LMCA - Liberty Media

[benjamin1978]

I have no doubt they are profitable and at reasonable (current) valuation. The deal looks decent. The analyst asked my question at the call - my main concerns are the above-average cyclical nature of discretionary live entertainment in a recession and the use of high variable rate debt to finance such an asset. Otherwise, there is no doubt these are cash cows.

 

If so you should be more worried about Live Nation where leverage is massive and also long term leases / concert halls to fill

 

 

[Phaceliacapital]

F1 looks like a very nice business...

 

 

[Spekulatius]

F1 looks like a very nice business...

 

Formula 1 is very popular in Europ, Asia and South America and I think there is potential in NA as well to make it a white collar racing version of the NASCAR. It's a prime entertainment property.

 

I remember as a small kid watching races live in the Nürburgring Race course and we did get in there for free. That was in the very early 70's. It is certainly better marketed now.

[xo 1]

http://www.forbes.com/sites/csylt/2015/07/15/the-secret-behind-formula-ones-4-4-billion-profits/#56db2727ceaf

 

http://www.forbes.com/sites/csylt/2016/09/04/exclusive-formula-one-sale-to-liberty-media-is-a-done-deal/#5e2196d06c6a

 

The latest article seems to suggest there is not much growth to be extracted at this valuation. Anyone think this is a vanity project? I read somewhere Malone wanted to get this asset in competition with Rupert Murdoch.

 

 

What's going on right now in the Media sector is a bidding of rare assets that are valuable. Formula one is one of the best racing assets out there. And there are growth opportunities. Although F1 hasn't been popular in the past in the United States. Now there is an expansion with the track in Austin and a possibility of more growth and popularity in the US.

 

You say it is a vanity asset. Then by that logic the braves can be looked at the same way. At the end of the day both are rare and valuable and one of a kind and the content can be pushed out to all the networks and cable packages Liberty Media owns in the empire.

 

There was an interesting podcast covering the F1 acquisition on Bloomberg's Deal of the Week in August:

http://www.bloomberg.com/news/articles/2016-08-17/deal-of-the-week-formula-one-sale-begets-questions-about-sport-s-future

 

Covers many of the points raised here already, but it is a thoughtful discussion of the potential and the difficulties that may face Liberty in integration.

[undervalued]

Based on the top of the most recent 10Q, https://www.sec.gov/Archives/edgar/data/1560385/000155837016007519/lmca-20160630x10q.htm

 

So right now, LMCA's market cap is about $1.8B (84m shares outstanding * $22).

Braves' market cap is 840M (49m * $17).

Sirius XM market cap is 11.4B. Total all 3 equals about 14B

 

Is this right?

 

After reading the presentation, it feels like F1 is buying Liberty because original Liberty shareholders gets only 35% of the control.

[WideMoat]

After reading the presentation, it feels like F1 is buying Liberty because original Liberty shareholders gets only 35% of the control.

 

They are getting C shares (or K shares if you prefer).

 

"...Series C common stock that, except as otherwise required by applicable law, entitles the holder to no voting rights..."

 

"...In addition, our chairman, John C. Malone, beneficially owns shares representing the power to direct approximately 48 % of the aggregate voting power in our company, due to his beneficial ownership of approximately 96% of the outstanding shares of Liberty Series B common stock as of January 31, 2016."

 

[10-k]

[scorpioncapital]

Existing Liberty shareholders put up 1.1 billion cash and get:

35.3% of Formula 1

12% of Live Nation Entertainment. (35.3% * 34%)

--

I suppose one could look at it as 'giving up' 22% of Live Nation in exchange for a 'little more' Formula 1 since 1.1 billion would technically only buy 25%. Note, F1 group will still owns 34% of LYV in absolute terms. The LMCK shares issued do seem to be at a discount to NAV. $21.26 vs at least $26 or so if you look through the LYV stake.

 

It will remain to be seen if the exchange of live music for race cars, or conversely the purchase by the F1 gang of live music in exchange for their cars is win-win for all! After all, I get the impression they are going to be using both vehicles to do joint events.

 

If stagflation-lite is the scenario, I suppose having an asset-light franchise with reasonable pricing power is not the worst thing although I'd like to see if they can get the interest expense down.

 

[Foreign Tuffett]

Back of the envelope this looks to be an attractive deal, although clearly it's one that's not without risks. I slapped a 5% TTM FCF yield on F1 and the #s look good. In a qualitative sense: you have a team with an outstanding record of value creation in the media space purchasing a unique sports asset at a good (but not great) price. I trust everyone agrees that F1, unless it falls apart from mismanagement, is unlikely to be replicated or replaced?

[bonkers]

The analyst asked my question at the call - my main concerns are the above-average cyclical nature of discretionary live entertainment in a recession and the use of high variable rate debt to finance such an asset.

 

I am really surprised at F1's current financial leverage.

"Delta Topco had $4.1 billion of term loans on its books last year and an adjusted debt/EBITDA leverage ratio of 9.4x according to ratings agency Moody’s." Similarly, on LMCA's slides Gross debt / EBITDA = 8.7x, but this is the deal and not perhaps final.

 

Liberty Global has 4-5x, SiriusXM 3-4x, DirecTV had 2.5x, Discovery 1.9x, LiveNation 3.5x (but with huge cash pile supposedly overseas).

 

Maffei made a comment on the call "We are confident that it can maintain leverage levels that on the surface look high but when you look at the elements of business…it mitigates a lot of that risk", but nothing more specific.

 

What do you people think will be the sustainable gross leverage ratio for this business? Hard to believe it could be higher than what utility-like cable businesses had in the past when their business was still good. ???

[Ian L]

Cable companies will have much higher depreciation than Formula one.

It has been a growth market in terms of Sports Media rights contracts. F1 is a worldwide sport at the very top end of premium sports and should be able to take advantage. With Liberty media's expertise they could even exceed the trend and earnings could grow substantially.

I think with its contracted revenues F1 can carry the debt, much of the EBITDA will flow to FCF and can go towards buybacks so FCF per share could increase a lot.

[benjamin1978]

a) they pay minimal cash taxes so FCF conversion is really high

b) business has essentially no capex

c) revenues are contracted years in advance, and

d) similar to LYV I expect to see a large pile of float from prepayment of ticket revenues etc.

 

If you look at UFCF/Interest, coverage is about 2x on an LTM basis, despite pretty high rates for the 1st and 2nd liens at 5 and 8% respectively.

 

So I think the business can support quite a lot of leverage, and if they grow they can delever rapidly

[scorpioncapital]

So maybe looks a bit like an LBO buyout, you take on a little more debt than is normally prudent and chisel away at paying it off with FCF.

[benjamin1978]

So maybe looks a bit like an LBO buyout, you take on a little more debt than is normally prudent and chisel away at paying it off with FCF.

 

it is exactly a public market LBO

[Foreign Tuffett]

So maybe looks a bit like an LBO buyout, you take on a little more debt than is normally prudent and chisel away at paying it off with FCF.

 

it is exactly a public market LBO

 

I fully agree with these sentiments

[scorpioncapital]

http://www.nytimes.com/2016/09/17/sports/autoracing/formula-one-at-a-turning-point-with-its-new-american-owners.html?_r=0

 

http://www.forbes.com/sites/csylt/2016/09/23/how-did-f1-lose-1-billion-of-value-in-two-months/2/#4bc7202f571b

 

Does anyone have any idea how to measure or think about their ability to succeed in professionalizing and standardizing this asset using the American corporate methods of expanding the franchise?

I have mixed feelings about it and no illusion that there won't be some periods where it won't go as smoothly as they expect. (Of course even that is to be expected)

 

[gfp]

Barrons is running a comprehensive piece on the Liberty entities this weekend.  Use the google trick to read the article for free -

 

https://www.google.com/url?sa=t&rct=j&q=&esrc=s&source=web&cd=1&cad=rja&uact=8&ved=0ahUKEwizi5fpj7zPAhWOsh4KHfntBUkQqQIIHzAA&url=http%3A%2F%2Fwww.barrons.com%2Farticles%2Fliberty-media-better-than-berkshire-1475298602%3Ftesla%3Dy%3Fmod%3DBOL_hp_highlight_1&usg=AFQjCNEo0yn6qYg255K0PgPTLpE726vIug

 

[DCG]

There's still no single stock you can buy to own pieces of all parts of the company through, right? I have no interest in owning shares of 9 different Liberty companies and trying to allocate capital between them.

 

 

Also, it seems like there could be a risk around the possibility of changes in tax laws. I'm not sure Malone's tax aversion is equivalent to what's coming to light about Trump. A lot of companies (including Amazon) seem to do whatever possible to avoid paying taxes, but this election may continue to bring all the tax loopholes into focus.

[DCG]

Anyone?

[Liberty]

1) There's no single stock you can buy, sorry. There are pros and cons to this, as you can pick just what you're comfortable with rather than have it all thrown in the mix.

 

2) Malone has lived through all kinds of tax regimes and I'm pretty sure he'll do fine with whatever comes next. He hires the very best tax people in the business.

[merkhet]

1) There's no single stock you can buy, sorry. There are pros and cons to this, as you can pick just what you're comfortable with rather than have it all thrown in the mix.

 

2) Malone has lived through all kinds of tax regimes and I'm pretty sure he'll do fine with whatever comes next. He hires the very best tax people in the business.

 

As a side note to (2), I believe back when he was @ TCI, the had an entire tax team dedicated to figuring out how to extend his deferred tax liabilities -- I'm assuming that practice has continued in some form. Moreover, the recent Liberty Ventures split-off is, I think, evidence that he will continue to find ways to make sure he has very little tax leakage.

[compounding]

It's not like he exploits a single loophole in the tax code - they are just more cognisant than others of how different structures, deals, or financing can defer the timing of the tax payment. And they go out of their way to think of how to do these things intelligently.

 

With Malone it's also more than just the fiduciary responsibility, he is philosophically very much against paying taxes, which, in turn, makes it very unlikely that they would stop prioritising tax efficiency.

 

If you can give an example of something you feel is improper, or at risk in some way, I'm sure the thread would be all ears.

[muscleman]

Offer's equity value is 4.4 bn. FCF for this business is 457 Million. The multiple of P/FCF is only 10x. That seems very reasonable to me.

From Buffet and Munger's experience, buying trophy assets at reasonable prices (10x multiple or so) should work really well over the long term.

Am I mistaken?

 

I am curious why there is almost no difference between FCF and EBITDA. Don't they pay interest expense and tax?

[scorpioncapital]

Good question, this is a common theme among several stocks, namely the use of debt leverage. Insurance can get cost-free leverage at the expense of restrictions on investable assets. On the other hand, regular businesses pay interest but have the possibility of above-average returns in their business. You can probably see the intersection/danger zone...namely when there is a cost to borrow and earning power is unstable or contracting. Markets don't like that, especially if inflation heats up a bit.

Liberty has generally owned higher quality assets by virtue of their balance between new-age moats and old-school making a profit. Still you have to look back only to the great recession to see how Liberty style assets reacted. Generally dropping far more than average and rebounding far more than average. In normal times, they do decently. But debt is always an invisible partner, sort of like the way government is a partner in your business via taxes. Nobody will come and tell you it was too aggressive until much later, so we don't know. Prudence has to come in thinking about these issues beforehand, and like all investing, if you don't pull the trigger and act boldly in the face of uncertainty ever, it will be hard to create returns. Intelligent risks vs kamikaze risks :)

 

[fisch777]

The 457M is unlevered free cash flow, so interest is not deducted, and at 7-8 turns of leverage, you can bet it's pretty substantial.  Cash taxes are probably next to nothing due to interest deduction and UK/Jersey domicile.

 

Maffei said LMC thinks they got a good deal or they wouldn't have done it, but I think it remains to be seen whether the price is that attractive.

[merkhet]

Liberty Media is assuming about $4 billion of leverage for Formula One, and the $470 million of FCF is unlevered FCF, so you have to take into account the interest paid on that $4 billion. My sense is that they paid somewhere in the 17x range on levered FCF.