LMCA - Liberty Media

[ItsAValueTrap]

Hmmm Malone might be really, really excited about Charter.  Here's what the Charter opportunity might look like:

 

In YE2013 it generated $409M in free cash flow.

It generated 2,858M in adjusted EBITDA.

Let's suppose that EBITDA per home passed doubles from $223/passing to $446, that capex stays the same, that Charter's tax rate stays low (unrealistic because its NOLs will run out), that the TWC deal isn't accretive, that Charter refinances debt at the same interest rate, etc. 

e.g. penetration goes up 70% and improving margins deliver the last 30%.

 

Free cash flow goes to 2858+409 --> $3,267M.

At a FCF multiple of 15, Charter would have a market cap of $49.005B.

If it takes 5 years for this to happen, share price appreciation would be roughly 27%/year.  *Don't take these calculations too seriously.  They are probably inaccurate.

 

Liberty Broadband would be a leveraged way to play this.

[raaandy]

keep in mind that you very likely will not get close to all of the shares you oversubscribe for. especially in liquid offerings when rights are transferable. but it never hurts to try for the max. this is where your profits come in...

 

Correct me if I'm wrong, but so far only the general outline of the rights offering is known, right?  Is there anything specific that already makes you think this one is going to be profitable?  Or is it just because similar tactics from Malone in the past have been profitable, so this one probably will as well?

 

I'm familiar with the general idea from the Greenblatt book, but having never actually done anything like this before I just want to make sure i'm not missing something...

[ItsAValueTrap]

This law blog provides some insight as to why Liberty's True Position subsidiary purchased SkyHook:

 

http://www.fosspatents.com/2014/02/liberty-medias-trueposition-acquires.html

[Guest wellmont]

keep in mind that you very likely will not get close to all of the shares you oversubscribe for. especially in liquid offerings when rights are transferable. but it never hurts to try for the max. this is where your profits come in...

 

Correct me if I'm wrong, but so far only the general outline of the rights offering is known, right?  Is there anything specific that already makes you think this one is going to be profitable?  Or is it just because similar tactics from Malone in the past have been profitable, so this one probably will as well?

 

I'm familiar with the general idea from the Greenblatt book, but having never actually done anything like this before I just want to make sure i'm not missing something...

 

Yes more details will be revealed in SEC documents. You will be mailed a prospectus from Liberty.

 

When I said profitable, I meant in a general sense, not specific to this case. In rights offerings, the over-subscription privilege is really where you can score points. I have done some rights offerings in small banks where the rights were not transferable. I was able to acquire the maximum number of shares via the over subscription privilege because other investors couldn't be troubled to participate, or didn't have the money to put up.

 

I don't see this liberty offering as anything extraordinary, like the original liberty split off from TCI (which I was too naive to try and understand at the time). For one thing it's not a spin off conducted via rights offering (shos, cacq), which is how the original liberty was extracted from tci. I have read the rights offering chapter in the greenblatt book multiple times and come away learning more and more about what Malone accomplished. The chapter is Dense with key information and requires multiple reads imo.

 

But understand if you don't participate in the rights offering when you own shares you get diluted and your wealth is subtracted.

 

[giofranchi]

Am I missing anything?

 

Your post pretty well summarizes how it should work. Keeping in mind, like wellmont rightly pointed out, that probably oversubscription orders won’t be executed 100%.

 

Last summer BH did something similar, and it has been very profitable (at least for me! ;)).

 

Gio

 

[loganc]

This law blog provides some insight as to why Liberty's True Position subsidiary purchased SkyHook:

 

http://www.fosspatents.com/2014/02/liberty-medias-trueposition-acquires.html

 

Nice find.  Thanks for posting.

[Liberty]

http://www.reuters.com/article/2014/05/15/us-comcast-charter-idUSBREA4E0MN20140515

 

Comcast Corp (CMCSA.O) and Charter Communications Inc (CHTR.O) said on Thursday that cable veteran Michael Willner will run the cable company that will be spun off as part of a three-way deal that hinges on regulators approving Comcast's $45 billion takeover of Time Warner Cable Inc (TWC.N).

 

The yet-to-be-named company that was announced on April 28 will serve 2.5 million customers in states including Indiana, Michigan and Wisconsin. The company, which will have an equity value of $5.8 billion, will be two-thirds owned by Comcast shareholders and one-third owned by Charter.

 

Willner, 62, had a long career at Insight Communications, a cable operator that was acquired by Time Warner Cable in 2011 for about $3 billion. No former Time Warner Cable or Insight cable subscribers will be part of the new company, however.

[giofranchi]

Liberty Media Announces Intention to Acquire Live Nation Shares in Connection with Live Nation Convertible Note Offering

 

ENGLEWOOD, Colo.--(BUSINESS WIRE)-- Liberty Media Corporation ("Liberty") (NASDAQ: LMCA, LMCB) announced today that it intends to acquire up to 3,700,000 shares of common stock of Live Nation Entertainment, Inc. ("Live Nation") from investors participating in Live Nation's previously announced offering of convertible notes. The shares would be acquired, through market purchases, following the completion of Live Nation's marketing efforts. Liberty is not a participant in Live Nation's offering, and Liberty cannot assure you that Live Nation's offering will be completed, or that there will be sufficient shares available for purchase, in each case, on favorable terms or at all.

 

 

Gio

 

[ItsAValueTrap]

1-Is Liberty simply buying LYV shares to avoid being regulated by the Investment Company Act?

 

This article describes some of the implications such as Malone losing the supervoting powers of his shares:

http://www.forbes.com/forbes/2001/0611/064.html

 

---

2- Regulatory danger might happen if 40% or more of Liberty's assets are in passive positions.  If Liberty owns less than 25% of a company, it could be considered to have a passive investment in that company.  So, that investment would count towards the 40%.

 

Charter might merge with the Time Warner Spinco later on.  Or, Charter may decide to acquire other cable companies.  This could drop Liberty's ownership to less than 25%.

 

If any of Liberty's passive investments were to appreciate a lot, suddenly it could face the prospect of being regulated under the Investment Company Act??

 

3- By buying shares of Live Nation and Charter, Liberty is keeping ahead of 25% ownership.  At least for now.

 

4- I don't think that Malone really wants to buy Live Nation shares.  It seems like it would be a better idea to buy back shares, keep debt down, buy shares of Charter, etc. etc.  It seems like the threat of regulations is making him do things that he'd rather not do.

 

I could definitely be wrong.

[Liberty]

http://qzprod.files.wordpress.com/2014/05/output_masynl.gif?w=640&h=426

 

http://qzprod.files.wordpress.com/2014/05/output_gjwmv9.gif?w=640&h=426

[Guest JoelS]

LMCA is trading at roughly 15% discount to underlying assets, and those assets appear to be undervalued themselves.

Sirius could be $5 2015 year end, Charter should be worth at least 50% more, other assets incl LYV, Atlanta braves and minority positions have good upside..

+ You have qualitative optionality with John Malone pulling "rabbits out of the hat"

+ you have the catalyst of the split off in 2H 2014.

 

If the stock falls in a wholesale market decline, buybacks are likely, and Malone/Maffei pick up bargains. If the stock rises, it can be used as acquisition currency.

 

Can someone offer up some counter points?.. Cheers!

[JAllen]

LMCA is trading at roughly 15% discount to underlying assets, and those assets appear to be undervalued themselves.

Sirius could be $5 2015 year end, Charter should be worth at least 50% more, other assets incl LYV, Atlanta braves and minority positions have good upside..

+ You have qualitative optionality with John Malone pulling "rabbits out of the hat"

+ you have the catalyst of the split off in 2H 2014.

 

If the stock falls in a wholesale market decline, buybacks are likely, and Malone/Maffei pick up bargains. If the stock rises, it can be used as acquisition currency.

 

Can someone offer up some counter points?.. Cheers!

 

 

Here's a counterpoint: I was just thinking that the CHTR stock price increase makes buying LMCA for the Liberty Broadband spinoff warrants quite a bit less attractive.  We owned CHTR last year, but don't see how it's going to return much more than the market (say ~15%) over the next few years, even with programming synergies derived from acquisitions.  It's a monolithic beast that is slow to shift.

 

 

What do you base your CHTR price projection on?  We be interested in the spinoff if CHTR was lower than $120 or so.  That would make buying in with the discount at $100, which would only be about 1.3 EV turns of EBITDA lower. 

[loganc]

Here's a counterpoint: I was just thinking that the CHTR stock price increase makes buying LMCA for the Liberty Broadband spinoff warrants quite a bit less attractive.  We owned CHTR last year, but don't see how it's going to return much more than the market (say ~15%) over the next few years, even with programming synergies derived from acquisitions.  It's a monolithic beast that is slow to shift.

 

 

What do you base your CHTR price projection on?  We be interested in the spinoff if CHTR was lower than $120 or so.  That would make buying in with the discount at $100, which would only be about 1.3 EV turns of EBITDA lower.

 

Are you saying that the "market" is going to return 15%? 

 

Programming synergies? What about broadband penetration? 

 

Edit:  I take your point about the "monolithic beast" - people aren't going to wake up and change their MSO en masse.  However, as alluded to in my previous statement, I do not believe the programming synergies are the real value driving lever for CHTR.  Fundamentally, it is penetration and broadband penetration, in particular.   

[JAllen]

Here's a counterpoint: I was just thinking that the CHTR stock price increase makes buying LMCA for the Liberty Broadband spinoff warrants quite a bit less attractive.  We owned CHTR last year, but don't see how it's going to return much more than the market (say ~15%) over the next few years, even with programming synergies derived from acquisitions.  It's a monolithic beast that is slow to shift.

 

 

What do you base your CHTR price projection on?  We be interested in the spinoff if CHTR was lower than $120 or so.  That would make buying in with the discount at $100, which would only be about 1.3 EV turns of EBITDA lower.

 

Are you saying the the the "market" is going to return 15%?

 

Programming synergies? What about broadband penetration?

 

 

No, optimistically the market will return 10% and optimistically CHTR will return 15%, but I think growth would have to accelerate for CHTR to return that.

 

 

Regarding increasing broadband penetration, this will happen overtime, just not quickly (broadband subs grew at only 3% Q/Q in 1Q 2014), which it would need to do to result in really strong shareholder returns, I believe.  Revenue and EBITDA are growing at ~7%.  I think they need to grow much faster than that for CHTR to be attractive at this stock price. This is mostly because CHTR trades at a large premium to other cable cos.  So if there will likely be some multiple compression, shareholders need extra growth to compensate for that. Don't get me wrong, I would love to continue to own CHTR for years, I just don't see how you make really strong returns buying the stock here.

 

 

Growth did accelerate after one full year of triple-play roll out which is a good sign, but it needs to accelerate even more.

[loganc]

No, optimistically the market will return 10% and optimistically CHTR will return 15%, but I think growth would have to accelerate for CHTR to return that.

 

Regarding increasing broadband penetration, this will happen overtime, just not quickly (broadband subs grew at only 3% Q/Q in 1Q 2014), which it would need to do to result in really strong shareholder returns, I believe.  Revenue and EBITDA are growing at ~7%.  I think they need to grow much faster than that for CHTR to be attractive at this stock price. This is mostly because CHTR trades at a large premium to other cable cos.  So if there will likely be some multiple compression, shareholders need extra growth to compensate for that. Don't get me wrong, I would love to continue to own CHTR for years, I just don't see how you make really strong returns buying the stock here.

 

Growth did accelerate after one full year of triple-play roll out which is a good sign, but it needs to accelerate even more.

 

Very fair points.  I think the optimistic scenario of 15% is a bit light, but those numbers are fundamentally reliant on the assumptions one makes on growth rates.  I could be overly optimistic. Personally, I primarily own CHTR via LMCA, but I would be happy owning the asset on a standalone basis.  As is well understood at this point, I believe cable assets have a very strong position in the space of delivering high speed broadband connectivity.  I think finding durable assets is difficult and cable seems to be pretty durable to me at this point. 

 

Edit: And CHTR is in a uniquely strong position in the US cable space due to the rural footprint that has minimal overlap with strong competition (i.e. FiOS) and strong management.  I am sure you are well aware of these facts and the fundamental issue is the price of the asset.  CHTR is not obviously cheap so I understand that criticism.     

[ItsAValueTrap]

1- I think there's huge opportunity in adjusted EBITDA growth.

 

http://glennchan.files.wordpress.com/2014/04/charter-ebitda-per-home-passed.png?w=660&h=290

 

Historically, Charter has been managed poorly and has had very low penetration rates despite weak competition.

 

Doubling EBITDA with some improvement in margins translates into more than double profitability.  On top of that, cable companies are leveraged.  The leverage will seriously magnify the effect of the underlying business getting better.  Interest rates should come down for Charter so there's some minor margin improvement there.

 

This will be offset with the tax shield from NOLs running out.

 

Growth in adjusted EBITDA - capex may exceed 15% by a lot.

 

2- This is hard to see because the transition to all-digital will cause some pain for Charter customers and the capex doesn't see an immediate return on investment.  But there's a reason why Malone bought Charter in Liberty Media and not Ventures or Global.  He liked Charter (Tom Rutledge really) so much that he put Charter in the vehicle where he has the greatest ownership (Malone owns a greater percent of Media than Ventures or Global).

[dwy000]

Charter's geographic clustering is pretty poor compared to comcast and especially Cablevision.  Charter started out as a roll-up of smaller, less dense cable providers with strong competition from satellite so it will never have the ability to get EBITDA levels up to those of Cablevision (which is primarily NYC and surrounding areas so a very, very, dense and high ARPU regional base).  Rutledge is one of the best out there and Malone is...well Malone so they will definitely improve the results but there's only so much you can do with second rate assets.  If they can get it close to Comcast EBITDA levels that would be huge in itself.

[JAllen]

1- I think there's huge opportunity in adjusted EBITDA growth.

 

http://glennchan.files.wordpress.com/2014/04/charter-ebitda-per-home-passed.png?w=660&h=290

 

Historically, Charter has been managed poorly and has had very low penetration rates despite weak competition.

 

Doubling EBITDA with some improvement in margins translates into more than double profitability.  On top of that, cable companies are leveraged.  The leverage will seriously magnify the effect of the underlying business getting better.  Interest rates should come down for Charter so there's some minor margin improvement there.

 

This will be offset with the tax shield from NOLs running out.

 

Growth in adjusted EBITDA - capex may exceed 15% by a lot.

 

2- This is hard to see because the transition to all-digital will cause some pain for Charter customers and the capex doesn't see an immediate return on investment.  But there's a reason why Malone bought Charter in Liberty Media and not Ventures or Global.  He liked Charter (Tom Rutledge really) so much that he put Charter in the vehicle where he has the greatest ownership (Malone owns a greater percent of Media than Ventures or Global).

 

 

So what is your projected time to double EBITDA?  It's growing at 7% now so it would need to accelerate quite a bit for that to happen in 5 years or less.

 

 

Also, do you expect CHTR's valuation premium to other companies to persist?  Comcast is growing at least as fast (pretty sure) as CHTR but has a lower valuation.

 

 

You think interest rates will continue to decline for CHTR?

 

 

I agree that FCF will rapidly increase, but right now there's no sign of capex moderating, so I'm not sure when that will happen.  When do you think that might happen?

 

 

I think that because cable cos. are mostly the same, except for population density and subscriber numbers, using EV/EBITDA is probably the best bet, or assume that eventually, each will have similar capex/revenues and use projected EBITDA margin minus expected capex margin (say low-teens) for each one for comparison.  This grants CHTR some leniency on its greater capex spending right now.

 

 

I just don't know when capex will moderate, if overall growth will increase, how much Google Fiber will expand over the time horizon we're talking about, which is quite a few years.  Will broadband pricing eventually be regulated like pretty much every other utility is another risk over the next 5-10 years.

[Liberty]

http://glennchan.wordpress.com/2014/05/28/lmca-investment-company-act/

[ItsAValueTrap]

Charter's conference calls and the supplemental disclosures ("Financial Addendum") posted on its website are actually really good.

 

Right now, they've only converted a small portion of their systems to all-digital.  Before they can transition to all-digital, they have to send a lot of set-top boxes to customers.  They also have to deal with all of the technical support calls, and calls from pissed off customers.  (If you watch analog TV and are forced to add a set-top box, you will be unhappy.  There is little upside for you and your rates will go up in the future because you eventually have to pay for the set-top box.)  There's a lag between when Charter spends the capex and when it will see a return on investment.

 

They've also been spending money on full-fledged set-top boxes rather than cheaper digital-->analog converter boxes.  So after the transition is complete, all customers will have video-on-demand capability and eventually they may get interactive menus.

 

From the latest conference call, they are only at 40% of their all-digital initiative.  Once that hits 100%, Charter should see the benefits of its capex.  They might also have elevated opex with support calls from customers as they transition to all-digital.

 

Adjusted EBITDA grew by 7.2% year-over-year, a significant uplift from top line growth and service investments.

 

Looking beyond the single quarter, a few words on our product set service operations. We’re currently at 40% of our all-digital initiative, and we continue to target completion by year end. Over the last six weeks, we began introducing our new product suite, Charter Spectrum in a number of markets that we’ve already taken all-digital including Dallas, Fort Worth and Greenville, South Carolina.

 

Customers inside these markets now have access to over 200 HD channels, with digital pictures and interactive programming guide and full video-on-demand capability on every single TV out there. Minimum internet speeds of 60 megabits for new and migrated internet customers, and in some markets like St. Louis, our minimum speed will be 100 megabits. And a fully featured voice product at all highly competitive price. We’re offering superior products at superior price points whether on promotion or at full price.

 

Moving to all analog content, encrypting the signals and placing a two-way box on every outlet in the footprint, brings significant long-term benefits, but it also is a highly disruptive operational process. We have a solid plan in place and it’s going very well. In fact, we continue to see a positive impact on our customer growth performance in all-digital markets. And each customer on our new pricing and packaging structure will receive the spectrum product suite when their market goes all-digital.

http://seekingalpha.com/article/2169913-charter-communications-ceo-discusses-q1-2014-results-earnings-call-transcript?part=single

 

2- It looks bad right now.  That's why I think the opportunity exists.

 

The transition to digital hurts the business in the short-term.  It pisses off the analog cable customers, results in lots of support calls, and takes a lot of capex.  Once customers get really fast Internet and lots of digital channels, we should see Charter gain customers.  It will take time for word of mouth and good reviews to spread.

 

It will also take time for them to get video and broadband penetration up to cablevision levels... which definitely seems doable.  Charter's footprint is less competitive so they might ultimately have higher penetration (which will take years).

 

3- The other thing you have to factor in is Tom Rutledge.  Management matters.  The Charter story is a bet on him significantly improving penetration, EBITDA per customer, etc. etc.  You can see that some cable companies operate their assets more effectively than other cable companies.  Management matters a lot.  I think the opportunity exists because many people don't place enough importance on it.

 

but right now there's no sign of capex moderating

This is addressed on the conference calls.

[constructive]

A lot of people think Rutledge is great but I don't get it.

 

Cablevision was a mediocre company when he arrived and mediocre when he left. The stock price went nowhere. Other than revenue per crossing, most margins and other metrics remained weak compared to Comcast and even Time Warner. Their high revenue per crossing is geographical circumstance, not a sign of personal genius.

[no_free_lunch]

A lot of people think Rutledge is great but I don't get it.

 

Cablevision was a mediocre company when he arrived and mediocre when he left. The stock price went nowhere. Other than revenue per crossing, most margins and other metrics remained weak compared to Comcast and even Time Warner. Their high revenue per crossing is geographical circumstance, not a sign of personal genius.

 

+1  There is so much "anecdotal" evidence on Rutledge but it's hard to back it up with numbers.  I guess charter has been on a tear since he took over but that's too short-term in my opinion.

[Liberty]

A lot of people think Rutledge is great but I don't get it.

 

Cablevision was a mediocre company when he arrived and mediocre when he left. The stock price went nowhere. Other than revenue per crossing, most margins and other metrics remained weak compared to Comcast and even Time Warner. Their high revenue per crossing is geographical circumstance, not a sign of personal genius.

 

+1  There is so much "anecdotal" evidence on Rutledge but it's hard to back it up with numbers.  I guess charter has been on a tear since he took over but that's too short-term in my opinion.

 

Malone seems to think he's the best operator in the business and is not just saying that but is putting his money behind him. Seems like a pretty good endorsement.

[JAllen]

A lot of people think Rutledge is great but I don't get it.

 

Cablevision was a mediocre company when he arrived and mediocre when he left. The stock price went nowhere. Other than revenue per crossing, most margins and other metrics remained weak compared to Comcast and even Time Warner. Their high revenue per crossing is geographical circumstance, not a sign of personal genius.

 

+1  There is so much "anecdotal" evidence on Rutledge but it's hard to back it up with numbers.  I guess charter has been on a tear since he took over but that's too short-term in my opinion.

A manager can be the best in the world such as Rutledge, but CHTR is still growing revenues and EBITDA at 7% and trades at a significant premium to comparable peers that are growing just as fast.  He can't just snap his fingers and cause the penetration to go to 50% or something. 

[constructive]

Malone seems to think he's the best operator in the business and is not just saying that but is putting his money behind him. Seems like a pretty good endorsement.

 

Yes Malone hiring Rutledge is a valuable piece of information. Maybe more valuable than my perspective of his record at Cablevision.

 

But no matter who you hire to run a business, it's a good idea to say they are the best.