have an individual pipe to your house. There is one big pipe to your neighbourhood with capacity X (=speed). Then cable companies could sell the individual households capacity shares which in total equal *more* than the total amount of speed available based on the assumption that not everybody would use up their speed limit at the same time. But if more ppl use Netflix at 8 pm you have a capacity problem. If X is upgraded, the cable company will start charging more for broadband access. But ppl who don't use their internet a lot will be deterred by higher prices (which means they will stop subsidizing the frequent users) which will push prices even higher for frequent users. At some point (I think Malone talked about this on the last LMCA call) you might see volume limitations which are used for phone contracts today. You might buy something like 100 Mbit/s 1TB/month. Or if net neutrality is not enforced Netflix needs to pay more and more money to cable companies (which will likely increase Netflix subscription prices or squeeze profits). The Netflix sub is very cheap right now, but that is based on the assumption that distribution is "free" which will not be the case forever. Customers will pay significantly more over time - either directly to the cable companies or indirectly through higher subscription prices.

 

The bottom line is: If the bundle is destroyed and cable companies don't sell you content anymore, ppl just use 5 different OTT services, but spend a lot more on broadband. It's hard to calculate these future costs, but it would be pretty ironic if the equivalent of today's bundle which might consist of various ott subscriptions and broadband cost would be more expensive...