LMCA - Liberty Media

[jay21]

Thanks Jay.  I haven't done the work to determine the risk to big cable cos, but I would have guessed it would be a problem if the bundle gets pierced in a reasonable way.

 

Again, it was a general anecdote though, only.

 

Happy to talk about it more if you would like. I think its one of the biggest misconceptions in media. The number of video subs isnt changing that drastically and cable cos are actually gaining share at the expense of satellite and U-Verse.

 

When you add in the potential for skinny bundles, Tv Everywhere, etc. cable cos still have a lot of potential value add to the ecosystem. Its also the highest ROI for content currently so they may have to think harder about putting all their shows on OTT platforms, which would change the industry in favor of cable.

[dwy000]

Cable doesnt really make any money from TV. It makes money from broadband. This is why CABO get rid of their video product and other small operators are dropping Viacom and other networks.

 

An esoteric 5G wireless broadband is probably a bigger threat.

 

I'm kinda baffled by CABO's direction.  They're really smart operators so I keep thinking I'm missing something but I really don't get their strategy.

 

Cable TV still makes a ton of money.  The satellite providers show that this is the case - they price way below the Cablecos and still generate prodigious amounts of cash flow, all with the same programming and variable costs.  The difference of course is the infrastructure that cablecos must support.  But that is the exact same infrastructure that they have to continue to fund for broadband.  Same wires, same digging up of streets, etc. (yes there are differences at the head ends etc but that's not really driving the economics).  So if tv still generates significant margin and cash flow on an incremental basis (even if it's shrinking), why walk away from that?

 

When Brian Roberts, Tom Rutledge, John Malone etc. are all headed in one direction and this little operator says they're all wrong and crazy, regardless of how smart that little guy is, I have to question their strategy.  What am I missing that they are seeing?

 

 

[jay21]

Cable doesnt really make any money from TV. It makes money from broadband. This is why CABO get rid of their video product and other small operators are dropping Viacom and other networks.

 

An esoteric 5G wireless broadband is probably a bigger threat.

 

I'm kinda baffled by CABO's direction.  They're really smart operators so I keep thinking I'm missing something but I really don't get their strategy.

 

Cable TV still makes a ton of money.  The satellite providers show that this is the case - they price way below the Cablecos and still generate prodigious amounts of cash flow, all with the same programming and variable costs.  The difference of course is the infrastructure that cablecos must support.  But that is the exact same infrastructure that they have to continue to fund for broadband.  Same wires, same digging up of streets, etc. (yes there are differences at the head ends etc but that's not really driving the economics).  So if tv still generates significant margin and cash flow on an incremental basis (even if it's shrinking), why walk away from that?

 

When Brian Roberts, Tom Rutledge, John Malone etc. are all headed in one direction and this little operator says they're all wrong and crazy, regardless of how smart that little guy is, I have to question their strategy.  What am I missing that they are seeing?

 

CABO doesn't have the scale of Comcast and TWC/CHTR and gets squeezed a lot more by content providers. Therefore, they have much higher content costs per sub. They dont make any money on TV. The bigger players might make a little but its not crazy amounts.

 

Satellite was genius because it only took a little bit of capital to deploy national scale for a better video product, which made providing video very profitable. They wont be able to compete in the future because of the need for a two way connection.

[dwy000]

Cable doesnt really make any money from TV. It makes money from broadband. This is why CABO get rid of their video product and other small operators are dropping Viacom and other networks.

 

An esoteric 5G wireless broadband is probably a bigger threat.

 

I'm kinda baffled by CABO's direction.  They're really smart operators so I keep thinking I'm missing something but I really don't get their strategy.

 

Cable TV still makes a ton of money.  The satellite providers show that this is the case - they price way below the Cablecos and still generate prodigious amounts of cash flow, all with the same programming and variable costs.  The difference of course is the infrastructure that cablecos must support.  But that is the exact same infrastructure that they have to continue to fund for broadband.  Same wires, same digging up of streets, etc. (yes there are differences at the head ends etc but that's not really driving the economics).  So if tv still generates significant margin and cash flow on an incremental basis (even if it's shrinking), why walk away from that?

 

When Brian Roberts, Tom Rutledge, John Malone etc. are all headed in one direction and this little operator says they're all wrong and crazy, regardless of how smart that little guy is, I have to question their strategy.  What am I missing that they are seeing?

 

CABO doesn't have the scale of Comcast and TWC/CHTR and gets squeezed a lot more by content providers. Therefore, they have much higher content costs per sub. They dont make any money on TV. The bigger players might make a little but its not crazy amounts.

 

Satellite was genius because it only took a little bit of capital to deploy national scale for a better video product, which made providing video very profitable. They wont be able to compete in the future because of the need for a two way connection.

 

Not so sure that's the case.  CABO definitely has higher content costs - but not enough to make it a zero margin business.  When they laid out the strategy they allocated virtually all of the capex on the network to the TV business and almost nothing to broadband.  If you remove the infrastructure, cable and satellite should be fairly similar in their costs and margins.  The whole benefit of satellite is that they have no infrastructure costs.  If CABO could eliminate that by moving solely to broadband I think it's a very fair statement and a logical move.  But they will still have the same infrastructure costs and now have less variable margin to cover it.  Volume makes a difference but not that much.  Even if you buy the strategy long term (which I agree with), why aggressively push customers off?  Let it gradually play out and keep the margin in the meantime.  It's not taking a ton of extra capital to support the tv side.

 

At the end of the day CABO is too small to be efficient on it's own.  For the sake of it's shareholders it should be positioning itself to be acquired for maximum price.  But it's going in the other direction and becoming less appealing as it sheds subscribers by the truckload.

[jgyetzer]

They may benefit by video-only subscribers dropping their video subscription in favor of using broadband for OTT.  If customers choose to do this, CABO would be a likely contender for the broadband service given its speed compared to competition.  Even though they have less revenue, profit is probably higher in a broadband-only customer than a video-only.  Not sure they would intentionally discourage video customers for this reason, but may end up benefitting the company anyway.

[KJP]

 

When they laid out the strategy they allocated virtually all of the capex on the network to the TV business and almost nothing to broadband. 

 

 

The best description of why CABO hates video is shown on slide 15 of this presentation:  http://ir.cableone.net/Cache/1500073042.PDF?O=PDF&T=&Y=&D=&FID=1500073042&iid=4137149

 

Are you saying that the entry for "capex per PSU" overstates the case because it includes CapEx that CABO would spend anyway for broadband expansion?

[dwy000]

 

When they laid out the strategy they allocated virtually all of the capex on the network to the TV business and almost nothing to broadband. 

 

 

The best description of why CABO hates video is shown on slide 15 of this presentation:  http://ir.cableone.net/Cache/1500073042.PDF?O=PDF&T=&Y=&D=&FID=1500073042&iid=4137149

 

Are you saying that the entry for "capex per PSU" overstates the case because it includes CapEx that CABO would spend anyway for broadband expansion?

 

Basically, yes.  PSU includes all services (so a customer taking triple play counts as 3 PSU's).  I question whether getting rid of the video product would allow you to stop spending $13/PSU in capex.

 

It's also the indirect costs per PSU.  Both capex and indirect costs are largely fixed (not entirely but it's not a variable cost).  So getting rid of video customers just increases the allocation for the remaining PSU's.  This is largely why Malone says that this is a scale business. 

 

If the economics they show there were accurate, every cable operator would sensibly be getting out of a negative fcf business.  They're pretty smart operators.  Either their math is wrong or the best in the business are wrong.  I can't figure out which.

[scorpioncapital]

Is it me or is LMCA trading at a substantial discount to the tracking assets this morning?

 

Based on Annex A - http://www.sec.gov/Archives/edgar/data/1560385/000104746916010222/a2227380zs-4a.htm#la79701_annex_a

 

LMCA has 83.75m shares outstanding (334m * 0.25 exchange ratio) and 1077m of equity - at cost. The Live Nations has a carrying amount of 395 and a market price of about 1.2 billion.

 

There is also 400m net coming from the settlment. Total 1.2 billion on top of 1077 = 2277 / 83.75 = 27.19. You could have bought this morning as low as 19.17?

 

The sirius tracker, however, LSXMA is trading at a tighter 11 billion vs ~11.5 billion market cap.

[Liberty]

Is it me or is LMCA trading at a substantial discount to the tracking assets this morning?

 

Based on Annex A - http://www.sec.gov/Archives/edgar/data/1560385/000104746916010222/a2227380zs-4a.htm#la79701_annex_a

 

LMCA has 83.75m shares outstanding and 1077m of equity - at cost. The Live Nations has a carrying amount of 395 and a market price of about 1.2 billion.

 

There is also 400m net coming from the settlment. Total 1.2 billion on top of 1077 = 2277 / 83.75 = 27.19. You could have bought this morning as low as 19.17?

 

Are you looking at just the price of LMCA? Because they just split Media into three trackers, one for SIRI, one for the Braves, and the remaining in LMCA.

[scorpioncapital]

Yes. I assume the LMCA trading today is the new tracker (also I don't think the 400m on that Annex is from the settlement since the date is Sep 2015 and the settlement occurred just last month). However there was this amendment today - http://www.businesswire.com/news/home/20160418005503/en/Liberty-Media-Corporation-Announces-Entry-Supplemental-Indenture

 

 

[cayale]

Yes. I assume the LMCA trading today is the new tracker (also I don't think the 400m on that Annex is from the settlement since the date is Sep 2015 and the settlement occurred just last month). However there was this amendment today - http://www.businesswire.com/news/home/20160418005503/en/Liberty-Media-Corporation-Announces-Entry-Supplemental-Indenture

 

Correct me if I'm wrong, but I don't think that materially changes the equation, does it?

[scorpioncapital]

I would think the fair market value of the liability represents the equivalent amount of the dilution, if shares are issued.

[merkhet]

I would think the fair market value of the liability represents the equivalent amount of the dilution, if shares are issued.

 

IIRC, the convertibles are at the option of the holder, and the current value of the conversion is something like $825 per $1,000 of notes, so there's no reason to convert. Nice that it's cash settled though.

[scorpioncapital]

" Media Group our 1.375% Cash Convertible Senior Notes due 2023 in the principal amount of $1 billion and the Bond Hedge and Warrant Transactions executed concurrently with the issuance of such notes."

 

Not much detail on these hedges but it sounds like they are trying to freeze the total liability to a fixed amount regardless of the market value of the stock. Not sure about the warrant transactions though...

[merkhet]

" Media Group our 1.375% Cash Convertible Senior Notes due 2023 in the principal amount of $1 billion and the Bond Hedge and Warrant Transactions executed concurrently with the issuance of such notes."

 

Not much detail on these hedges but it sounds like they are trying to freeze the total liability to a fixed amount regardless of the market value of the stock. Not sure about the warrant transactions though...

 

I think that's correct, but I don't recall off the top of my mind the hedge.

[scorpioncapital]

Based on this PDF - http://www.libertymedia.com/pdfs/LMC-Asset-List_updated-4-15-2016.pdf

 

Some more info on the new % ownerships. The only thing I seem to recall something about LMCA retaining 20% of Braves Group through an intercompany note as well which isn't listed there.

[Jurgis]

So, anyone keeping BATRA and why?

 

Very superficially, I don't see a big point of investing in sports team...  :-\

I am prejudiced against sports though and I am somewhat biased due to the sports team "investments" that are basically rich-boy-trophy-toys.

 

Edit: did BATRA really drop from $36 to $20 today during the day? ???

Edit2: and LMCA dropped from $27 to $19? ???

[bonkers]

Jurgis: apparently Braves includes a stadium with commercial space (real estate projects under construction), and the team is profitable. Forbes estimated its value at 1.15 B USD some time ago. So it should have some value.

[scorpioncapital]

market is valuing Braves about 650m right now but sure is better than the nothing it was valuing it before.

[colinwalt]

So, anyone keeping BATRA and why?

 

Very superficially, I don't see a big point of investing in sports team...  :-\

I am prejudiced against sports though and I am somewhat biased due to the sports team "investments" that are basically rich-boy-trophy-toys.

 

Edit: did BATRA really drop from $36 to $20 today during the day? ???

Edit2: and LMCA dropped from $27 to $19? ???

 

Seems that way, on the other hand, LSXMK seems to be up over 3$ - so I think overall we're up (that's just eyeballing it - didn't really do the math)

[Jurgis]

I should have looked before the spinoff. I did not expect 30% drops on the first day. Coulda/shoulda sold on open...

 

Now I might just wait and do a valuation...

[scorpioncapital]

LMCA before $39 - 335m shares.

so 20 shares = $780

 

after

LMCA: 5 shares @ 19.3

LSXMA: 20 shares @ 32

BATRA: 2 shares @ 20

-

$96.5 + $640+ $40 = 777

 

So pretty flat so far.

 

[colinwalt]

I should have looked before the spinoff. I did not expect 30% drops on the first day. Coulda/shoulda sold on open...

 

Now I might just wait and do a valuation...

 

Very sad, but true story, I sold one of the trackers once... that was the one that ended up buying that satellite radio thingy - I think that went up 20 times before it got folded back in and I bought again :-(

[Jurgis]

Very sad, but true story, I sold one of the trackers once... that was the one that ended up buying that satellite radio thingy - I think that went up 20 times before it got folded back in and I bought again :-(

 

Right that's the trouble with Liberties. Malone may pick the one nobody likes and do something great with it. You never know.

[bonkers]

I think we might be on to something here with Liberty.

 

To me LMCA, LMCB, LMCK are the new trackers for Liberty. The old Liberty stock "disappeared" as it was split into these trackers, and the old tickers were adopted by the new Liberty trackers. I get new Liberty's market cap as of now to be 1.51 B USD.

 

Liberty Braves and Liberty SiriusXM are more pure-plays, Liberty is the mixed bad. From IR investor FAQ:

"The Liberty Media Group consists primarily of Liberty Media Corporation’s interest in Live Nation Entertainment, Inc., our other public company minority investments including Time Warner, Inc. and Viacom Inc., and an approximate 20% inter-group interest in the Liberty Braves Group."

 

I don't know what that inter-group interest is, but if it's worth 25 % (1/5) of BATRA market cap (BATRA being remaining 4/5), that would be 160 M of its current market valuation. But I can't be sure what that means.

 

I also think it's ridiculous that the S-4 was made based on Q3 and not Q4 numbers. In fact I don't know how much assets, equity and liabilities Liberty now has. Especially, on the S-4 I read that Live Nation ownership share was 27 %, but apparently "a forward contract" took this up to 34.4 % by December.

 

Live Nation's Q3 balance sheet value of 395 M (out of 1,077 M) seems to relate to that 27 %. I assume that rest of Q3 equity, e.g. AFS securities that we shown at fair market values of 533 M and "Other" equity method investments of 164 M are still roughly the same. With higher Live Nation ownership now both equity and liabilities are probably up, who knows what has happened to NAV.

 

Also, is the Vivendi 420 M post-tax settlement coming to only Liberty, or split pro-rata among all trackers? It was ruled before the split, but the cash has not arrived yet, and I guess Liberty represents the old "parent" most likely to get the money.