JBird Posted June 30, 2013 Share Posted June 30, 2013 When you create valuations do you estimate a probably-weighted range of values? Link to comment Share on other sites More sharing options...
Packer16 Posted June 30, 2013 Share Posted June 30, 2013 No I do not as I would not know what the probabilities are today or in the future. I try to make it simple as I don't have time to do extensive DCF modeling on my investments. I do however get a feel for what a normalized valuation would be. Let me give you an example. About 2 to 2.5 years ago I invested in 2 radio companies. If you looked at the values at which I bought one Saga Communications it was 4.7x EBITDA. Good recurring revenue media properties typically were sold for 8 to 10x EBITDA if not higher prior to 2008. This is due to real synergies that can be obtained by aggregating media stations. So in looking at both Salem and Saga I found the 2 radios who had the best performance of the radios in terms of EBITDA before and after the crisis. They both also happened to be amongst the cheapest of the radios on an EBITDA and FCF basis also. The debt coverage ratios for both were also the best amongst the radios. After the radios has appreciated I noticed the TVs had not so I purchased some of them at 5 to 6x EBITDA and now they are bring purchased for 8 to 10x + EBITDA multiples. Packer Link to comment Share on other sites More sharing options...
JBird Posted July 1, 2013 Share Posted July 1, 2013 Thanks Link to comment Share on other sites More sharing options...
muscleman Posted July 4, 2013 Share Posted July 4, 2013 Mr. Packer, could you tell me how you analyze telecom companies? I am very interested in PT, but not sure how to start. Could you share your perspectives on that? The basic things that I know: 1. large fixed cost, so they had better have a large customer base, and bundle plan offering is usually cost effective. 2. Capex. They need to upgrade the network from time to time. 2G to 3G and then to 4G. I am not sure what is the cost of each upgrades, and usually how many years would it take before another upgrade is needed? 3. What is their moat? Existing network? Link to comment Share on other sites More sharing options...
Packer16 Posted July 4, 2013 Share Posted July 4, 2013 Telecom can be thought of as 2 businesses (a legacy business (think landline and wireless phone service) and broadband services business (think cable, broadband internet and 4G wireless)). Right now we are in transition from legacy to broadband services. The legacy business throws off alot of free cash flow which is being re-invested in broadband services. I think going forward you are going to see a convergence of these 2 businesses and consolidation. If you look at the presentation, PlanMeastro has posted about telecom you can see the increasing profitability of scale and the 2 less consolidated markets are the US an Brazil. So as we see consolidation in those markets we should be able to see more profitability. Bundling these services together is key and right now PT has done that successfully in Portugal and is beginning in Brazil (through Oi). PT has done a great job if increasing EDITDA in a terrible macro situation and having to spin-off its cable business. So PT has re-built its broadband services business from scratch and is a good competitor in broadband services. The CEO of OI and formerly PT get the triple-play future. BTW this is trend that John Malone is investing in when he is buying cable cos such as Virgin Media and Charter Communications. The one risk for both OI and PT is the relatively high leverage of over 3x EBITDA. But as long as the focus is on broadband, I think this fine due to low interest rates and the cable cos typically have in excess of this amount of debt. The moat is the existing network and the cost advantage of bundling. There is also the media distribution channel. Packer Link to comment Share on other sites More sharing options...
Sportgamma Posted July 4, 2013 Share Posted July 4, 2013 Telecom can be thought of as 2 businesses (a legacy business (think landline and wireless phone service) and broadband services business (think cable, broadband internet and 4G wireless)). Right now we are in transition from legacy to broadband services. The legacy business throws off alot of free cash flow which is being re-invested in broadband services. I think going forward you are going to see a convergence of these 2 businesses and consolidation. If you look at the presentation, PlanMeastro has posted about telecom you can see the increasing profitability of scale and the 2 less consolidated markets are the US an Brazil. So as we see consolidation in those markets we should be able to see more profitability. Bundling these services together is key and right now PT has done that successfully in Portugal and is beginning in Brazil (through Oi). PT has done a great job if increasing EDITDA in a terrible macro situation and having to spin-off its cable business. So PT has re-built its broadband services business from scratch and is a good competitor in broadband services. The CEO of OI and formerly PT get the triple-play future. BTW this is trend that John Malone is investing in when he is buying cable cos such as Virgin Media and Charter Communications. The one risk for both OI and PT is the relatively high leverage of over 3x EBITDA. But as long as the focus is on broadband, I think this fine due to low interest rates and the cable cos typically have in excess of this amount of debt. The moat is the existing network and the cost advantage of bundling. There is also the media distribution channel. Packer Hi Packer, Could you direct me to the presentation? Edit: "BTW this is trend that John Malone is investing in when he is buying cable cos such as Virgin Media and Charter Communications." Malone is specifically going for Cable operators as they have more balance sheet firepower (due to the dividends) and system architecture (getting speeds up). How would you compare the telcos and cables? TIA Link to comment Share on other sites More sharing options...
HJ Posted July 4, 2013 Share Posted July 4, 2013 Packer, are you invested in PT currently? Under the current macro back drop, what do you think is a fair valuation multiple for PT's domestic and Brazilian operations respectively? Thanks for all your thoughts. Link to comment Share on other sites More sharing options...
Packer16 Posted July 4, 2013 Share Posted July 4, 2013 Here is link to the presentation: http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/pt-portugal-telecom/10/ It is the GS presentation. As to Malone's comments. He was looking to cable because of the cash flows (which the telecos have in abundance) and due easier plant upgrades to provide broadband services. Most cable cos have more debt than telcos. Interestingly enough most cable cos don't make that much on cable (due to high content costs) but do make alot via broadband connections. It is interesting to see that the CEO of PT has successfully competed against the incumbent cable co and won in Portugal. I think the idea is to do the same in Brazil. I don't have a position in PT but do have one in OIBR. Since the CEO of PT thinks that is were the growth is and it is selling for less than PT, I felt OIBR was a better play on that theme. In reading some sell side reports in OIBR, the triple play possibilities are not mentioned but what is mentioned is that OIBR has an old network and alot of debt. In terms of fair multiples of EBITDA. A good triple play company can go for 8 to 9x EBITDA (which is what OIBE is trying to become). Malone bought out VM at multiple of 8.5x and Charter at a multiple of 9x and there has to be some upside for him to pay those multiples. Packer Link to comment Share on other sites More sharing options...
PlanMaestro Posted July 4, 2013 Share Posted July 4, 2013 It is interesting to see that the CEO of PT has successfully competed against the incumbent cable co and won in Portugal. I think the idea is to do the same in Brazil. That I liked a lot Packer, great management team. It is one of my main worries though. Triple play is a free option but still, can they do it again? "Portugal is the only market in the world where leadership in triple play has been wrested from cable companies." – Bava Link to comment Share on other sites More sharing options...
Packer16 Posted July 4, 2013 Share Posted July 4, 2013 If anyone can do it, it is these guys. At this price Oi just has to survive to pay down the debt and its will be a double. If it turns into another PT then your talking multiples of that. Packer Link to comment Share on other sites More sharing options...
HJ Posted July 6, 2013 Share Posted July 6, 2013 You guys have some extraordinary bandwidth in the variety of business that you know. I know nothing about Brasil, but am intrigued by this just because people here are involved with it. So all of this is hanging on Bava? The stock trades like the company is going to file for bankruptcy, but in looking at the 20-F, the company cash flow still seem to be reasonable? It seem to be quite extreme if purely on concern of business deterioration? On the other hand, you see lines in 20-F like "We are subject to numerous legal and administrative proceedings. It is difficult to quantify the potential impact of these legal and administrative proceedings. We classify our risk of loss from legal and administrative proceedings as “probable,” “possible” or “remote.” We make provisions for probable losses but do not make provisions for possible and remote losses. As of December 31, 2012, we had provisioned R$6,421 million for probable losses relating to various tax, labor and civil legal and administrative proceedings against us. As of December 31, 2012, we had claims against us of R$765 million in tax proceedings, R$1,579 million in labor proceedings and R$4,076 million in civil proceedings with a risk of loss classified as “possible” for which we had made no provisions. " That's like more than 100% of book equity if you add up all the probable and possible. Is this the nature of doing business in Brasil, or specific to Oi? Is this why the stock trading this way? Someone in the controlling group selling? I also wonder how much of the current infrastructure are more like the RLEC assets that Verizon has been getting off (Fairpoint / Frontier), and how much is the more reasonable assets. Not that this is anyway analogous to this situation, just wondering how much assets is "worthwhile to upgrade" vs. "sitting duck waiting to get written down one day". Thank you all for sharing your knowledge and thoughts. Link to comment Share on other sites More sharing options...
Packer16 Posted July 6, 2013 Share Posted July 6, 2013 It looks like they have reserves to cover those situations. As to similarity to FTR, OIBR is rolling out triple/quad play while FTR only has double play (telephone and internet). Since alot of the video is migrating to the web at some point they may be able to offer the triple. What is unique about OIBR is Bava has not only competed against the local cable co from ground zero but become number one. He also plans to do this with Oi. As to the stock price, Brazil is not an investment favorite and Oi does have a modest but I believe managable amount of debt (esp. given the recent ECB decision to keep rates down (the US and Japan already have this in place). Without a plan to expand into triple play services, the market is probably correct. In addition, Oi's competitors have less debt and so from an investment perspective may appear less risky so absent Bava, Oi does not have a constituency. Packer Link to comment Share on other sites More sharing options...
muscleman Posted July 9, 2013 Share Posted July 9, 2013 Mr. Packer, could you please tell me the margin of safety for OiBR? I have a stake in PT, and I am interested in directly betting on Oi as well, but I am not sure what the margin of safety is here. They sold the land line tower rights for 1bn BRL, and they plan to sell the wireless towers as well. I guess they will sell and lease back. It sounds like they not only have the wireless tower's rights of use but also the ownership of the towers. I could be wrong though. So probably they could sell for, 6 bn BRL? That would still not cover a lot of the liabilities, if I assume the intangibles are worthless. Link to comment Share on other sites More sharing options...
Packer16 Posted July 9, 2013 Share Posted July 9, 2013 The margin of safety is in the price and the position of having a good amount of the quad-play cap ex in place. They also have an experienced CEO who was successful at PT doing the same withtout some of the pieces Oi has. The debt is more than the competitors but Oi generates alot of cash flow to support the debt level. PT has as much or more leverage as PT. With low interest rates I think debt is not too bad. If interest rates were high, it would be another story. Packer Link to comment Share on other sites More sharing options...
Kiltacular Posted July 10, 2013 Share Posted July 10, 2013 Hello Packer, Are you buying OIBR or OIBR.C? Skip this post if you'd prefer not to say. Btw, excellent write-up on AIQ. Link to comment Share on other sites More sharing options...
Kiltacular Posted July 10, 2013 Share Posted July 10, 2013 Packer: With low interest rates I think debt is not too bad. If interest rates were high, it would be another story. So, you see this as a risk and my guess is the market does too but that it overweighs the risk as compared to your opinion. In that vein, is it that you feel IF interest rates start heading higher it will be obvious in a time period that would still permit getting out of the investment before the market discounted the new, ''high inflation / your debt is going to sink you' scenario? It seems this is a theme in many of your investments. The debt makes them a problem, you see the problem and feel the debt can be managed (in a variety of ways). Yet, you're also aware that's what you're doing so you must assume that if the change in debt costs (interest rates) happens and hurts these types of investments, you'll have time to sell, etc. ??? kiltacular Link to comment Share on other sites More sharing options...
muscleman Posted July 10, 2013 Share Posted July 10, 2013 The margin of safety is in the price and the position of having a good amount of the quad-play cap ex in place. They also have an experienced CEO who was successful at PT doing the same withtout some of the pieces Oi has. The debt is more than the competitors but Oi generates alot of cash flow to support the debt level. PT has as much or more leverage as PT. With low interest rates I think debt is not too bad. If interest rates were high, it would be another story. Packer I see. I used to look at financial stocks and look at liquidation values. For telecoms, I guess that probably is harder to apply here. I am comparing Oi to Sprint, and it seems like Oi is somewhat like Sprint's situation last year. People don't seem to like Oi due to the high debt, but according to MorningStar, both companies' Long term debt/2012 EBITDA is around 4. Sprint's debt level is even higher than Oi. In terms of Price/(EBITDA-interest expense), Oi is actually much cheaper than S. Do you think Oi's preferred stock is a better bet or the common? Its preferred has no liquidation preference against common, and no voting rights, as someone posted in the PT thread. I am wondering if common stock holders can vote to issue more preferred stocks and dilute those holders? I checked their 20-F, and they said: "The Company is authorized to increase its capital, according to a resolution of the Board of Directors, up to the limit of 2.5 billion common or preferred shares, within the legal limit of 2/3 for the issuance of new nonvoting preferred shares." Right now preferred already consists of 2/3 of total shares, so I don't think they can issue more preferred without issuing common at the same time. Probably this means preferred would be a better bet then? Link to comment Share on other sites More sharing options...
Packer16 Posted July 10, 2013 Share Posted July 10, 2013 My view on debt is that debt is still overvalued versus equity (esp short-term debt). As such it makes sense to sell (issue debt) to buy even fairly priced income generating assets. In this case, the debt is financing a cheap asset. What I think will happen is the relative value of stocks versus bonds will increase with little or no price inflation. Bonds can be experience the effect of devaluation via falling in price versus income producing assets (such as stocks) and commodities and facilitate a deleveraging of the debt. As to leverage and safety, I have experienced two types situation where debt has blown me up with the firms going in bankruptcy. First are situations where the debt is too much and the firms have small coverage (less than 1.5x) even in industries where there is some growth (like cable). Thos happened to me in a firm called NTL. Second there are situations where the coverage today is fine but the business is in decline. An example of this was Lodgenet. It was fine in terms of coverage and its EBITDA grew coming out of 2008 but then it started to decline. Once that happened I sold at a loss but was saved from the subsequent decline to 0. Right now, the directory firms are in second camp. A better way to play these declining firms is to buy their debt if it is undervalued. As to the difference between preferreds and common in Brazilian companies, I have always preferred the cheaper selling stock. The common have the vote but the preferred have a minimum dividend. As a minority shareholder the minimum dividend and cheaper price are more valuable to me. In OIBR's case, I am betting on the control group as good managers and I don't have enough assets to influence a shareholder vote so the preferred shares are better for me today. Packer Link to comment Share on other sites More sharing options...
Kiltacular Posted July 10, 2013 Share Posted July 10, 2013 Thanks for a thoughtful reply. Link to comment Share on other sites More sharing options...
finetrader Posted July 19, 2013 Share Posted July 19, 2013 For what it's worth, I opened a position in Oibr. This could be a double in a 2 years time frame. Link to comment Share on other sites More sharing options...
Packer16 Posted July 19, 2013 Share Posted July 19, 2013 Hopefully you got in before the run-up. I missed it as I was going to double down. There may be a few more bumps in the road where I can add to my position. However, even at today's close there is still some nice upside. Packer Link to comment Share on other sites More sharing options...
finetrader Posted July 20, 2013 Share Posted July 20, 2013 Yes, got in at 1.54, yesterday. As you know Packer telecom companies are within my circle of competence and It's been a long time since I've been looking for a big telecom company trading at distressed level with good chance ofrecovery. Thanks for bringing this one to this board. Link to comment Share on other sites More sharing options...
tombgrt Posted July 20, 2013 Share Posted July 20, 2013 Packer, thank you for your willingness to share your thoughts and ideas with us, it is much appreciated. How do you deal with stocks that have run up a lot but are still cheap? I mean, do you ever suffer from biases because stocks like TVL ran up 500%+ from their lows? I'm not sure how I would be able to hold most/all of my investment with such a fast gain! Link to comment Share on other sites More sharing options...
Packer16 Posted July 20, 2013 Share Posted July 20, 2013 That is one of the tougher issues I am dealing with now. I have been slowly selling the stocks that have run-up closer to fair value and replacing them with more undervalued fare. I found a good quote from the folks at Southeast Asset Management that they sell as a stock is over 80% of fair value and replace it with a stock at 40% of fair value. I was able to this with SGA and SALM. I have historically sold too early (see Virtus where I sold for a 50% gain and it subsequently went up 6x). TVL is a tougher one in part because of its volatility and because HM is selling some stock (based upon the merger prospectus) to pay taxes for the merger. You can see the big blocks that have been sold the past few days are from them. I am Assuming if they were not selling it would be higher but I don't know for sure. Packer Link to comment Share on other sites More sharing options...
krazeenyc Posted October 2, 2013 Share Posted October 2, 2013 Packer, I see that you are an expert in telecom. Do you have any thoughts on small cell backhaul? Also do you have any thoughts on STRP specifically regarding the value of their 39 GHz spectrum ownership? thx. Link to comment Share on other sites More sharing options...
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