Ask Packer - No Seriously, Ask Him Anything (AHA)!

[muscleman]

In general, EBITDA can be used in situations where there is a large one-time outlay where the benefits will be seen over years and there is customer lock-in.  Real estate is the extreme example.  Cable has some of these characteristics also however, there are more frequent "one-time" outlays but there is customer lock-in.  EBITDA also removes the non-cash amortization costs for consolidating industries.

 

As to Sequoia, I still own it.  I was planning on going to the annual meeting & maybe asking for a change to the management agreement with a lower fee with possibility of the fee going back to historical levels if they outperform at historical margins.

 

Packer

 

Thank you! In order for EBITDA to make sense here, we have to see that actual capex is far lower than Depreciation. I do got it for the Amortization cost.

If the actual long term capex is in line with long term depreciation, then only Amortization can be added back to earnings.

 

Another question, regarding return on invested capital, I wonder if it makes more sense to use

EBITDA/(PPE plus accumulated D&A)?

 

Lastly, I asked a question about US cable franchise asset item. No one seems to know. Could you please help me take a look?

http://www.cornerofberkshireandfairfax.ca/forum/general-discussion/us-cable-company's-franchise-value/

 

 

Thank you!

[muscleman]

Packer, I also have a question about the competitive landscape of the cable industry.

 

From CABO's 10-k, it says:

"

In addition, a number of municipalities have announced plans to construct their own data networks with access speeds that match or exceed those of our own through the use of fiber optic technology. While historically municipalities in many of the markets we serve have been subject to state laws that restrain municipalities from providing broadband coverage through government-owned networks, the FCC issued an order preempting these laws in March 2015. An appeal of this order is pending in the U.S. Court of Appeals for the Sixth Circuit. In addition, in some cases, local government entities and municipal utilities may legally compete with us without obtaining a franchise from a state or local governmental franchising authority (“LFA”), reducing their barriers to entry into our markets. Affirmation of the FCC preemption ruling and the entrance of municipalities as competitors in our markets would add to the competition we face and could lead to additional customer attrition.

"

 

As we know, when deregulation happened for the airlines in the 1970s, competition suddenly became intense, and a lot of airlines went ch 11.

I wonder if the cable competitive landscape is changing. What's your take on this?

[dwy000]

No expert but interested observer...

 

I think you are referring primarily to broadband competitive landscape (as opposed to cable which would take into account OTT and cord shaving/cutting etc.).

 

Personally, I think the government effectively killed - or at least heavily stifled - brand new broadband competition when they included cable in the Title II regulations of the FCC last year.  Under that, the FCC has the ability to manage, cap or even dictate pricing on broadband, even though they say they have no intention of doing so.  In addition, it requires owners of networks to give access to 3'd parties to resell.  Building out a fiber network is hugely expensive and requires a very long time horizon for payback.  It would be very difficult for any rational company entering this space to make the case for the upfront investment without having full control (or visibility) into the pricing or usage for that product. 

[muscleman]

No expert but interested observer...

 

I think you are referring primarily to broadband competitive landscape (as opposed to cable which would take into account OTT and cord shaving/cutting etc.).

 

Personally, I think the government effectively killed - or at least heavily stifled - brand new broadband competition when they included cable in the Title II regulations of the FCC last year.  Under that, the FCC has the ability to manage, cap or even dictate pricing on broadband, even though they say they have no intention of doing so.  In addition, it requires owners of networks to give access to 3'd parties to resell.  Building out a fiber network is hugely expensive and requires a very long time horizon for payback.  It would be very difficult for any rational company entering this space to make the case for the upfront investment without having full control (or visibility) into the pricing or usage for that product.

 

In that case, why is the title II order being appealed by cable companies?

 

Could you please help me understand these two paragraphs here?

https://www.sec.gov/Archives/edgar/data/1632127/000143774916026995/cabo20151119_10k.htm

 

Franchising. We are required to obtain franchises from state or local governmental authorities to operate our cable systems. Those franchises typically are non-exclusive and limited in time, contain various conditions and limitations and provide for the payment of fees to the local authority, determined generally as a percentage of revenues. Failure to comply with all of the terms and conditions of a franchise may give rise to rights of termination by the franchising authority. The FCC has adopted rules designed to expedite the process of awarding competitive franchises and relieving applicants for competing franchises of some locally-imposed franchise obligations. This development, which is especially beneficial to new entrants, is expected to continue to accelerate the competition we are experiencing in the video service marketplace.

 

Rate Regulation. FCC regulations prohibit LFAs or the FCC from regulating the rates that cable systems charge for certain levels of video cable service, equipment and service calls when those cable systems are subject to “effective competition.” In 2015, the FCC revised its rate regulations to create a presumption that all cable systems are subject to the effective-competition exemption unless proven otherwise. That decision has been appealed to a U.S. Federal court, and we cannot predict the outcome.

 

 

 

How does Franchising work? Is this basically a business license? How is Franchising asset recorded on the balance sheet? I know TWC-CHTR merger will result in Franchising asset written up to 60 bn. That's quite a lot.

 

Rate Regulation: The language above seems to show that FCC said all cable systems are subject to effective-competition exemption, which means all cable systems can not be regulated for the rates. That's a good things for cable companies isn't it? Why is this being appealed?

[muscleman]

I think my question about the effective competition is too dumb.

https://www.fcc.gov/document/commission-adopts-effective-competition-order

 

Based on the order, I think it is likely that the order is being appealed not by cable companies but by cable's competitors or local authorities.

[dwy000]

Again, I'd preface this that I'm not an expert just an avid observer.

 

Regarding franchises - these are typically historic and date back to when the cable companies got permission from state and local governments to rip up streets and lay cable for TV (largely back in the 70's and 80's).  The local governments typically got either upfront fees or ongoing royalties for the franchise license.  When you buy a local cable company you are effectively buying their franchise rights and it often requires the local/state authority to approve the transfer.  With most of the basic capex infrastructure having been depreciated, a good chunk of purchase price is allocated towards the value of the franchise (better that than goodwill because you can depreciate it).  That's probably the majority of the write-up in the TWC merger.

 

Because the local and state authorities were in charge of allocating and handing out franchises, it really undermined the ability of the FCC to encourage competition.  Especially relevant when the business switched from local, cable provided TV to include broadband.  As you can imagine, a local cable company can have very close ties to the state/local government which can help limit awarding of add'l franchises.  So the FCC came in over the top and tried to undermine or eliminate the local/state authorities in terms of franchise offerings.  Note that satellite providers usually don't have to have the local franchises because they aren't local or ripping up streets.  But they do provide "effective competition" which eliminates the FCC ability to govern pricing of cable tv.  Yet another reason for FCC to want Title II.

 

Note in the 2nd paragraph regarding rate regulation that it does not capture broadband, just video.  Broadband was always in this netherworld in that it wasn't considered cable and it wasn't considered telecom (telecom being governed under Title II).  In 2015, the FCC classified broadband under Title II, effectively giving it the same regulatory oversight that it has over telephone companies (which is very, very broad and onerous).  The argument was largely to ensure net neutrality but they went beyond just putting in a net neutrality rule and imposed Title II.

 

If you haven't, you should read Cable Cowboy.  A lot of the historic franchise stuff is really interesting and gives a great background as to how we got where we are today.

 

[muscleman]

Again, I'd preface this that I'm not an expert just an avid observer.

 

Regarding franchises - these are typically historic and date back to when the cable companies got permission from state and local governments to rip up streets and lay cable for TV (largely back in the 70's and 80's).  The local governments typically got either upfront fees or ongoing royalties for the franchise license.  When you buy a local cable company you are effectively buying their franchise rights and it often requires the local/state authority to approve the transfer.  With most of the basic capex infrastructure having been depreciated, a good chunk of purchase price is allocated towards the value of the franchise (better that than goodwill because you can depreciate it).  That's probably the majority of the write-up in the TWC merger.

 

Because the local and state authorities were in charge of allocating and handing out franchises, it really undermined the ability of the FCC to encourage competition.  Especially relevant when the business switched from local, cable provided TV to include broadband.  As you can imagine, a local cable company can have very close ties to the state/local government which can help limit awarding of add'l franchises.  So the FCC came in over the top and tried to undermine or eliminate the local/state authorities in terms of franchise offerings.  Note that satellite providers usually don't have to have the local franchises because they aren't local or ripping up streets.  But they do provide "effective competition" which eliminates the FCC ability to govern pricing of cable tv.  Yet another reason for FCC to want Title II.

 

Note in the 2nd paragraph regarding rate regulation that it does not capture broadband, just video.  Broadband was always in this netherworld in that it wasn't considered cable and it wasn't considered telecom (telecom being governed under Title II).  In 2015, the FCC classified broadband under Title II, effectively giving it the same regulatory oversight that it has over telephone companies (which is very, very broad and onerous).  The argument was largely to ensure net neutrality but they went beyond just putting in a net neutrality rule and imposed Title II.

 

If you haven't, you should read Cable Cowboy.  A lot of the historic franchise stuff is really interesting and gives a great background as to how we got where we are today.

 

Thank you for the explanation! I have read Cable Cowboy but I bet I got out much less out of it than you did.

"they do provide "effective competition" which eliminates the FCC ability to govern pricing of cable tv.  Yet another reason for FCC to want Title II."

Why does competition eliminate a regulator's ability to regulate pricing?

Is that because some court or some lawmaker would say, there is already effective competition so you should not regulate prices?

 

Does Title II introduce any bad impacts on the cable companies? Please excuse my dumb questions. I think net neutrality make it easier for NFLX and HULU to take businesses from tradition cable's video customers.

[muscleman]

I am still pretty puzzled by Title II's impact on cable cos' business.

http://www.netcompetition.org/congress/the-multi-billion-dollar-impact-of-fcc-title-ii-broadband-for-google-entire-internet-ecosystem

 

This article seems to say that Title II will enable broadband to charge metered rates like the wireless data providers, and this will create a huge liability for Google and other websites. I can't understand why.

1. I don't understand why Title II will enable broadband to charge metered rates.

2. Even if they do, the users will end up paying for the internet data, not the websites, right?

 

 

Sorry if I am asking too many dumb questions.

[dwy000]

 

"they do provide "effective competition" which eliminates the FCC ability to govern pricing of cable tv.  Yet another reason for FCC to want Title II."

Why does competition eliminate a regulator's ability to regulate pricing?

Is that because some court or some lawmaker would say, there is already effective competition so you should not regulate prices?

 

The FCC had (still have) the ability to regulate cable pricing if it believed that there was a lack of effective competition.  I don't know if they ever used it to set pricing though - I'm not aware of it happening.  But the onus was on the cableco to prove there was effective competition.  The recent change basically acknowledges the ubiquitous competition from satellite and IPTV in that it now assumes that there is effective competition and the onus is shifted to the FCC to prove there is not if they want to regulate pricing.

"Does Title II introduce any bad impacts on the cable companies? Please excuse my dumb questions. I think net neutrality make it easier for NFLX and HULU to take businesses from tradition cable's video customers."

 

I guess it depends upon who's viewpoint you're looking at it from.  Title II provides very broad and deep regulatory powers to the FCC over broadband.  It's not just pricing, it's access (incl. net neutrality), minimum service levels, quality levels, required coverage etc.  And importantly, it can require that competitors be allowed to access/resell an incumbent's infrastructure at prescribed pricing (kind of like the MVNO's who buy services in huge bulk and then sell it at retail). 

 

When the FCC redefined broadband to fall under Title II they claimed that they had no intention of imposing pricing regulation or most of the other stuff that they can now do.  But we all know how long government promises last....  It was supposed to be imposed to regulate net neutrality, which they could have done on it's own.  Imposing Title II to address net neutrality is like having a howitzer to hunt for sparrows.  You just know it will get used at some point (personal opinion).

 

Title II in itself does not permit the cableco's to charge metered rates.  They could have done that any time they wanted because pricing wasn't regulated.  The issue with metered rates is more indirect.

 

Net neutrality was an issue because the Netflix, YouTube and Hulu's of the world were (still are) taking up an inordinate amount of bandwidth usage.  It's estimated that on a weeknight at 8pm Netflix can be 20-25% of all internet usage.  And that creates bottlenecks.  Selling preferred access to these big users is great if you are a Netflix lover but is unfair if you some little internet company who now gets put at the back of the line because you can't afford access.

 

The cableco's argue that with limited bandwith access, there needs to be some sort of governance or everybody suffers.  So why shouldn't the biggest users pay more than the limited users.  Previously this was Netflix paying Comcast.  With that being disallowed it means it is more likely to be the end user watching a ton of Netflix who has to pay for it.  And the way to do that it with metered pricing.  Just like you see with wireless.  But that has a host of knock on impacts.  If you can watch a TV show on Hulu and it uses up all your monthly data, or you can watch it On Demand on Comcast where it doesn't use of data (because it's cable), it's going to make life very difficult for Netflix and Hulu.  Yeah, you can cancel your cable but your internet cost to watch all that TV will skyrocket - and make cable much more appealing.

 

Note that as part of the Charter/TWC merger, Charter has agreed to NOT impose tiered pricing for broadband for 3 years.  I'm guessing for the above reason.  Cable could seriously hurt all those OTT and streaming providers any time they wanted by imposing such pricing.  By agreeing not to for 3 years it increases competition for a while. 

 

So it's all a big circular gameboard strategy.  But in my view, it's very difficult to lose as the cable company who provides the broadband access.  You're going to get your dues one way or the other and have a very, very competitive product. 

[muscleman]

Thank you dwy000 for your great responses!

Could you please share some thoughts on MVNOs?

 

I remember I saw somewhere before that congress mandates discount rates for MVNOs in the US. How about other parts of the world?

 

It is surprising to see that the article below says Sprint and T-Mobile actually welcomes MVNOs and help them set it up.

http://www.fiercewireless.com/special-reports/mvno-explosion-will-latest-wave-virtual-operators-survive-0

 

If this is the case, it sounds like US cable cos with MVNOs to offer quad play will have a better chance to success than mobile operators also offering DSLs. Unless, as you said regarding Title II, if Cable cos are forced to setup some kind of virtual cable network like MVNOs and sell it at a discount to the mobile operators. Is that possible?

 

In Europe, Liberty moved toward MVNO for a while and then acquired Base in Belgium. Not sure why they wanted to become a mobile operator now.

 

 

 

UPDATE:

I read Liberty Global's acquisition of Base in Belgium again and I think it is a good strategy to reduce the number of mobile competitors from three to two, and it may also cross sell cable products to Base customers, so it is probably a good thing.

 

However in other parts of Europe they will still focus on MVNO. Why is that?

[dwy000]

Thank you dwy000 for your great responses!

Could you please share some thoughts on MVNOs?

 

I remember I saw somewhere before that congress mandates discount rates for MVNOs in the US. How about other parts of the world?

 

It is surprising to see that the article below says Sprint and T-Mobile actually welcomes MVNOs and help them set it up.

http://www.fiercewireless.com/special-reports/mvno-explosion-will-latest-wave-virtual-operators-survive-0

 

If this is the case, it sounds like US cable cos with MVNOs to offer quad play will have a better chance to success than mobile operators also offering DSLs. Unless, as you said regarding Title II, if Cable cos are forced to setup some kind of virtual cable network like MVNOs and sell it at a discount to the mobile operators. Is that possible?

 

In Europe, Liberty moved toward MVNO for a while and then acquired Base in Belgium. Not sure why they wanted to become a mobile operator now.

 

 

 

UPDATE:

I read Liberty Global's acquisition of Base in Belgium again and I think it is a good strategy to reduce the number of mobile competitors from three to two, and it may also cross sell cable products to Base customers, so it is probably a good thing.

 

However in other parts of Europe they will still focus on MVNO. Why is that?

Sorry for long replies.  I start typing and all these thought bubbles just streams out...

 

The international stuff is really interesting and I'm sure there are strategic overlaps with what is going on in the US but I can't even pretend to know the driving factors there.  Smarter people than me on this board (including Packer) play actively in this and are probably better positioned to opine.  My philosophy on the international side (and I have very little skin in the game there) is "trust Malone and hang on for the ride".

 

MVNO's have been a fascinating game to watch.  They were a complete disaster in the 90's and 00's.  MVNO's, CLEC's, overbuilders all had similar strategies (I'm sure someone will nail me on the differences but I'm just meaning very big picture).  They could target select customer groups and geographies with appealing characteristics, leverage use of the incumbent's infrastructure, selectively build out where it made sense and try to arbitrage the pricing.  Unfortunately it all fell apart largely for 2 reasons:  a) even leveraging someone else's infrastructure, the set up and base costs were enormous and it required huge volumes to cover these and profit.  You could only get that volume thru massive marketing spend and price discounts (they had no differentiating value prop).  For the most part, the incumbents weren't going to let that happen;  b) they didn't control the infrastructure.  They were relying on their primary competitor for the underlying technology and technical service.  Even with regulation, that's a tough road to hoe.

 

The change in attitude in recent years by Sprint and T-Mobile has been for different motivations.  3-5 years ago, T-Mobile and Sprint woke up to their dire long term straits.  Wireless is a volume business with massive base costs and tough competition.  Both TM and S were too small to compete with Verizon and AT&T and had 2nd rate network coverage.  In a downward cycle they didn't have the network to compete with the big guys and didn't have the customer base to generate the cash to support/upgrade the network.  They were desperate to get volume onto the network to generate cash.  MVNO's are one way to do this even though, ironically, the target customers of MVNO's tend to be the low end of the market where TM and S play.  So in order to get that volume, they had to shift from fighting against MVNO's to supporting them with all of the existing infrastructure (again, more income if you rent that out too).  They were trading margin for volume.  (As an aside, T-Mobile was the first to go all-in in the race to take down pricing in hopes of driving the needed volume to get to cash flow breakeven and permit upgrade of the network.  Sprint is in the desperate fast-follower state and may not make it.)

 

For broadband, it may be too early to tell since the Title II just came into effect recently.  But for anyone thinking about laying fiber to the home in hopes of competing with the cablecos it just adds another risk and uncertainty to an already long term and difficult payback model.

[bobozou]

Packer - do you have a good method of translating DART filings from korean to decipherable english?  TIA

[Packer16]

Yes open in Google browser and hit translate to English.

[muscleman]

In terms of competition of Cable, I saw from Punchcard blog that "The high cost of laying cable makes it impractical to create a competing network."

But isn't it similar for teleco and wireless companies? How come there was intense competition in the wireless industry?

[muscleman]

Another question about Cable. A lot of people say cable has very high return on invested captial, but the article below shows otherwise. Any thoughts on this?

 

http://www.techpolicydaily.com/internet/whos-making-money-internet-comparing-roic-across-internet-sectors/

[tombgrt]

Interessed in the above as well!

 

Also Packer, coul you tell us in the Energy sector, which are your highest conviction ideas at the moment?

 

Wat are your current thought on intralot? Still following? What are your thoughts on the evolution of minority intrests?

 

TIA

[winjitsu]

In terms of competition of Cable, I saw from Punchcard blog that "The high cost of laying cable makes it impractical to create a competing network."

But isn't it similar for teleco and wireless companies? How come there was intense competition in the wireless industry?

 

I think with cable the problem is last mile, wiring up cable to every single individual household, whereas wireless uses spectrum and can broadcast out to an area. That being said both telcos and wireless have pretty strong competitive advantages... from my purely US-centric point of view:

 

AT&T was the definition of telco monopoly. It took pretty heavy regulation to break that monopoly down (with all this CLEC, LEC, Regional Bell stuff). If the monopoly wasn't broken down, I wouldn't be surprised if we ended up like Australia (

)

 

And I don't think competition in wireless is that high. There are 3 major companies that basically dominate the entire space (VZ, ATT, T-Mobile, Sprint is headed towards insolvency at this rate and will probably merge, US Cellular a very small regional player). Limited spectrum (though did anyone see the Dish short thesis from Kerisdale??), high capex costs, no new entrants & stable marketshare (with the exception of T-mobile taking sprint customers).

[sampr01]

Hi Packer,

 

If you are still following AIQ, what your thoughts on last quarter results.

Thanks

Yes open in Google browser and hit translate to English.

[Packer16]

Cable questions - Wireless competition depends upon country.  Some is very intense US but has been consolidating while other in EMs has much less and higher margins.  The ROIC in the attached article is based upon NI not the right metric to use of a cash flow business.  The correct metric is CFO less maintenance cap-ex.

 

O&G - I like Gear the best.  Others that are cheap with not as good management are Bellatrix & RMP.  I am looking at the other new Don Gray company Petrus.

 

AIQ - Now that we are past the purchase, the company needs convince the market that they are not going to be hosed by the Chinese control investors.  They are starting with the recent presentation.  See 8-K for details.  They also have some nice upside in China if the new board member who is the CEO of the largest private pay hospital chain in China can get AIQ into the radiology department.  We will see.

 

Intralot - just waiting to see if new management can do something more than old management.  They are cheap but they need to prove beyond buying back stock that they can grow value.

 

Packer

[tombgrt]

Thanks Packer, appreciated! Didn't know about Petrus, will have to look it up.

 

What is your take on the potential of more dilution at Gear given the bank facility? Semi annual review coming up. At current stock price dilution could be severe.

[simplefocus]

Do you still own BXE?  If so, what's your position compared to your overall portfolio?  Orange and Baupost are selling, so does their selling change your view on BXE?  Thanks.

[argonaut]

GNCMA is down by a third since January but they still seem to be executing though slowly on their plan. Are you continuing to hold to see how this year plays out or did you get out?

[Packer16]

Gear - If there is some, I think it will be small.  In the last round (IMO a time of more peril), the dilution was only 10% at the 2P NAV.  Management is focused on preventing dilution.

 

BXE - We will see here.  I have position sized slightly smaller than Gear on cost about 50% based upon current price.  It is the cheapest of Can NG guys out there will a low-cost position.

 

GNCMA - This one baffles me as the two closest comps (SHEN & CNSL) are in much more competitive markets and sell at multiples that would imply a 100% upside from here for GNCMA.  There may be some issues with Alaska oil but I am optimistic about the oil prices so these things should work themselves out.

 

Packer

[Eye4Valu]

Packer-Since you value companies on a professional basis, I was wondering if there is any useful literature on valuing companies as opposed to the usual stuff that people recommend for investors, e.g. Security Analysis, Intelligent Investor, etc.) In other words, let's suppose I was interning at your company. Is there anything you would recommend that I read? Thanks!

[tede02]

Packer-Since you value companies on a professional basis, I was wondering if there is any useful literature on valuing companies as opposed to the usual stuff that people recommend for investors, e.g. Security Analysis, Intelligent Investor, etc.) In other words, let's suppose I was interning at your company. Is there anything you would recommend that I read? Thanks!

 

Further on this, Packer, how long have you been doing business appraisals?  How did you get into the profession?  Do you have an education background in accounting or finance? 

 

Best,

 

Ted