During the financial crisis I did pretty well. I bought up some financials and other things and did pretty well coming out (having done well going into it too), but one of my biggest misses was Liberty Media. I have no excuse for missing that as I did own it in the past and did very well with it and so was very familiar with John Malone and his various assets. I sold out when I thought media assets were overpriced with deals being done at 15, 20, 30x EV/EBITDA (or something like that).
But during the crisis I was so focused on the financials and was so convinced that the biggest gainers coming out would be the financials that survive (and the financials seemed to be the scariest sector to even look at, which I liked) so it didn’t even occur to me to look at Liberty. I did buy CBS and other stocks in other sectors and did very well with them too, so I guess it’s not so much that I was only looking at financials. I don’t know why, I just totally missed it. I think the Yacktman fund nailed this one.
Here is a description of Liberty Media’s stock price performance from the LMC 2012 annual report (it’s interesting to note that Berkshire Hathaway recently took a stake in Liberty Media. Weschler (One of BRK’s new fund managers) has owned it in the past in his own fund, I think)):
Malone feels that 7-8x post-synergy EV/EBITDA multiple is very cheap if you can borrow at 3%. Given super-cheap capital, sustainable cash flow businesses look very attractive to be bought on leverage.
You can’t leverage a manufacturing company. Maybe you can do 2x (debt / EBITDA). But cable companies can go up to 5x leverage. CHTR will operate at 5x leverage. Malone says that’s where his other companies are, Discovery, QVC etc…
Malone believes that 80% of subscribers will reject sports programming at wholesale prices. If that is the case, the current bundling of cable channels is an unsustainable model. Cable is getting too expensive for too many households. He thinks the old model will be gone in five years.
CHTR has great management. Rutledge, by all accounts, is the best operator/manager in the business.
Has been an undermanaged, underinvested asset for a number of years (implies potential for improvement).
Has been a victim of a lot of market share stealing by the satellite guys.
Faces the weakest competition terrestially. Majority of systems not in Verizon or ATT universe/areas.
We are at a point in history where high speed connectivity is important. There is a big appetite for speed. Cable technology is the most cost-effective way to increase speed. Cable will go to gigabyte-type connectivity speed in a couple of years.
Key is doing it cost-effectively at scale. Malone says FIOS didn’t work (losing money). Overbuilding just broadband won’t work.
Malone is personally convinced that cable can get to gigabyte speed with very little incremental capital.
Great management team
Very large tax position
Unique position to be consolidator in the space
debt is very cheap
credibility of cash flow stream in cable has been growing so leverage is available
On TCI sale to ATT:
- Malone didn’t want to sell; it broke his heart to sell.
- When someone offers a 40% premium you can’t turn it down; responsibility to shareholders.
- In retrospect, he wishes he hadn’t done it.
Back to CHTR:
- Unique opportunity to take a vehicle and grow it.
- Through both superior marketing and promotion, internal/organic growth can be exceptionally strong for a number of years.
- Particularly, the rate of growth of free cash flow can be very, very strong.
- Allows it to access leverage market in order to do rollups/transactions, particularly when there are horizontal synergies. Kind of like the old TCI model.
- Horizontal acquisitions, synergies, growth scale, opportunities to work with other cable companies to form consortia (like the old “cable mafia” as Faber said).
- Malone said he wants to bring back the old days of @Home, Ted Turner etc. Back then they were able to create national scale. Now he thinks they can create global scale.
So this is an interesting situation. Malone just bought in and is just beginning to do something here. Tom Rutledge just joined a little over a year ago. This is also a post-bankruptcy play as one of the stocks we talk about here (Oaktree) sold a big stake in CHTR to Malone. I suppose it’s not so much a post-bankruptcy play anymore since it’s up 3x or so since reemergence.
But the fact that it is reemergent, the stock seemed to be hated and despised (due to the leverage, view that old cable is dead etc…), they got a new CEO that is “by all accounts the best operator/manager in the business” and then the greatest investor/operator in the business just bought a giant stake (and wants to do something with it), and it has big tax loss carryforwards makes it pretty interesting.
Of course, this is also risky in that it is very leveraged. A lot of people think interest rates are going to go a lot higher and that leveraged companies will get into trouble sooner or later. This is definitely not BRK at book value or JPM at tangible book. I tend not to think that rates are going higher as I am a little biased to the deflationary side (Japan-style).
It’s an interesting opportunity to get on board with some amazing people in the early stages of something, but there is risk here.
I was going to do some work on the valuation but I think so much of the value here is what Rutledge and Malone can do going forward (and the deals that will come down the pike). Otherwise, the key factor in valuation is the net operating loss, which we know Malone and Co. will figure out how to use. For other money losing operations it’s hard to think NOL’s will ever be realized, but when you get Malone involved, you know it will be realized sooner or later.
Since markets are no longer so unloved as I thought it was in 2011, I will have to dig around a bit more to find stuff to write about (and invest in, even though I am still long a lot of financials).
So stay tuned!