John Malone Malone and His Cable/Media Empire I’ve been meaning to write about Malones empire to solidify my thoughts and notes into a single post. Another reason is because LMCA/K and LBRDA/K are somewhat material investments for me so it helps to review the reasons why I like them so much. This also gives me an excuse to look at other parts of his companies a bit more better than previously and create a “reference post” where I can come back later to check and add things. That being said, this post is a bit long and messy. I probably should have split it up, but I wanted to try how it gets received this way. Also, sorry for not doing the tl;dr’s this time. Take into consideration that with all the NAV calculations, spreadsheets, there’s bound to be some mistakes. (if you spot any please leave a comment).
Another outsider John Malone is one of the outsiders from The Outsiders book , similarly to Teledynes Henry Singleton. Singleton. He became the CEO of Tele-Communications Inc, or TCI, which returned incredible 30.3% CAGR over period of 25 years until it was sold to AT&T at a nice premium in 1999. His performance was the best of the CEOs featured in the book. When Malone started as CEO of TCI, the company was on the verge of
bankrupt due to excess debt. Ultimately he did manage to survive by pinching the pennies for years and it was presumably during that time that he learned a lot about using leverage. Malones strategy consisted of few key elements: 1. Decentralized, low-cost operations. operations. He created a strong culture with a mix of incentives and autonomy. 2. Smart capital allocation, allocation, accretive buybacks at low price and issuing equity for acquisitions at high price. Horizontal and later vertical integration at good prices were at the heart of his strategy. 3. Financial engineering, engineering, mostly via leverage 4. Tax efficiency -> -> emphasis on cash flows and growth. TCI almost never sold an asset unless there was a tax angle to it. Similarly to Singleton, with capital allocation decisions he did what was smart, not what was expected: “It makes sense to maybe sell off some of our systems at 10 times cash flow to buy back our stock at 7 times” TCI grew mostly by rolling up the fragmented cable industry, but instead of buying everything they can, Malone was very prudent about the price that he paid. (usually 5x cash flows after synergies) In the latter part of TCI’s history, he started to buy stakes in content companies to get control of the programming and content that the cable operators carried on their systems. Malone acquired around 30 different companies from content side in the 80’s (CNN, Starz etc.) Finally in 1998 he sold TCI to AT&T at 40% premium. Soon after that he watched $3.5bn of his own net worth to decline rapidly because AT&T management destroyed value incredibly quickly by overpaying for acquisitions and mismanaging their assets. Malone wasn’t able to do anything – he couldn’t even sell his stock because of
restrictions. This is most likely why he started to value control so much. Ultimately he managed to spin Liberty assets out of AT&T and that’s basically how his current Liberty empire came to exist. Greenblatt had the rights offering as an example in his famous book “ You “ You Too Can Be a Stock Market Genius“: Genius “:
The rights offering / spin-off was structured so that it was very complicated and that there would be massive upside to those who participated. The genius part was that it simultaneously discouraged most investors to take part in it. Anyone could have purchased and exercised those rights so there was a lot of money to be made for those who did their diligence. The prospectus of the deal was almost 400 pages long, so it gives you some idea of the complexity of it. Even Bob Magness, the founder and major shareholder of TCI didn’t understand it very well. I believe this rights offering is the one thing that’s grinding some peoples gears
about Malones integrity: the deal was clearly structured so that people would be discouraged to participate in it even though everyone had the equal opportunity to. I believe that from Malones perspective the important part is the ‘choice’. I personally take the view that if Malone would want to enrich himself at the cost of shareholders, he could do that. After following what he’s done over the years and how many people he has made wealthier through his capital allocation skills, I’m inclined to think that he’s fair to shareholders of Liberty entities. I do understand his point of view too and why he wanted to finally get paid: he lead TCI for 25 years and had a small position in the company despite making other people (like Bob Magness) very wealthy. The section in Greenblatts book is well worth read and this was just a part of it – in reality it was a bit more complex. I also highly recommend highly recommend the book Cable Cowboy which which tells his story and the history of the modern cable businesses.
Malone on leverage (and why he loves it) “I like leverage. I think leverage is your friend if you are prudent about it. Particularly if the government makes it tax deductible.” These notes are mostly from the 2012 Mavericks lecture (Highly lecture (Highly recommended watch): Cable has been historically been able to support 5x EBITDA leverage, but it depends on interest rates If they aren’t finding acquisitions and your cash flow goes up, they take leverage up and shrink equity with buybacks With high leverage you must have some liquidity, like 0.5x EBITDA to avoid liquidity problem Various companies use different leverage profiles, a company with a flywheel, a stable utility-like nature (such as cable) will carry more
leverage For Malone hedging interest rates “is a religion” and they’ve always swapped to fixed They are always rolling maturities, moving them back and lowering rates if possible Hedging interest rates and rolling the maturities makes it so that they have visibility with their debt and interests They don’t usually speculate usually speculate by issuing debt without use of proceeds
“I used to say in the cable industry that if your interest rate was lower than your growth rate, your present value is infinite. That’s why the cable industry created so many rich guys. It was the combination of tax-sheltered cash-flow growth that was, in effect, growing faster than the interest rate under which you could borrow money. If money. If you do any arithmetic at all, the present value calculation tends toward infinity under that thesis.” Leverage is intrinsic part of the businesses that Malone owns, so I wanted to clarify my own thoughts and see how it will look theoretically on a made-up cable companys financials:
With 5% growth for EBITDA of 1000, keeping the 4X leverage multiple (standard for Malones cable companies) and 6% interest rate, they can invest or buy back shares 4x the amount that EBITDA increased for the year in issued debt along with whatever they’ll have left after paying for interest, capex and taxes. taxes . I have to emphasize that this only makes sense when you have great operational skills, utility-like products and growing cash flows. flows. A lot of businesses have gone bankrupt because of too high leverage and too low understanding of the risks so it does make sense to be careful.
Malones cable playbook “It’s not about earnings, it’s about wealth creation and levered cash flow growth.” Since he managed to spin Liberty out of AT&T, he has been busy rolling up Europes (and more recently US and Latin-Americas) cable assets. Here are my interpretations of his playbook and how he manages to buy and operate these companies better than other people: First of all, he does rigorous due diligence: diligence : He knows the industry probably better than anyone and thus it’s highly unlikely that he does bad deals. Most of the time from the outside it’s not always clear how the deal he makes is good, but once you know some of the playbook it’s a bit easier to figure out (There’s probably more, but I think these are the most important ones): Operational improvements, improvements, Malone knows the in and outs of the cable business and thus he can put his own people to run the businesses better than the previous management. This usually means enhancing product offerings, new products, etc. Synergies – Synergies – Programming costs are a huge one, operational synergies (for example, they can use scale to get cheaper set-tops from suppliers), financial synergies (sometimes if the acquired company has very low debt, the transaction is develering for Malones company), economies of scale Optimizing the balance sheet. sheet. Most of the time this means that Malone takes the leverage of the acquired company up. This is possible (and less risky) mostly because his CEOs can operate the company a lot better, achieve higher growth and higher cash flows. He can prioritize the long-term view . Some companies (like telcos) pay dividends and don’t invest much. With Charter, it hasn’t generated much FCF because Rutledge has a long-term view of the business and he’s investing heavily in it. Malone enables this with
strong control. When Liberty Global/Charter buys a company, they are always trying to use as much debt as possible. Some amount of equity will sometimes be fine especially if the valuation is higher than the company to be bought – in that case the transaction will be accretive.
Share class explanations Malones companies almost always have share class structure that goes as follows: 1. Series A shares shares are “normal” voting shares with 1 vote / share (LMCA, DISCA, LBRDA etc.) 2. Series B shares B shares are super-voting shares with 10 votes / share, Malone usually owns most of these (LMCB, DISCB, LBRDB etc.) 3. Series C shares C shares are non-voting shares. These are often used as currency so that voting shares don’t get diluted. (LMCK, DISCK, LBRDK etc.) All share classes are entitled to same amount of economic income. If you are buying some of his stocks, you should buy the one that’s cheapest – usually series C shares, but sometimes the series A shares trade below C shares momentarily. (like LBRDA vs LBRDK recently)
Tracking stocks “I regard them as largely transitory. If you are incubating a company, but it’s not ready to stand on its own, tracking stock is a great way to identify it, focus a light on it, raise capital for it even, but not separate it and make it stand on it own.. yet” Some of the stocks in Malone/Liberty complex are tracking stocks: stocks: 1. Liberty Global group -> group -> Liberty Global (LBTYA/LBTYB/LBTYK) (LBTYA/LBTYB/LBTYK)
and Liberty Global Latin America (LILA/LILAK) America (LILA/LILAK) 2. Liberty Interactive -> QVC QVC (QVCA/QVCB) (QVCA/QVCB) and Liberty Ventures (LVNTA/LVNTB) Tracking stock tracks the economic performance of a subsidiary of a company. For example, Liberty Global recently created a tracking stocks for their Latin America operations (LILA/LILAK). This way investors can invest in either (Europe or Latin America) operations, but both companies will benefit from the consolidated balance sheet (scale advantages). Tracking stocks provide following benefits when compared to spin-offs: Tax synergies – synergies – if there’s two companies under one “umbrella” and other ones profitable and other one’s not because it’s growing fast, they can shelter each others taxes. Operational synergies because synergies because both companies can be run by one set of employees. Scale advantages – advantages – save money with programming costs and supplier costs Financial synergies / consolidated balance sheet – sheet – for example they can get cheaper debt Protection from antitrust laws This approach is unconventional and might be problematic unless you have strong controlling owner. Malone has said that tracking stocks have worked for them but not for others mostly because he controls the companies: “If there’s only one banana split and there’s two kids, how do you decide who gets the banana split? Well, you got to have a strong parent”
Spin offs In addition to tracking stocks, Malone likes to do spin offs when it makes
sense. He does this for a few reasons: To unlock value If he plans to sell or more usually swap the asset, he spins it off They can use the class C shares as currency to acquire something else – for example Liberty Broadband was spinned to hold CHTR stake and LBRDK ended to be used as currency in the CHTR/TWC deal + Reasons I forget In addition to all these, it creates a lot more opportunities through optionality. Consider for example the Discovery spin-off: if they hadn’t done that (and if Malone hadn’t given up control there), future M&A with Charter would probably had hit more roadblocks because of vertical integration. (Or this is how I think it could have affected it) Glenn Chan created Chan created this amazing diagram of the spin-offs and tracking stocks since TCI days (he kindly let me use it here):
As you can see, he has been busy.
Malone ownerships
Unfortunately I couldn’t find the source for this image (for credits/permission), but it’s so awesome that I couldn’t help but to post it. What’s amazing is that all/most of these companies were spinned off from the original Liberty company that he got out with from AT&T. Here’s the recap: 1. Liberty Media Corp (LMCA, Corp (LMCA, LMCB, LMCK), voting LMCK), voting power 47.1%, 47.1% , economic value 9.2%, 9.2%, Chairman
2. Liberty Broadband (LBRDA, Broadband (LBRDA, LBRDB, LBRDK), voting LBRDK), voting power 47.1%, 47.1% , economic value 9.2% (Before 9.2% (Before CTHR/TWC deal), Chairman 3. Liberty Global Group below Group below includes tracking stocks Liberty Global and Liberty Global Latin America and Caribbean, Chairman Liberty Global (LBTYA, Global (LBTYA, LBTYB, LBTYK), voting LBTYK), voting power 25%, 25% , economic value 2.7% Liberty Global Latin America and Caribbean (“LiLAC”) (LILA/LILAB/LILAK), ~same as in Liberty Global 4. Liberty Interactive below Interactive below includes tracking stocks QVC and Liberty Ventures, Chairman QVC Group (QVCA/QVCB), Group (QVCA/QVCB), voting voting power 37%, 37% , economic value 6% Liberty Ventures (LVNTA/LVNTB), (LVNTA/LVNTB), voting voting power 33%, 33% , economic value 6% 5. Liberty Tripadvisor Holdings (LTRPA/LTRPB), Holdings (LTRPA/LTRPB), voting voting power 4%, 4% , economic value 6% 6. Starz (STRZA/STRZB), Starz (STRZA/STRZB), voting voting power 33%, 33% , economic value 6% 7. Discovery (DISCA/DISCB/DIS Discovery (DISCA/DISCB/DISCK), CK), voting voting power 29%, 29% , economic value 5% 8. Ascent Capital (ASCMA/ASCMB), (ASCMA/ASCMB), voting voting power 16%, 16% , economic value 4% 9. Lionsgate (LGF), Lionsgate (LGF), 3% stake
Insider trades So if you look at Malones insider trading you see him selling small pieces of his holdings almost all the time. Check the trades from openinsider.com openinsider.com Notice Notice that there’s a bug that shows that he’s selling A shares when in reality he’s selling non-voting C shares. I personally wouldn’t look too much into his small, $1-5m sells.
For example, his Liberty Media stake is worth something like $1.2-1.3 billion, so if he sells like $5m worth, that’s as little as 0.4% of his holdings. Because his companies don’t pay dividends, selling is the only way to get cash out of them so it makes sense. I think that’s fair. The man’s already 74 years old, so why so why not buy something nice while you still can? can? Of course if he’d sell a big stake in a company, that would warrant for closer examination. (He usually tries to swap them to avoid paying taxes, though) If he buys something (which I think is somewhat unlikely without big distress in prices), that’s something definitely worth looking into. Last time he bought was LMCA in June 2013 $2m worth. Last bigger buys he did was in 2012.
Liberty Media Corporation (LMCA/LMCB/LMCK) Since 2006, including all the spin-offs, LMC has compounded at roughly 30% CAGR. A lot of this is because of their incredibly profitable investment in Sirius XM, which has so far been a 20+ bagger in 5 years or so. Liberty Media is basically a highly concentrated fund where you’ll get to invest alongside arguably the best cable/media investor-operator ever. You could of course buy what he buys and most likely come off well, but you’d be missing out on, for example accretive buybacks, possible future deals at the LMC and the Vivendi settlement (more on that below). LMCA owns over 50% of SIRI and consolidates their operations in their balance sheets. In addition to that, SIRIs true profitability is still masked as it has high free cash flow but relatively low earnings. This makes the company look richly valued when the reality might be something else entirely. At the time of writing Liberty Media consists of following assets (figures from Q1/2015): Sirius XM (SIRI) XM (SIRI) – 57.8% ownership Live Nation Entertainment (LYV) Entertainment (LYV) – ~27% ownership
100% of Atlanta Braves, Braves, Forbes thinks they are worth over $1bn, $1bn , but take it for what it’s worth. LMC bought them for $400m so $400m so I’m fairly sure they are worth at least that much. + Small stakes in various things, things, see the full asset list here In addition, Liberty Media should be getting around ~$1bn ~$1bn from from their lawsuit against Vivendi. Vivendi . Vivendi has appealed so it’s taking more time, even though the legal battle has already lasted over a decade. Latest news is that they expect to get the cash sometime next year.
Sirius XM Going long LMC means going long SIRI, so it’s wise to have some idea how it is. Because I don’t want to make this post more massive than it already is, I’m going to cover what I think are the most important points about SIRI: 1. Market cap at $3.73 / share is ~$20.5bn market cap 2. Targeting 4x EBITDA leverage (Malone leverage (Malone has said it’s growing so fast it’s hard to keep appropriately levered) 3. They are buying are buying back massive amounts of shares with shares with FCF + debt 4. Free cash flow for Q1 / 2015 was $276m, up 24%. 24% . What’s more amazing is that per share FCF was up 36%. 36% . I believe FCF estimate for 2015 is $1.25bn which would put 2015 FCF yield to 6% Long story short, if SIRI can keep growing at similar rates, it’s undervalued. Few reasons why Malone likes it: It has scalable platform due to fixed costs. costs. With each incremental subscriber their margins grow and FCF grows faster than top line. Subscriber model brings model brings stability and enables use of higher leverage, enhancing returns Good growth prospects: prospects: Used car market, good relationships with OEMs (see for example Nissan connect rolling connect rolling out on 2016) The best operating model in the industry , driven by exclusive content
Unique, monopoly-like satellite and spectrum assets and assets and thus the model is hard/impossible for competitors to replicate. It’s so much easier for Sirius to replicate the competitors models than vice versa. Artists and content producers want to get paid and Sirius makes that possible by actually making sufficient amount of money to pay them. OEM relationships – relationships – If I remember correctly, SIRI is installed in 70% of new cars.
Thoughts on risks I think streaming services offering free streaming (Spotify, Pandora) would have to do something different to disrupt Sirius XM so I don’t see those as threats. They also can’t produce (as much) exclusive content because of the inferiority of their operating model. I never want to underestimate Apple so I think they might be able to leverage their existing ecosystem to create a meaningful competitor ( Apple ( Apple music), music), especially if they can get good exclusive content. I think this is currently the biggest threat to SIRI, but we’ll see. I believe Sirius has a clear lead here and it’s going to be tough for Apple to disrupt them. The problem with Apple music mostly is that as far as I understand, it’s not a direct competitor to Sirius’ in-car real estate.. not yet at least. I believe you can’t stream music as efficiently via internet due to wireless/cellular limitations? This might change in the future though once/if wireless infrastructure grows. The biggest threat to SIRI would be a service that has similar ease of use and exclusive content where the service provider can pay the content producers as well as SIRI does. In fact, they’d have to do something considerably better because Sirius is already so deeply ingrained to their target market.
Lawsuits There are ongoing lawsuits over some pre-1972 songs that they’ve played . I don’t know whether they can be material – last that I heard they could pay something like $200m, which wouldn’t be too bad. Of course this doesn’t
mean that the possible settlement won’t be higher, but this is one of those things that should be considered when investing in this. Another, more recent article on this.
SIRI tax-free dividends to LMC? SIRI is buying stock back super aggressively, we can estimate that it would take 2-3 years for SIRI (debt assisted) buybacks to push LMC ownership above 80%. After owning 80% of SIRI, dividends will be tax-free and it would give Maffei/Malone combo direct access to cash. If the NAV discount persists they’ll probably just buy backs stock which would be more efficient than SIRI buying its stock. One part that I like more about LMC in contrast to owning their holdings straight is that you’ve got the smartest people on the business overseeing what you own. I’ve listened and read about these guys so that I know that they’ll do the right thing and I don’t necessarily have to wonder whether I should sell or not.
Resources for SIRI Punch cards blog post on Sirius XM SIRI call transcripts on Seeking alpha There was recently a SA post on Sirius XM Canada, Canada, which is worth looking into
Live Nation Entertainment (LYV) Live Nation Entertainment is the biggest player in live music industry. It likely has a wide moat because of the flywheel from controlling every aspect of the process: they sell the tickets, book the venues, pay the artists, collect the revenues from advertising and are in the process of monetizing the live concerts via partnerships.
I believe they don’t have any meaningful competitors, so they keep on growing and it’s hard if not impossible to build scale (cost-effectively) because the industry is so strongly controlled by LYV. LYV is growing its owners earnings at nice rate. It will be nice to see what LMC plans to do with their stake: for example there will probably be some synergies between SIRI and LYV. Malone has reportedly been in talks with Vivendi with Vivendi with Universal in mind so mind so they are trying to find pieces to complement their existing music-centered ecosystem. For further information + valuation, I refer you to Live Nation Entertainment – An Unregulated Monopoly?
Other resources VIC writeups from 2011 2011 and and 2013
Vivendi lawsuit Liberty took some stock as payment from Vivendi for some assets in early 2000’s, but Vivendi failed to disclose that they were in the midst of a liquidity crisis. At the trial Vivendis defence was that Liberty was too stupid to do adequate job of diligence so they deserved to get defrauded. “Who knows.. It might work!” -Malone on Vivendis defence The latest news on this was heard in the Q4/2014 quarter call: call: So hopefully we will have this resolved probably by early next year at least in front of the Second Circuit. So if I understood correctly, we could expect for cash sometime (early?) next
year.
Rough sum-of-parts I’m totally not going to go through every little piece what they own so I’m going to use figures provided by this presentation. presentation. The figures are dated at April 1st so they are fairly recent:
Here’s my quick spreadsheet where I use their public assets value (April 1st), took Vivendi judgement into account and updated SIRIs value:
By the time I’m editing this (and by the time you are reading this), this is unfortunately already old news. It does however give some sense how it looks. So including $1bn Vivendi judgement, the rough NAV discount during that time was >20%. Take into consideration that with LMC there’s a corporate layer which probably should be capitalized and thus the stock should be expected to trade under NAV in the future as well. I don’t think though that the NAV discount should be as high as it currently is. I do understand though that the market doesn’t give any value to the Vivendi judgement simply because it’s so easy to forget. In addition to that it’s uncertain when/if there’s going to be a payment.
Liberty Broadband (LBRDA/LBRDB/LBRDK) “High-speed internet is very sticky. People love it. I think they would give up food before they would give up the internet.” Liberty Broadband is basically a holding company that owns >25% of Charter pre-TWC deal. Before the TWC deal, this is what they own: Charter – Charter – 28.84m shares, value at $171.80 / share is ~$4.95bn TWC – TWC – 2.36m shares, value at $180 / share is ~$423m (These will all be converted to new charter shares) Trueposition – Trueposition – see below $700m in cash which cash which is / will be invested in new CHTR -$300m debt to debt to Liberty Media They also had TWC call options written, written, which according to Q1 filings were fairly valued at -$71.5m. I don’t know / understand how these work with the TWC merger so I’m going to treat them with their fair value.
Trueposition develops Trueposition develops and markets technology for locating phones and devices on the cellular network. I personally have no idea what Trueposition is worth – it’s Adjusted OIBDA for 2014 was negative n egative $3m. Glenn Chan had an excellent post on it, it, but I’m not assigning it any value – just to be safe. I think it’s possible that Truepositions value isn’t in it operations, but in the fact that it’s an operating business. Section 355 exchange, exchange, a form of tax-free distribution to shareholders, apparently requires there to be an operating business. So unless I’m mistaken, they wouldn’t have been able to spin LBRD tax-free out of LMC without Trueposition.
Rough sum-of-parts
This too is already old news because the prices surged really fast after I had done/written these, which is really irritating. Corner of Berkshire and Fairfax LBRDA
Charter & TWC deal To understand LBRD, you have to understand Charter, which is buying out
both TWC and Bright House Networks in the recently announced deal. To get the deal done, LVNTA and 3rd party investors such as Soroban and Jana partners (who also happens to be on the “smart “ smart investors list“) list“) invest in LBRDK stock at $56.23 / share and proceeds will be used investing in the new Charter. This looks fair for existing shareholders as you can invest in the same shares currently at lower price. This deal has been written kinda extensively by several writers and I think I’ve seen at least few spreadsheets regarding the deal, it’s very good idea to produce your own because 1. you learn something in the process 2. you develop more conviction to the idea because you understand it better. Charter is valued at 10.5x EV/EBITDA TWC will be bought at $55.62bn / $22.69 debt -> $78.31bn EV and about $8bn EBITDA. EV/EBITDA is 9.8x. Adjusted 9.8x. Adjusted for synergies, EV/EBITDA for TWC is calculated at 8.3x Even without synergies the deal is accretive for Charter. The Charter. The best part of this deal is that TWC assets are mismanaged and they are brought under Tom Rutledge, who will improve the operations. Great posts on the deal: Value Venture post 17 Mile post SA Trevor Chang post And here’s my attempt in valuing pro forma Charter:
Revenue growth is a given, but why the margin expansion? 1. Fixed costs 2. Broadband customers customers are higher margin than video video customers and are growing faster than video customers are declining (Rutledge also has history of dramatically reducing video churn) As for taxes, I remember reading that the New Charter is effectively sheltered from taxes until 2019 due to NOL’s, stepping up acquired assets, capex etc. I’ve laid out two cases, 9x EV/EBITDA valuation and 10x EV/EBITDA. If share
price goes lower, buybacks will be more accretive, so I think it’s not that big of a deal in the long-term. I think that the most likely outcome is somewhere between 13.5-18% CAGR in the medium-term. In the long-term we’ll probably see low-mid-teens returns, depending on whether Malone’s right with cable or whether something else happens. What I love about cable is that it’s a play into one of the megatrends that I see being huge in the future. Also notice that my margin and growth assumptions are a bit lower than some peoples, so there might be some upside to these scenarios if Rutledge manages to pull margins over 40% and growth higher than mid-digits p.a. The reality will always be different from models, for example because Rutledge will be investing more for the long-term, so FCF/earnings will likely be lower and thus there might be less buybacks. In any case, I believe that Malone didn’t bullshit us when he said during Liberty 2015 AGM that he thought the deal will have high teens IRR. In addition to all these, there might be some additional upside if capex will be lower in the future. My model assumes that the capex will stay the same in relation to pro-forma EBITDA / EBITDA-capex ratio.
Tom Rutledge If you’ve followed Charter for a while, you’ve probably heard that Rutledge is considered the best operator in the business. But why? Before Malone recruited Rutledge to Charter, he was the COO of Cablevision. During his tenure there, Cablevision achieved the best operating metrics in the industry. He’s worked in cable industry for most of his life and he rose to his current position from installing equipment to customer homes. When he joined Charter, he recruited most of his team from Cablevision. Malone is very impressed with Rutledge and what he did with CHTR, for
example: 1. Simplifying the service with “one package” -> package” -> this helps customer not to call them much so that they don’t need much people at customer servicing, which in turn drives higher margins 2. Going all-digital where all-digital where they can offer 50mb minimum service at reasonable price and with the benefit that when data consumption is increasing, they have no problem with the capacity. 3. With fixed telephone he he said that they are going going to price it so that people can’t say no. I think results speak for themselves. Rutledge has been the only cable guy growing systematically in high single-digits.
Miscellaneous, interesting notes on CHTR/TWC Many investors believe that all households in the U.S. have highspeed internet. In fact, 50% of U.S. households use cable or fiber internet, 20% of U.S. households use DSL internet, and 30% of U.S. households do not have broadband internet. As internet. As recently as 2012, U.S. cable companies such as Comcast, Time Warner Cable, and Charter all had more video subscriber subscriberss than internet subscribers. In other words, broadband internet is a huge opportunity in the future, especially as data speed/capacity demand grows. Some other points to be noted: TWC is yet to convert all-digital. all-digital. They have already started this process and once it’s completed, it will be a driver to enhance the performance of the combined company. Malone thinks that it will take 3 years to complete this complete this process at TWC/BHN, but it will be worth it. The deal will likely go through faster than people think because the three companies have already been examined by the
regulatory entities so the process should be more straightforward. Internet connectivity is very high margin, which will drive margin expansion in expansion in the future for cable companies. Bright House already has a wireless service with around 45k hotspots in hotspots in Florida, could accelerate Charters expansion efforts. TWC has a technology called Hotspot 2.0, 2.0, which enables broadband customers to have a seamless experience with their access points. Overlap with FiOS is minimal with both Charter and TWC – TWC – under 4% with FiOS (VZ) across geographic footprint vs. CVC/CMCSA/TWC at 45%/15%/12% It might take ~3 years for the biggest results to start to show up. up. The reason for this is that Rutledge plans to unify the combined companys product offerings etc. + upgrade the analog systems during the time. This might not be possible to do without strong control from Liberty because it requires a long-term view. From what I’ve read and understood, the understood, the set-top boxes that CHTR is deploying (“Worldbox”), is miles ahead of competitors. competitors. For example, it’s backwards compatible, cloud-based, they can have multiple suppliers because of their own security technology used driving lower costs etc.
Cables competitive advantage Cable has an advantage with broadband against DSL based incumbent providers because cable requires considerably less incremental capital to increase speeds on their service. This advantage has to be used as fast as possible to ensure lasting competitive position and this is why Charters Rutledge has been investing for the future, sacrificing free cash flow in the short-term. Another thing that’s a factor is that the telcos have committed to a high dividend policy, which restricts their ability to invest in infrastructure as well.
“It costs about $3,400 to make a new or upgraded connection to a single average suburban customer, including infrastructure, line extensions and home installation. Since the average margin per household is $50 to $100 per month, the payback can easily take more than six-years.” (source for above quote)
Mobile / wifi opportunity “Data demand on wireless networks are going to create a scarcity situation increasingly, where more and more of data will have to be downloaded through terrestial networks.” Malone is visioning that cable is going to create a nation-wide wifi-network, where devices are going to work seamlessly whether they are at home or elsewhere. Ultimately these networks will have to work together – either co-operatively or through consolidation. He mentioned that wifi cost per bit has the potential to be cheaper than the cellular spectrum cost. This is interesting because Mark Massey mentioned in his interview that Liberty Global is in the process of making its 15m+ customer modems into WIFI hotspots that can be accessed by all customers, creating a wifi network for f or the benefit of the customers. (I think I’ve read though that the Horizon wifi range is kinda shitty) “My guess is, the government would be greatly pleased if there was a third meaningful alternative to the two dominant wireless companies.” One thing that people have missed with the TWC, is that due to historical quirk, they have a perpetual right to being a MVNO ( Mobile Virtual Network
Operator). Operator ). Charter didn’t have these rights, but through the TWC deal they do by extension. The best thing about this is that because the costs are largely fixed, this will be both a growth and margin expansion opportunity. It also has the potential to create a lot of value for the customer with possible quad plays where all communications is handled through the cable company, creating even more stickier customer relationships.
VOD VO D Malone talked also in the AGM about video on demand (VOD) and how the cable companies failed to capitalize on that, which ultimately led to the emergence of Netflix and Hulu. He still believes that by leveraging their existing distribution system, it still could be an opportunity.
The ultimate goal From what Ive gathered, making the consumer sticky and securing the leadership position with new products and offering better service than telcos is Malones ultimate goal with cable. He wants cable to be the one-stop for communications by bundling all of it together: best broadband speed at the best price, cheap wi-fi for seamless experience in and out of home, mobile play as MVNO and maybe making a competitive VOD product to compete with NFLX and Hulu. (+ something I forget) The infrastructure of cable offers so many possibilities in the data-heavy world of tomorrow and it currently has a lead which must be taken advantage of before competitors catch up. Let’s have a look at Malones international cable operations:
Liberty Global (LBTYA/LBTYB/LBTYK)
Liberty Global consists mostly of operations in Europe, where they are already past the biggest consolidation phase. It’s kinda big at over $42bn market cap @ $47.9 / share, ~881.79m shares. As for the valuation I think it’s around 10x EV/EBITDA, with 5x EBITDA leverage. Again, I’m not going to go in detail here because there’s simply not much to say: a lot of what’s happening with Charter is applicable to Liberty Global, though I think Rutledge is better CEO than Fries. I believe that they are mostly done with big deals (like Fries has said), but I’d never rule out the chance for them to do a mega deal if a good opportunity presents itself. Maybe Malone will figure how to get the banana out of the jar (in other words, do a deal with Vodafone) Him talking about Vodafone: “The principal barrier to us, and I’m talking philosophically here — I’m not making an offer to anybody — philosophically, you have a different view of how a large company should capitalize itself,” Malone said. “Their philosophy is low leverage, low risk and high cash payout to their shareholders. I prefer to grow equity value.” From Malones point of view, Vodafone is run inefficiently. There’s a lot of value to be created because people haven’t figured out how to run the cable systems as well as he does. So what’s next? Cable consolidation, according to Fries is pretty much done in Europe, so the next logical thing after horizontal expansion is vertical integration and focusing on penetrations (which are relatively low) and operational prowess. I believe Liberty Global will be participating increasingly more in the content side and they’ve already done some JV deals with Discovery.
[edit] Also, see cable penetration comparison table further down to see the LBTYAs potential in terms of increased penetration rates.
Horizon set-top box problems? There has been some concerns that Liberty Globals new Horizon box sucks. There are several threads that can be found on Google where people are complaining about it. Even as recently as 7 months ago, there was a reddit thread where people just slammed it down and down and I can totally understand that: nothing makes me more mad than using something regularly that has a shitty user interface. The silver-lining here could be that LGI can update the boxes remotely and apparently they’ve managed to fix some problems, problems , but I find it weird how they rolled out a box Europe-wide which people consider a disaster user-interface wise. This might not be material to LGI – especially if they manage to fix the biggest shortcomings – but I do hope that they get their shit together with it. I did find this little piece which talks about their new box which is launching in Netherlands in connection with Ziggo acquisition: Liberty Global had gotten a lot of complaints about the old box so they apparently managed to address the compaints and upgraded it. This is somewhat encouraging.
Liberty Global Latin America and Caribbean (LILA/LILAB/LILAK) About a week ago Liberty Global created a tracking-stock for their Latin America and Caribbean operations (“LiLAC”). For starters, check out the LiLAC presentation. presentation. LILAK owns following assets: VTR , The biggest cable system in Chile 60% of LCPR , Liberty Cablevision Puerto Rico – a joint venture with
Cablevision, where they essentially have a monopoly if/when the Choice acquisition completes LILAK likely has the longest runway in the empire. empire. Tens of millions of people there are still adopting the modern lifestyle so there’s huge potential for Malone/Fries implement the playbook there with massive M&A + organic growth. Even if LiLAC for whatever reason would become distressed, it’s still legally part of Liberty Global so they share the balance sheet. I don’t know how the matter would be solved from the perspective of the shareholders, but ultimately I think provides some margin of safety to the investment. Despite the economic problems in Puerto Rico, the cable revenues have been growing mostly because of favorable demographics: My impression is that Puerto Rico is still a developing place where people are still adopting to lifestyle filled with TV, computers and especially the internet. This should drive high single-digit growth in the region for the cable system there. LiLAC might experience some problems with the economies of Latin America, but I believe one has to think long-term about this. I think I’ve read that they hedge some of their currency exposure. Here’s my attempt in valuing LILAK:
Take into consideration that “earnings” in this case represents normalized FCF with normalized maintenance capex. I think that LILAK will have higher capex due to new-build opportunities and thus less buybacks.
Here are the population pyramids, which give some sense of the potential of the demographics.
Comparison of cable penetration I believe one of the keys of judging cable companies is their penetration rate:
Few notes: LiLAC penetration look mature, but most growth comes from favorable demographics because most people don’t even own a computer yet Liberty Global has a great opportunity with Internet penetration, though I’m not sure with the individual countries how the markets are there. LGI has good interactive service about their operations in their web version of 2014 Annual Report. At first sight you might notice that the Pro Forma Charters penetration rates are highly similar to Comcasts. It represents how intrinsically dependent the
future performance of the company is of Rutledge.
Bonus: CWC Article: Malone to take stake in CWC CWC is a UK-based cable and wireless company operating in the Latin America. They recently acquired Columbus and apparently the transaction made Malone a major shareholder in the company. CWC appointed Thad York to their board of directors, directors , who is the manager of Malones personal business entities. entities. Thad held senior positions at Telecommunications Inc. (“TCI”) and TCI International that ranged from operations to finance in TCI’s cable TV business. He started in the cable television business as an Installer for TCI while attending college. There’s some speculation that CWC at some point could be folded into LILAK and thus Malone could end up owning bigger percentage of it than now. This begs a question whether you should invest in CWC to anticipate this deal? I’ll have to work on this myself, but here’s the quick numbers on CWC: EBITDA $585m LTM Market cap 4.368B*69p = 3bn GBP or $4.7bn USD Current leverage 3.6x EBITDA (target 2.5-3, which is low, but will be likely upped if Malone gets control?) Q1 net debt $2366m EV/EBITDA = $7066/$585 -> 12x With 12x EV/EBITDA it look like a lot of the potential is already priced in while LILAK is trading under 10x. Currently it seems that on valuation basis there would be more value in LILAK, but one shouldn’t underestimate the fact that Malone owns more CWC than LILAK.
I’m pretty sure that there will be a deal at some point and Malone will own more LILAK. If there’s one conclusion that one should have here, it’s that Malone sees a lot of potential in cable in Latin America.
Liberty Interactive Liberty Interactive consists of two tracking stocks: 1. Liberty Ventures (LVNTA/LVNTB) (LVNTA/LVNTB) 2. QVC (QVCA/QVCB) QVC (QVCA/QVCB) The rationale for these being under the same umbrella is likely because QVC is profitable and Ventures has some investments and debt with favorable taxattributes so LVNTA can shelter some of QVC’s taxes. Quick look at both:
Liberty Ventures (LVNTA/LVNTB) “This one’s effectively a public hedge fund”
LVNTA consists of numerous equity stakes, wholly or almost wholly owned digital commerce businesses and some derivatives – the “noisy stuff”. “The kind of stuff you normally wouldn’t take public as it’s too complicated and analysts don’t want to mess with it” Few notes: 1. Their investments philosophy is is the kind that I’ve grown to like a lot lately: Seek high ROIC businesses with reinvestment opportunities
at attractive valuations. valuations . 2. Some investments are tax-driven (for tax-driven (for example, Green energy), meaning that without their favorable tax attributes they wouldn’t be there. The latest presentation had short discussion about their current investments and what they are attempting to disrupt. I highlighted the ones that belong to LVNTA currently:
Their latest deal is to buy $2.4bn worth of LBRDK at NAV ($56.23) and their
existing TWC stake gets swapped with LBRD for equity. This kind of reinforces how attractive Malone thinks LBRD/new Charter is, though I also think this arrangement was needed to get the deal done and to avoid investment company act which would demolish the super-voting share structure. What’s interesting about Ventures is that they are getting annual cash flow from QVC because they shield some of QVCs taxes, though cumulative deferred tax liability grows as well:
Here’s my understanding of the whole arrangement: Because of the favorable tax treatment from bonds they get to invest the cash from tax shield
beforehand before they have to pay the liabilities back in full ($5.1bn) in 20292031 or 14-16 years from now. They’ll have to pay total of $5.1bn starting from 2029. Before this they can invest the cash that they are going to get beforehand from their arrangements so you’ll have to discount their performance until they have to pay the taxliabilities back. In other words, LVNTA is kind of a levered investment vehicle play. So unless I’m wrong, they’ll have to pay $7.2bn in 2029-2031 and so to determine how much LVNTA is worth, you’ll have to estimate how much they’ll be able to grow their current investments + tax cash flow they are going to get in the mean time. Here’s a snippet from the spreadsheet that I made:
I’m almost 100% sure that I’ve made a mistake along the line because LVNTA is so complicated, but it’s something. Notice that their levered structure results to CAGR performance being higher than their growth in investments. 1. I valued their e-commerce e-commerce businesses businesses at $1bn 2. I assigned value value of 0 to green energy – for safety 3. My hopefully conservative conservative valuation valuation for their investments investments + businesses businesses is ~$8.5bn 4. I took the cash flow they they get from shielding QVC QVC tax into consideration. consideration. 5. Taking into consideration consideration Malone & Maffei Maffei combo track-record, track-record, I think 10% growth expectation in investments might be too conservative and
that’s why I put few different scenarios there. 6. I noticed that you can value value this roughly by taking taking the estimated estimated ROI of LVNTA and adding 2% to get the CAGR because of leverage If you like Expedia, their other investments and LBRDK at NAV, this could a good way to buy into it. Also, take into account that they currently have ~$700m worth of deferred tax liabilities from their equities, but I wouldn’t be too worried about them paying taxes unless necessary. One option that they have, which they also did with Tripadvisor is to spin-off the holdings via Reverse Morris Trust ( Trust (another another article on investopedia) investopedia ) and monetize them that way tax-free.
Some risks: In addition to not investing their cash well enough, the bonds that are due 2029 are exchangeable. If they are called unexpectedly (like if one of the bondholders gets taken out in M&A event), LVNTA has to pay beforehand for the liabilities. The good thing is that the bondholders are incentivized to hold until maturity. One of the problems is that it can be hard for them to find attractive investments going forward, especially if the current bull run continues. They do have the option to buy back LVNTA shares, granted they are priced fairly.
Scenarios for monetization This fairly recent Sumzero writeup on LVNTA was was written by a person who seems smart/knowledgeable and came with scenarios where LVNTA could monetize their assets. If you are interested, I highly recommend you to read it.
Malone sells everything but this? I might be looking a bit too much into it, but remember when I wrote about Malones insider trading where he’s selling bunch of stuff regularly? Well, if
you check, you might notice that for some reason he hasn’t sold / isn’t selling any LVNTA. There doesn’t exist non-voting shares so that might be one part of it though – I don’t know. – Now that I’ve got a bit better understanding better understanding of LVNTA, I get why someone would want to own this. I’m probably going to initiate a small position, keep following it and try to understand it even better.
QVC Group (QVCA/QVCB) For me, QVC is one of the least interesting pieces of the empire. It consists of QVC,, a TV/online multi-channel retailer and a stake in HSN. QVC Because I’m not very interested in it, I’ll cover what I can come up for now and refer you to a better and more comprehensive write-up: Slow growth – growth – let’s face it, retailing is really hard and competitive. QVC is well managed and it has good profitability (despite) being a retailer. Asset light – light – drives high FCF with very little capital expenditures – most of the cash flow goes to aggressive buybacks. 3x adj. OIBDA leverage Content driven – driven – for example, they are producing 2.5m minutes of high quality videos yearly. Developing online shopping experience aggressively, experience aggressively, which is IIRC at least >50% of their sales. Most of their products are exclusive, which creates additional value to customers and also mitigates Amazon threat. Customers are somewhat loyal as most of the sales are repeat purchases. My conclusion is that QVC is a good business, but not as great as I consider others parts of Malones empire to be. As expected it’s well managed, though if it wasn’t it probably wouldn’t be there as it would have been swapped/sold
out. The best (and the only) write-up that I’ve read on QVC is by Value Ventures from 2013. 2013. Highly recommended if you are interested.
Discovery (DISCA/DISCB/DISCK) I’ve actually written about Discovery a few months back, but I wouldn’t recommend that post to anyone. Back then I understood a lot less about the company and the industry and I still feel like I don’t understand either of them well. My impression is that Discoverys CEO Zaslav is pretty good operator and they’ve built scale fairly well, but you can only do so much with assets that look relatively mature – at least in the US. International revenues are be expected to grow both organically and due to M&A in the long-term, but it’s hard to say how much. Scale is important. You important. You get more negotiation power over distributors depending on how much content you provide. In addition to that, content production costs are largely fixed so the business enjoys economies of scale. Malone has hinted that there could be a oncoming content consolidation. consolidation. The business is asset light – light – most of their costs are related to producing content and other costs are mostly fixed. This means that the business generates a lot of free cash flow, which has historically been used to shrink the equity. DISC makes about 45% of money from distribution and rest from advertising and other, so distribution is significant part of their business. They can demand more money from cable operators when they bundle a lot of channels together (scale) and these costs have historically been forwarded to customers. I believe in the future Discoverys business might be under pressure because internet can’t necessarily be controlled and monetized as well current distribution systems through Cable. When I look at how people of people in
their 20’s using content via internet (and how I personally use), this is something that I think has fair chance of happening in the long-term. Because bundling, according to my understanding, is a large part of Discoverys business model, the trend of paying for what you need (as opposed to paying for whole package) would hurt the bottom line. Channel popularity and demand is probably a mitigating element. Discoverys channel is in the top 5 of cable channels and I believe some of their other channels fare pretty well. As for the valuation I don’t have much insights – it’s priced at about ~18 P/FCF, EV/FCF being somewhat higher. If they can grow AOIBDA in the longterm, debt enhanced buybacks will shrink equity fast enhancing returns. The only problem with long-term growth is beforementioned trends, which is why I don’t feel bullish on the stock.
Starz (STRZA/STRZB) Starz is an entertainment brand owns few pay-TV channels, distributes movies, series and does for-hire 2D animations. It’s financials from the past 4 years don’t look good, at least compared to other parts of the empire. I found this really good answer from Malone (from some interview most likely in 2013), credits to orion on CoB&F: CoB&F: “Starz can go either way. It way. It can get bigger through acquisition or it can get merged into somebody who can drive ’em better. My view is Starz needs to be part of something bigger. They need a currency to get there. And there. And so this gives them a stock and a currency. If somebody wants to come and make a proposal after it’s spun for why it would be a great combination, you know, we’ll be all ears at that point.”
In other words, Malone wants to sell/swap it. As a standalone it doesn’t seem have much potential and they are apparently trying to find buyers for the business, business , but without success. For the past years they’ve started doing original programming, which – if they hit a jackpot – would probably help them a lot in finding a buyer.
Lionsgate (LGF) Recently Malone swapped some of his Starz stake for 3% of Lionsgate. I don’t know what he plans to do with it – he did say that it’s like a learning experience for him: him: “I’m an engineer, what the hell do I know about content? Trying to understand where these ideas come from, how they get created and produced. The development of stories is really going to be important in this random-access world that Reed Hastings is driving us into.” Now, even though Malone still has investments in content, he doesn’t control them as it could presumably create problems with regulation during cable consolidation (as he said in the 2015 AGM). I think he’s a lot more attracted to cable and LMC. This isn’t a usual investment for him: making movies is very expensive and the business doesn’t enjoy what Malone usually likes in a company: moat, customer stickiness, recurring revenues etc. Malone might be thinking that content aggregators (like Discovery) could become under pressure due to rapid expansion of internet, while those who develop/create the content (like Lions Gate) could keep on thriving and perhaps make more money because of lack of the middle man. Anyways, I think the most plausible explanation for this is that Malone wants to benefit from likely oncoming content consolidation (i.e. LGF gets bought out) or he thinks that content creators are going to leverage the internet heavily against current distributors. I don’t know.
It could also be possible that he could somehow leverage the relationship with LGF to extend to his other, heavily skewed into distribution -kind of companies. Of course I might be missing some kind of angle here and I’m eager to see what it is (if there’s one). Why Did John Malone invest in Lions Gate?
Ascent Capital (ASCMA/ASCMB) Now this is an odd thing and I almost missed it completely: Malone never talks about it, he doesn’t sit on the board.. but he still apparently owns ~4% of it. It’s a security monitoring business – I glanced at it and it might have potential, but for the most part I don’t feel very interested in it because there’s so much more interesting stuff going on with the other companies. I think he’s not required to report his sells, so it’s possible that he’s selling. Can’t be sure though until there’s a new proxy statement.
Bonus: Grupo Televisa (TV) Televisa Grupo is the biggest cable/satellite/media company in Mexico and Spanish-speaking world. Apart from its amazing assets and secular trend opportunity, it’s interesting because recently two Malones lietunenants joined their board: Mike Fries (Liberty Global CEO) and David Zaslav (Discovery CEO). There’s a fairly recent presentation by Game Creek Capital, Capital, where they estimate TVs target price to be between $45-57 / share. What I want to highlight from their presentation are the assets that the company is holding:
Here are my quick notes from the presentation, but I highly recommend you to check it out yourself. TV has 38% stake in Univision Univision,, which is about to IPO. IPO . TV also collects 12% royalties from Univisions revenues. revenues. As a bonus, the royalty rate will increase to 16%+ in 2018. They have excellent, dominant assets: assets: their cable, satellite and content networks are #1 measured by market share in Mexico. Content business is business is slow growth, should have some runway left Sky business is business is growing at low double-digits
Cable business is business is very high growth and should drive cash flows stronger in the future Cable consolidation in consolidation in Mexico / Latin America is yet to happen and Mike Fries can definitely help with that. TV today reminds of Comcast in the late 80’s, 80’s , which if true, could be a good opportunity. Their assets might be even better as far as I’m concerned. Demographics of Spanish-speaking world are a long-term opportunity – – only around 50% of Mexicans population is using internet. Vertical integration provides synergies. synergies. About the management team, I don’t really know. They have managed to build good assets and the company seems to be in good shape so I’m inclined to think that they are good. The BOD additions raises my hopes for optimizing various aspects of the company (re: Malone playbook).
I think this image makes the demographic potential clear.
As for the concerns, concerns, we are talking about Mexico. I’m not familiar with it at all, but my preconception is that there is corruption, can be lacking in corporate governance etc. The good thing is that TV does have a long operational history, so as far as I know there isn’t a precedent for much shady stuff. Even though the company has great assets, they seem to be undermanaged. For managed. For example, they have really low leverage which they are justifying with fire power, but for what exactly? What the thing is worth then? I’m not sure, but here are the primary numbers: (Figures are according to Q2 presentation) presentation) 1. Marketcap: $22.5bn ($36.25 $22.5bn ($36.25 / share) 2. Net debt ~$3bn 3. EV/EBITDA ~11x / 2015 according 2015 according to my spreadsheet, including estimated Univision stake There are a lot of moving parts – the GCC analysis does look credible, but I don’t really understand possible (regulatory?) problems with Mexico and there could also be something that I’m not taking into consideration. Operational & financial risk with TV looks low, but it’s definitely not as optimized as Malones companies are, which hinders the growth/profitability of the business going forward. I believe that unless their capital allocation skills improve, the business looks ~fairly valued. As an interesting side note, note, in Liberty Medias AGM, AGM, Malone was asked about it, but he subtly ignored it (implying that he wouldn’t want attention to it?). It’s possible that he simply forgot to answer it since he gave such a long answer to the other question, but it would be.. Out of character, let’s call it that. So TV could be some sort of bonus for the whole Liberty family and it looks
like Malone has his eyes on it to some degree. Coincidentally, LiLAC tracking stock started just trading and the timing is interesting to put it mildly. LiLACs presumed primary purpose is to roll-up Latin America, which according to the LiLAC presentation is ‘ripe for consolidation’. 2014 Business description (includes description (includes 2014 letter to shareholders)
Where is the most value right now? Take into consideration that these are my views on where there could be most value and even though they do reflect the economy #1 I believe in the long-term Liberty Global Latin America and Caribbean (LiLAC) operations (LILA/LILAK) operations (LILA/LILAK) has the longest runway with organic growth and accretive M&A. I also think of it as little bit more riskier than the more mature assets in Europe/US. The stock dropped nicely since it started trading presumably because index funds focused on Europe are selling it. Unfortunately at the time of writing it’s rebounded some. #2 If SIRI can SIRI can keep growing in medium-term as well as it currently is, Liberty Media Corporation (LMCA/LMCK) Corporation (LMCA/LMCK) can be the second best bet (maybe even the best) in the medium-term. I view it as higher risk, higher reward situation compared to new Charter, mostly because I’m unsure of Sirius’ moat and whether there’s one. #3 The third best opportunity I believe is in is in Liberty Broadband/Charter (LBRDA/LBRDK/CHTR), (LBRDA/LBRDK/CHTR), where Malone has been putting more money indirectly through LVNTA. LVNTA could could be a joker of sorts: it could prove to be more valuable than its current market cap would warrant, but I believe there’s more risk too. It’s really complex with the tax-arrangements and it’s essentially a bet on Malone & Maffeis ability to make great investments before their liabilities are due in 15 years. LBTYA/K , despite currently being the biggest company out of the empire, still looks like it has nice runway with rolling new products and
relatively low internet penetration. Content consolidation could consolidation could be an opportunity, but I don’t understand the industry and its prospects well enough to make a educated guess about it. Bonus: TV could could be a good long-term play as it has unmatched assets and secular growth opportunity, but unless their capital allocation improves I believe it’s fairly valued. This (as far as I know) isn’t a Malone holding so it’s kind of a off-topic, but I think it makes for a nice bonus. Some things to keep an eye on: 1. The theory is that the best ideas go to what Malone owns the most, in other words Liberty Media Corporation (LMCA/LMCK). He most likely also prioritizes those which he controls directly by sitting as chairman. 2. If there’s a rights offering, participate in it. (Usually they do a rights offering related to spin-offs) 3. If his companies are buying a lot of shares back, they might undervalued. I believe that they might buy shares back even be undervalued. be though they are fairly valued if they don’t have anything else to invest in. 4. Keep an eye one the spin-offs and tracking-stocks that his companies do: do: for example LILA/LILAK
Succession Malone is already 74 years old, so that’s a factor that has to be taken into account when thinking about future. Seeing him in the interviews he seems healthy and lively though, so he’s got that going on for him. He has thought about succession by giving two of his CEOs, Fries from Liberty Global and Zaslav from Discovery an option to purchase his super voting class B shares in each company . Greg Maffei, who’s at the helm of Liberty Media, Liberty Interactive
(QVC&LVNTA) and Chairmanning some other companies like Starz, hasn’t gotten such deal (yet?). I think though Malone has said that his most/all of his shares will go to a trust and he’ll probably give voting rights to people he trusts. I believe these guys know his playbook, know how to operate, have capital allocation skills etc. so they will keep on respecting his legacy. I am aware of the fact that there might be some sort of regression to the mean depending on how much Malone participates in the companies, but considering how long relationships these guys have had with him, I think the companies will ultimately do fine.
Some resources / interviews Malone 2 hour interview about his past in 2001 (if you’ve read Cable Cowboy, there’s not much new here) Nice interview from 2010 with Malone about cable / media industry 2012 Mavericks lecture – lecture – my favorite one, I’ve probably watched this 56 times Cable Cowboy – Must read book if you are interested in him
Insights, tips and misc from Malone Most of these notes are from the Maverick 2012 lecture: On diligence: “The most important thing about these deals is plenty of time for diligence” He also makes a good point how taking the time takes away from the emotion, enthusiasm when you are building the models and exactly why the deal going to work.
“There’s no easy answer on diligence. You have to figure out the other guys business as best as you can. You have to use the best professionals you can find in areas where your own expertise is lacking.” On acquisitions: “When you buy a company, the most important thing is the retention of the people who created the value that you are buying to keep.” The people you are buying out must have skin in the game at least until good people can be brought in to learn the business. On taxes and tax efficiency: Malone has almost perverse passion in avoiding taxes. For example, at their headquarters the tax goup is the biggest one that they have and in TCI days their internal tax team met monthly to determine optimal tax strategies. “[Government] is your partner, but you don’t want them taking their share early”
“The government is your partner for life, they just don’t get to come to all the meetings. That’s the only edge you got.”
“Leverage and tax efficiency go hand in hand”
“If you bought the asset with cash or debt, you get to step up the asset” He gave a good example of Sprint, where there was a start-up company and another profitable company. Because the profitable companys profits where partly tax-sheltered by the start-ups losses, they could put the sheltered cash
back in to business, which resulted in a very efficient capital structure. If you look at QVC and LVNTA capital structure, where LVNTA shelters some of QVCs taxes and gets paid for it, you can see that it’s very efficient. In the Mavericks lecture he talks about taxes some and you get a sense that he’s been giving tax avoidance/optimization A LOT of thought.
Final words In the end it was a huge pleasure to do this post because Malone is such a fascinating character. I believe that he’s is one of the best investors of our time, which is interesting considering the lack of visibility that he gets in general. Almost every value investor studies Buffett in some way – either directly or indirectly, but you see a lot less people studying Malone. This is most likely because he doesn’t write/educate like Buffett does, but that doesn’t mean that there aren’t great lessons to be learned. Anyways, great man, great story, great investor. What more is there to say? I hope the story continues as long as possible.
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Fred D July 21, 2015
Great post, superb overview !
Reply to Fred
jules July 21, 2015
Thanks Reply to jules
Yair July 21, 2015
Thank you for a detailed post. We all anticipate an interest rate will rise by the FED. So, how tho regard this rise: I. Malone will find it hard to cuntinue to leverage his empire –> his compenies stock prices will not outpreform (compere to market average) II. In the last years Malone fulfill his empire with enough cheap money, so only his competitors (and the rest of the market compenies) will need to serve high cost debt –> his compenies stock prices will outpreform compere to the market Reply to Yair
jules July 21, 2015
Good points, I believe that the best way to try to measure the effects of interest rates is to play around with rates in a spreadsheet and see how they effect the companies. Can’t really say how much rates have to increase for Malones companies to start to underperform. Reply to jules
innerscorecard July 21, 2015
This was the clearest overview of Malone and Liberty that I have read. And I’ve read a few of the other ones (some of which you have alluded to). Looking forward to any updates/edits. Reply to innerscorecard
jules July 21, 2015
Thanks Reply to jules
Hiram Patel July 21, 2015
This is a fabulous post. I’ve been meaning to do one of these to keep my own investments in Malone entities organized. Do you think Liberty Global is fully or overvalued? Reply to Hiram
jules July 21, 2015
I think it might be fairly valued or slightly undervalued. I believe they’ve got decent runway with improving penetrations+quad plays+wifi opportunities etc. Other parts of the empire look more interesting right now so I’m personally not investing in LBTYK at these levels. Reply to jules
Anthony Anthony July 23, 2015
DAMN! Wonderful post. Very cool to see someone put it all together in one post. Keep up the good work Reply to Anthony
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