So Liberty Media (LMCA) had their investor day last week. I wasn’t there but the investor day webcast is available with a slide presentation at the LMCA website.
There was some fun stuff in the beginning (with a disturbing slide of Greg Maffei doing some sort of dance) and then Maffei (LMCA), Meyer (Sirius XM), Rutledge (Charter) and Rapino (Live Nation) did presentations on their businesses.
Anyway, I will cut and paste a whole bunch of stuff from the presentation as it’s easier to do that than to type stuff up myself.
This will be sort of a summary, but not a complete summary. This is sort of a note to myself so I will add thoughts along the way. Maybe it will be helpful for people who don’t want to sit down for two hours to listen to the webcast.
Those interested in LMCA should at least go look at the slides (much of them are here, but many more in the original presentation) and if you have time, listen to the presentations. They are really well done, and the Q&A afterwards is very interesting.
John Malone is one of the legendary people in business and he is always worth listening to. You can learn a lot about many things by listening to him. Just like you learn a lot about banking by listening to Jamie Dimon and learn a lot about everything from listening to Buffett, you learn a lot about cable, media / entertainment from listening to Malone.
Anyway, here is one of the ‘fun’ section slides from the presentation:
Non-New Yorkers might not recognize the buildings in this photo, but that’s the Time Warner Center in New York City. Maffei was talking about a fictional radio station on Sirius XM (called Malone’s Melodies). The tune playing is “Time Is On My Side”, so you know they really want to do this deal.
LMCA did a series of deals to raise some cash (that was used to pay down margin debt). LMCA continues to repurchase shares. As we’ll see later, they have already bought back more than half the shares in the recent past. The repurchase of 5.2% of LMCA from Comcast in a tax-free exchange was priced at $132/share. LMCA still has $327 million in repurchase authorization after this deal (details of this deal are in the presentation slides).
The sale of SIRI shares back to SIRI also comes tax efficiently as this was some of the high basis stock that LMCA owns and effectively gets dividend treatment for tax purposes.
The convertible bond deal is a tax efficient way to lock in some low funding rates for the long term (10 years).
As a result, LMCA has been able to pay down much of the margin debt they took on when they bought Charter. Maffei used the term “reload the gun” to describe what these transactions did. Those words should excite people who are looking for LMCA to do more deals. Well, maybe they are getting ready for Time Warner Cable.
LMCA is very shareholder friendly (we already knew that), but this chart is incredible. They’ve bought back more than half of their shares since 2008, and they still have plenty of liquidity (borrowing capacity, high basis SIRI shares etc…).
Stock Price Performance
LMCA share price performance has been amazing too, and recent performance is not just a recovery from the crisis lows. The CAGR is +36%/year since 2006, so that includes the crisis.
Sirius XM (SIRI)
Jim Meyer made a presentation about SIRI which I thought was very interesting. He addresses some of the questions that critics raise.
Of course, LMCA bought SIRI as a distressed situation and did very well with it, but Malone sees a lot more growth ahead for SIRI.
One of the issues is competition from internet radio, like Pandora and music services like Spotify. Meyer points out that SIRI is not a music company. SIRI does music, talk and sports:
Also, with respect to competition from internet streaming services, Meyer points out that the big competitor out there is still terrestrial radio:
The following charts show the superior earnings model versus the competition:
The following charts show subscriber, revenue and EBITDA growth:
Meyer said that SIRI can safely get to 40%+ EBITDA margins at maturity. He said this is doable due to the scalability of the business.
But at the end of the day, what’s really important is free cash:
and free cash per share:
He said he is asked what he values more; subscriber growth, revenue or EBITDA? He said “yes” to all but free cash flow per share growth is most important.
Growth is linked to new auto sales, obviously, and here’s the trend and forecast (auto industry forecast). SIRI has been increasing share in new auto sales.
What’s interesting is that even if new auto sales flatten out, SIRI can still grow subscribers because every new auto sale is a potential new subscriber (assuming the new car buyer didn’t have it before; otherwise I suppose a driver just replaces a car so subscriber count won’t change).
Anyway, SIRI did some work on this and shows the growth potential based on projected new car sales:
Meyer said that they are very comfortable that they will reach more than 100 million enabled vehicles by 2018 (enabled vehicles is not the same as number of subscribers, but shows the potential).
Their balance sheet looks much better now than before at 2.7x leverage (versus 3.5x target):
The other big growth area is used cars. The used car market is 3x larger than the new car market and this area has a lot of potential. Also, connected vehicle services (telematics) is another area of growth potential that Meyer talked about.
As Malone mentioned in the Q&A later, he sees a lot more growth to come at SIRI.
Charter Communications (CHTR)
Tom Rutledge did a presentation on CHTR. This is actually a pretty exciting situation, I think. There is a lot more on the topic in the Q&A where Malone talks a lot about the history of cable and what he sees happening there going forward.
One of the reasons why I got interested in CHTR and LMCA (I have owned LMCA and DISCA in the past but haven’t followed them too much recently until early this year) again is because I thought that the industry was coming to some big inflection point. For many years, cable companies just kept growing by adding subscribers. They were making so much money and growing so much that they didn’t really care what they paid for content as the subscribers paid for them. That’s why I was always a fan of content; I’ve owned Disney and CBS in the past for that reason. I figured content providers will always get paid regardless of what happens in the distribution world. For all I care, the phone, cable and satellite companies can fight it out and destroy each other, but they will all still have to pay high fees to ESPN. So as a Disney shareholder, I was indifferent to what happened in the pipe wars. Who cares who won. They will all just have to pay more to get more content to compete even more.
Then cable got saturated (well, it has been saturated for a while) and stopped growing and then phone companies came in with video offerings, and of course satellite companies continued to take share away from cable. So, all of a sudden, with distributors unable to grow (due to saturation), and prices of content continuing to go up and customer cable bills rising, new alternatives pop up, like Netflix, Hulu, Youtube or whatever else.
Distribution companies start wondering why they are paying so much money to content providers when the same content can sometimes be viewed elsewhere for free.
In any case, I don’t really understand the media business that much, but all of this stuff was the impression I was getting. The industry seemed really ripe for a change. Business as usual just wasn’t going to work anymore.
And then LMCA takes a big stake in CHTR. So for me, this deal coincided with my feeling that something is happening in the industry, or at least something is about to happen. At first, I wasn’t sure how the industry can change. I thought, like everybody else, that cable was under pressure from phone companies and satellite providers, and increasingly from over-the-top TV. I did understand that their ownership of the last mile into people’s homes was a big asset but it wasn’t really clear to me how the cable companies with their video package (which Malone himself said will be obsolete in five years or less) will compete with the over-the-top guys like Netflix.
Now I think I understand this a lot better what can happen.
Anyway, let’s get back to the CHTR presentation where Rutledge explains why CHTR is such a great opportunity.
Rutledge started by explaining the history of CHTR. It was founded by Paul Allen. They assembled a big system by paying very high prices and spent a lot of money creating a state-of-the-art network. Because of the high prices they paid and poor management, they went bankrupt. They then had to cut cost where they shouldn’t have leading to poor service etc. As a result of this, CHTR has the lowest product penetration.
So a lot of the growth story here is just bringing things back up to where they should be in terms of product penetration. Here is a slide that shows the potential for CHTR:
Also, FiOS competes in only 4% of CHTR’s markets. As for satellite competition, CHTR’s edge is that they have two-way connectivity versus one-way for satellite.
Malone said a while ago in an interview that he thinks CHTR can get competitive high speed internet at a much lower cost than others (fiber optics etc.). Here is a slide that shows how this can happen:
This is the other story for CHTR. By going all digital, they free up a lot of broadband on their cables that will allow them to increase speed / capacity for high speed internet and other things.
Rutledge says that capex is high now due to spending related to going all digital, but once that is done capital intensity of the business should go down. Along with increasing revenues, this should boost EBITDA going forward.
There are a lot more details in the presentation, but the CHTR story is pretty simple; reversing the years of undermanagement to boost revenues, going all digital, decreasing capex needs going forward and operating leverage from that.
Live Nation (LYV)
Frankly, Live Nation has never been on my radar. I always thought of the concert industry has one that makes money from the occasional Rolling Stones fairwell tours, Kiss reunion tours and things like that. I think for many years (not that I follow this stuff) the highest grossing concert tours tended to be these old, boomer-generation rock bands. So Michael Rapino’s presentation was an eye-opener for me.
First of all, I was wrong about the concert industry. Who knew it was a growth business? I don’t go to concerts anymore, so I guess there would have been no way for me to know anyway. But here it is:
And look at 2013 growth by region:
…and for ignorant people like me who think only U2 or the Stones can sell tickets, check this out:
I don’t know if I should be proud or embarrassed to say that I have no idea who these people are. OK, I know Fleetwood Mac, Depeche Mode, Kid Rock and Beyonce. Not bad, I guess…
So why is it growing so much? What’s different now than before? This is an interesting thing that Rapino said. He explained that concerts these days are driven by fan demand. In the past, concerts have been driven largely by record labels. It was the record distribution model that included concerts as promotional events to sell records.
Now concert demand is driven by fans, and how this is done is very interesting: It is done through social media like Youtube, Facebook etc.
Check out this slide:
So we see that only 17% of the Rihanna concerts take place in the world excluding North America and Western Europe, but 56% of her fans on Facebook and 40% on Youtube are from this area.
If you ever wonder who benefits or makes money from Youtube or Facebook, well, now we can think about LYV.
The live concert business is not a particularly high margin business. So that may be another reason why I wasn’t too interested in LYV before, but the LYV business model is actually to use the live concert business to drive the other high margin businesses:
They are also increasing business through mobile (another question people keep asking; how people make money off of mobile), and their secondary ticket sales business looks pretty interesting. There is a bunch of stuff in the presentation that you should look at if you’re interested.
But the bottom line is that all of this is leading to some interesting growth:
Anyway, I’ve never looked at LYV in detail so I don’t know where all the above numbers lead in terms of valuation, but there seems to be no doubt that it is growing at a decent rate and there seems to be some more growth opportunities in the future.
So that’s it on the business presentations.
And then there was what many may consider the most interesting part of the day.
Malone and Maffei took questions from investors and there were some interesting discussions on various topics. Anyway, these are from my messy notes so not word-for-word or anything.
Why continue to keep owning SIRI? Why not spin it off?
They like SIRI. LMCA has no big free cash generating assets. SIRI is the only big one. It’s ability to generate capital for LMCA to use is interesting.
SIRI is also a work in progress. They feel they can still help SIRI.
Maffei mentioned that historically, LMCA has spun off assets when the value of an asset was not recognized by the market, or when a business has reached an apogee. They think neither is the case at SIRI. The value of SIRI is well recognized inside of LMCA now and there is much more they can do there. There is still “a lot of upside”.
Malone says CHTR will require capital (Time Warner?). SIRI will give them the financial flexibility to “chase a few more rabbits”.
Malone also said that there are still some synergies in the music business that hasn’t been exploited (and LMCA can help SIRI with that).
Is there more tension between programmers and distributors now? Relationship more complex, more aggression than in the past? Is this a reason for consolidating?
Malone said that programmers and distributors have had good relations for years. It was all about who could create economic value. The over-the-top phenomena is creating unusual tension. TV everywhere would create value for everyone. Distributors and content providers still have huge monetization systems to defend. They will eventually realize that. Consolidation will make it easier. Fewer rational players works better than more, but is is not the primary reason to consolidate.
Dilution at CHTR in case of Time Warner deal
LMCA would like to keep interest above 25% for future flexibility. LMCA would purchase more CHTR to keep interest above that level to offset dilution, for governmental reasons. He explained later that the Investment Company Act makes a 25%-owned asset a good asset, and one under 25% a bad asset. I think he meant that under 25%, the ICA would deem it a passive investor interest or an investment security so would make LMCA an investment company, whereas owning more than 25% would make it an operating subsidiary (so wouldn’t make LMCA an investment company).
Competition to Cable
Malone feels that the long term competitive position of cable is good. Increasing digitization of video will free up bandwidth,and increase speed and capacity of internet delivery. Cable has a marginal cost advantage (a tremendous advantage) for base network.
He mentioned that DT (Deutsch Telecom) put in a volume cap. DT provided content is not included in the volume cap but non-DT content is. The regulators are currently digesting this so don’t know what will happen.
Malone mentioned that eventually terrestrial carriers will have to price traffic based on volume. The current model is unsustainable as revenue and pricing won’t reflect capital pressures of the providers.
Over-the-top content can be bundled with broadband and when that starts to happen, cable can clawback share from satellite. Cable market share will grow because of services bundled. (Somewhere he said that cable will get at or equal to fiberoptics in terms of speed).
Intrinsic Value versus Price of the Parts
Someone asked him how he viewed the prices of LMCA holdings versus intrinsic value.
Malone said that he has always been a leveraged free cash flow investor, so he discounts the free cash flow at whatever interest rate they can fund at. If you lengthen the maturity and fund at current levels, he says that the “multiples look low to me”.
Importance of Content? Does CHTR need more content? Comcast bought NBC
Malone said that the control of content is an important determinant of market share. He then went on to explain the evolution of the cable business.
Cable in the early days was highly balkanized. There was no ubiquity and they didn’t compete with each other. Back then, the opportunity for cooperation, scale and uqiquity was obvious.
TCI did one acquisition a week for ten years.
As an industry, they got together to cooperate. They organized joint ventures. For example, in technology they created the MPEG video compression, coaxial cable architecture etc… In content, they created Discovery, BET, Telemundo etc… The industry created 23 or 24 programming vehicles that the cable industry collectively invested in.
Ted Turner was an entrepreneur that got the support of the industry. TCI was a founding investor in Fox News.
The industry solved the balkanization and scale problem by joint effort. Malone says it can be done again. Hulu can be syndicated, or something created from scratch.
He mentioned Comcast, as big as it is, can’t buy national level content. It’s not big enough. You have to be pretty big to get content for TV everywhere.
So this cable industry inability to buy or create content has benefitted Netflix. They buy nationally, distribute ubiquitously and their local distribution is incrementally free. This is not a situation that can persist indefinitely.
Cable industry is in the need of organizational development.
HBO transformed the cable industry and “made us all rich”. If there is an equivalent to that, of course they would be more enthusiastic in investing in the business. M&A and industry cooperation go hand-in-hand.
(At some point the Microsoft purchase of Comcast shares was mentioned, and Maffei was actually at Microsoft at the time and did the deal; so we know he knows the business)
Investment opportunities? Which Liberty entity is the cheapest?
Malone said international (non-U.S.) is where the opportunity is now. He said don’t put all your eggs in the U.S. basket. There are some rabbits outside of the U.S., but obviously he can’t say what looks good.
75% of mobility is is wifi (and rising). The implication is that mobile traffic will end up on cable (wifi -> cable connection) and not cellular network.
With over-the-top and TV everywhere why do consumers need aggregation interface and pay economic rent?
Netflix, Hulu and other streaming models offer content without economic rent.
Malone said that the answer to that is that they don’t need it.
Why did HBO come into existence? Why didn’t Hollywood sell directly to cable operators? They couldn’t work together. This created opportunity for HBO to get scale. Once they had scale, they didn’t need all the studios so changed pricing power.
Over the top guys will get content through scale; original and unique content. Netflix has enough scale to get exclusion and original content.
Netflix started as a library of old content. They built a business on low distribution cost (almost free); heavily subsidized U.S. Postal Service. Netflix migrated to streaming service. They have gained scale and ubiquity of presence. The cable industry has been very slow and that gave a window of opportunity to the over-the-top guys.
With network neutrality (free incremental distribution cost) and scale, they have “quite a good business”.
A year ago NFLX was written off by many, but it’s good that NFLX survived. If it was bought by someone with deep pockets it would’ve been more dangerous; someone with infinite capacity to underwrite their strategy of buying exclusive content.
NFLX has scale and uniqueness to do well now (but as he said before, this is not sustainable).
So that’s about it.
I do like LMCA and CHTR; I find them very interesting situations (SIRI and LYV don’t look too bad either). As far as valuation is concerned, it seems like most of LMCA value is driven by the large listed holdings. The multiples look high, particularly on the big SIRI position, but the growth rates are pretty high too. If they keep growing subscribers and their margins get up to over 40% (EBITDA margins) as they say, it can be pretty interesting.
On the other hand, for an entity like LMCA at this point in time, I tend to think the bigger question is what LMCA does with the liquidity offered by SIRI over time.
I would tend not to look at it like, “what is SIRI actually worth and how much per LMCA share is that?”. My question would be more like, as LMCA liquidates SIRI over time (via SIRI buybacks and maybe other transactions), what do they invest in next?
LMCA is obviously holding SIRI for the cash generation ability so more interesting to me is what they invest in with the cash from SIRI rather than what SIRI is worth.
This is not to say that it doesn’t matter what SIRI is worth. Malone said that SIRI gives them the flexibility to “chase a few more rabbits”. I’m sort of more interested in the “rabbits” than satellite radio.
Still, it’s good to know that Malone thinks there is still a lot of upside there even as they use SIRI as a source of liquidity.