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John Malone and His Cable Media Empire
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7/23/2015 JohnMaloneandHisCable/MediaEmpire
http://www.jnvestor.com/malone/ 1/58
JohnMaloneandHisCable/MediaEmpireIvebeenmeaningtowriteaboutMalonesempiretosolidifymythoughtsandnotesintoasinglepost.AnotherreasonisbecauseLMCA/KandLBRDA/KaresomewhatmaterialinvestmentsformesoithelpstoreviewthereasonswhyIlikethemsomuch.
ThisalsogivesmeanexcusetolookatotherpartsofhiscompaniesabitmorebetterthanpreviouslyandcreateareferencepostwhereIcancomebacklatertocheckandaddthings.
Thatbeingsaid,thispostisabitlongandmessy.Iprobablyshouldhavesplititup,butIwantedtotryhowitgetsreceivedthisway.Also,sorryfornotdoingthetldrsthistime.
TakeintoconsiderationthatwithalltheNAVcalculations,spreadsheets,theresboundtobesomemistakes.(ifyouspotanypleaseleaveacomment).
AnotheroutsiderJohnMaloneisoneoftheoutsidersfromTheOutsidersbook,similarlytoTeledynesHenrySingleton.
HebecametheCEOofTeleCommunicationsInc,orTCI,whichreturnedincredible30.3%CAGRoverperiodof25yearsuntilitwassoldtoAT&Tatanicepremiumin1999.HisperformancewasthebestoftheCEOsfeaturedinthebook.
WhenMalonestartedasCEOofTCI,thecompanywasonthevergeof
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bankruptduetoexcessdebt.Ultimatelyhedidmanagetosurvivebypinchingthepenniesforyearsanditwaspresumablyduringthattimethathelearnedalotaboutusingleverage.
Malonesstrategyconsistedoffewkeyelements:
1. Decentralized,lowcostoperations.Hecreatedastrongculturewithamixofincentivesandautonomy.
2. Smartcapitalallocation,accretivebuybacksatlowpriceandissuingequityforacquisitionsathighprice.Horizontalandlaterverticalintegrationatgoodpriceswereattheheartofhisstrategy.
3. Financialengineering,mostlyvialeverage4. Taxefficiency>emphasisoncashflowsandgrowth.TCIalmost
neversoldanassetunlesstherewasataxangletoit.
SimilarlytoSingleton,withcapitalallocationdecisionshedidwhatwassmart,notwhatwasexpected:
Itmakessensetomaybeselloffsomeofoursystemsat10timescashflowtobuybackourstockat7times
TCIgrewmostlybyrollingupthefragmentedcableindustry,butinsteadofbuyingeverythingtheycan,Malonewasveryprudentaboutthepricethathepaid.(usually5xcashflowsaftersynergies)
InthelatterpartofTCIshistory,hestartedtobuystakesincontentcompaniestogetcontroloftheprogrammingandcontentthatthecableoperatorscarriedontheirsystems.Maloneacquiredaround30differentcompaniesfromcontentsideinthe80s(CNN,Starzetc.)
Finallyin1998hesoldTCItoAT&Tat40%premium.Soonafterthathewatched$3.5bnofhisownnetworthtodeclinerapidlybecauseAT&Tmanagementdestroyedvalueincrediblyquicklybyoverpayingforacquisitionsandmismanagingtheirassets.
Malonewasntabletodoanythinghecouldntevensellhisstockbecauseof
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restrictions.Thisismostlikelywhyhestartedtovaluecontrolsomuch.
UltimatelyhemanagedtospinLibertyassetsoutofAT&TandthatsbasicallyhowhiscurrentLibertyempirecametoexist.GreenblatthadtherightsofferingasanexampleinhisfamousbookYouTooCanBeaStockMarketGenius:
Therightsoffering/spinoffwasstructuredsothatitwasverycomplicatedandthattherewouldbemassiveupsidetothosewhoparticipated.Thegeniuspartwasthatitsimultaneouslydiscouragedmostinvestorstotakepartinit.Anyonecouldhavepurchasedandexercisedthoserightssotherewasalotofmoneytobemadeforthosewhodidtheirdiligence.
Theprospectusofthedealwasalmost400pageslong,soitgivesyousomeideaofthecomplexityofit.EvenBobMagness,thefounderandmajorshareholderofTCIdidntunderstanditverywell.
Ibelievethisrightsofferingistheonethingthatsgrindingsomepeoplesgears
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aboutMalonesintegrity:thedealwasclearlystructuredsothatpeoplewouldbediscouragedtoparticipateiniteventhougheveryonehadtheequalopportunityto.
IbelievethatfromMalonesperspectivetheimportantpartisthechoice.IpersonallytaketheviewthatifMalonewouldwanttoenrichhimselfatthecostofshareholders,hecoulddothat.
Afterfollowingwhathesdoneovertheyearsandhowmanypeoplehehasmadewealthierthroughhiscapitalallocationskills,IminclinedtothinkthathesfairtoshareholdersofLibertyentities.
Idounderstandhispointofviewtooandwhyhewantedtofinallygetpaid:heleadTCIfor25yearsandhadasmallpositioninthecompanydespitemakingotherpeople(likeBobMagness)verywealthy.
ThesectioninGreenblattsbookiswellworthreadandthiswasjustapartofitinrealityitwasabitmorecomplex.IalsohighlyrecommendthebookCableCowboywhichtellshisstoryandthehistoryofthemoderncablebusinesses.
Maloneonleverage(andwhyhelovesit)Ilikeleverage.Ithinkleverageisyourfriendifyouareprudent
aboutit.Particularlyifthegovernmentmakesittaxdeductible.
Thesenotesaremostlyfromthe2012Maverickslecture(Highlyrecommendedwatch):
Cablehasbeenhistoricallybeenabletosupport5xEBITDAleverage,butitdependsoninterestratesIftheyarentfindingacquisitionsandyourcashflowgoesup,theytakeleverageupandshrinkequitywithbuybacksWithhighleverageyoumusthavesomeliquidity,like0.5xEBITDAtoavoidliquidityproblemVariouscompaniesusedifferentleverageprofiles,acompanywithaflywheel,astableutilitylikenature(suchascable)willcarrymore
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leverageForMalonehedginginterestratesisareligionandtheyvealwaysswappedtofixedTheyarealwaysrollingmaturities,movingthembackandloweringratesifpossibleHedginginterestratesandrollingthematuritiesmakesitsothattheyhavevisibilitywiththeirdebtandinterestsTheydontusuallyspeculatebyissuingdebtwithoutuseofproceeds
Iusedtosayinthecableindustrythatifyourinterestratewaslowerthanyourgrowthrate,yourpresentvalueisinfinite.Thatswhythecableindustrycreatedsomanyrichguys.Itwasthecombinationoftaxshelteredcashflowgrowththatwas,ineffect,growingfasterthantheinterestrateunderwhichyoucouldborrowmoney.Ifyoudoanyarithmeticatall,thepresentvaluecalculationtendstowardinfinityunderthatthesis.
LeverageisintrinsicpartofthebusinessesthatMaloneowns,soIwantedtoclarifymyownthoughtsandseehowitwilllooktheoreticallyonamadeupcablecompanysfinancials:
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With5%growthforEBITDAof1000,keepingthe4Xleveragemultiple(standardforMalonescablecompanies)and6%interestrate,theycaninvestorbuybackshares4xtheamountthatEBITDAincreasedfortheyearinissueddebtalongwithwhatevertheyllhaveleftafterpayingforinterest,capexandtaxes.
Ihavetoemphasizethatthisonlymakessensewhenyouhavegreatoperationalskills,utilitylikeproductsandgrowingcashflows.Alotofbusinesseshavegonebankruptbecauseoftoohighleverageandtoolowunderstandingoftheriskssoitdoesmakesensetobecareful.
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MalonescableplaybookItsnotaboutearnings,itsaboutwealthcreationandleveredcash
flowgrowth.
SincehemanagedtospinLibertyoutofAT&T,hehasbeenbusyrollingupEuropes(andmorerecentlyUSandLatinAmericas)cableassets.Herearemyinterpretationsofhisplaybookandhowhemanagestobuyandoperatethesecompaniesbetterthanotherpeople:
Firstofall,hedoesrigorousduediligence:Heknowstheindustryprobablybetterthananyoneandthusitshighlyunlikelythathedoesbaddeals.Mostofthetimefromtheoutsideitsnotalwaysclearhowthedealhemakesisgood,butonceyouknowsomeoftheplaybookitsabiteasiertofigureout(Theresprobablymore,butIthinkthesearethemostimportantones):
Operationalimprovements,Maloneknowstheinandoutsofthecablebusinessandthushecanputhisownpeopletorunthebusinessesbetterthanthepreviousmanagement.Thisusuallymeansenhancingproductofferings,newproducts,etc.SynergiesProgrammingcostsareahugeone,operationalsynergies(forexample,theycanusescaletogetcheapersettopsfromsuppliers),financialsynergies(sometimesiftheacquiredcompanyhasverylowdebt,thetransactionisdeveleringforMalonescompany),economiesofscaleOptimizingthebalancesheet.MostofthetimethismeansthatMalonetakestheleverageoftheacquiredcompanyup.Thisispossible(andlessrisky)mostlybecausehisCEOscanoperatethecompanyalotbetter,achievehighergrowthandhighercashflows.Hecanprioritizethelongtermview.Somecompanies(liketelcos)paydividendsanddontinvestmuch.WithCharter,ithasntgeneratedmuchFCFbecauseRutledgehasalongtermviewofthebusinessandhesinvestingheavilyinit.Maloneenablesthiswith
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strongcontrol.
WhenLibertyGlobal/Charterbuysacompany,theyarealwaystryingtouseasmuchdebtaspossible.Someamountofequitywillsometimesbefineespeciallyifthevaluationishigherthanthecompanytobeboughtinthatcasethetransactionwillbeaccretive.
ShareclassexplanationsMalonescompaniesalmostalwayshaveshareclassstructurethatgoesasfollows:
1. SeriesAsharesarenormalvotingshareswith1vote/share(LMCA,DISCA,LBRDAetc.)
2. SeriesBsharesaresupervotingshareswith10votes/share,Maloneusuallyownsmostofthese(LMCB,DISCB,LBRDBetc.)
3. SeriesCsharesarenonvotingshares.Theseareoftenusedascurrencysothatvotingsharesdontgetdiluted.(LMCK,DISCK,LBRDKetc.)
Allshareclassesareentitledtosameamountofeconomicincome.Ifyouarebuyingsomeofhisstocks,youshouldbuytheonethatscheapestusuallyseriesCshares,butsometimestheseriesAsharestradebelowCsharesmomentarily.(likeLBRDAvsLBRDKrecently)
TrackingstocksIregardthemaslargelytransitory.Ifyouareincubatinga
company,butitsnotreadytostandonitsown,trackingstockisagreatwaytoidentifyit,focusalightonit,raisecapitalforiteven,butnotseparateitandmakeitstandonitown..yet
SomeofthestocksinMalone/Libertycomplexaretrackingstocks:
1. LibertyGlobalgroup>LibertyGlobal(LBTYA/LBTYB/LBTYK)
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andLibertyGlobalLatinAmerica(LILA/LILAK)2. LibertyInteractive>QVC(QVCA/QVCB)andLibertyVentures
(LVNTA/LVNTB)
Trackingstocktrackstheeconomicperformanceofasubsidiaryofacompany.
Forexample,LibertyGlobalrecentlycreatedatrackingstocksfortheirLatinAmericaoperations(LILA/LILAK).Thiswayinvestorscaninvestineither(EuropeorLatinAmerica)operations,butbothcompanieswillbenefitfromtheconsolidatedbalancesheet(scaleadvantages).
Trackingstocksprovidefollowingbenefitswhencomparedtospinoffs:
Taxsynergiesiftherestwocompaniesunderoneumbrellaandotheronesprofitableandotheronesnotbecauseitsgrowingfast,theycansheltereachotherstaxes.Operationalsynergiesbecausebothcompaniescanberunbyonesetofemployees.ScaleadvantagessavemoneywithprogrammingcostsandsuppliercostsFinancialsynergies/consolidatedbalancesheetforexampletheycangetcheaperdebtProtectionfromantitrustlaws
Thisapproachisunconventionalandmightbeproblematicunlessyouhavestrongcontrollingowner.Malonehassaidthattrackingstockshaveworkedforthembutnotforothersmostlybecausehecontrolsthecompanies:
Iftheresonlyonebananasplitandtherestwokids,howdoyoudecidewhogetsthebananasplit?Well,yougottohaveastrongparent
SpinoffsInadditiontotrackingstocks,Malonelikestodospinoffswhenitmakes
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sense.Hedoesthisforafewreasons:
TounlockvalueIfheplanstosellormoreusuallyswaptheasset,hespinsitoffTheycanusetheclassCsharesascurrencytoacquiresomethingelseforexampleLibertyBroadbandwasspinnedtoholdCHTRstakeandLBRDKendedtobeusedascurrencyintheCHTR/TWCdeal+ReasonsIforget
Inadditiontoallthese,itcreatesalotmoreopportunitiesthroughoptionality.ConsiderforexampletheDiscoveryspinoff:iftheyhadntdonethat(andifMalonehadntgivenupcontrolthere),futureM&AwithCharterwouldprobablyhadhitmoreroadblocksbecauseofverticalintegration.(OrthisishowIthinkitcouldhaveaffectedit)
GlennChancreatedthisamazingdiagramofthespinoffsandtrackingstockssinceTCIdays(hekindlyletmeuseithere):
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Asyoucansee,hehasbeenbusy.
Maloneownerships
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UnfortunatelyIcouldntfindthesourceforthisimage(forcredits/permission),butitssoawesomethatIcouldnthelpbuttopostit.
Whatsamazingisthatall/mostofthesecompanieswerespinnedofffromtheoriginalLibertycompanythathegotoutwithfromAT&T.
Herestherecap:
1.LibertyMediaCorp(LMCA,LMCB,LMCK),votingpower47.1%,economicvalue9.2%,Chairman
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2.LibertyBroadband(LBRDA,LBRDB,LBRDK),votingpower47.1%,economicvalue9.2%(BeforeCTHR/TWCdeal),Chairman
3.LibertyGlobalGroupbelowincludestrackingstocksLibertyGlobalandLibertyGlobalLatinAmericaandCaribbean,Chairman
LibertyGlobal(LBTYA,LBTYB,LBTYK),votingpower25%,economicvalue2.7%LibertyGlobalLatinAmericaandCaribbean(LiLAC)(LILA/LILAB/LILAK),~sameasinLibertyGlobal
4.LibertyInteractivebelowincludestrackingstocksQVCandLibertyVentures,Chairman
QVCGroup(QVCA/QVCB),votingpower37%,economicvalue6%LibertyVentures(LVNTA/LVNTB),votingpower33%,economicvalue6%
5.LibertyTripadvisorHoldings(LTRPA/LTRPB),votingpower4%,economicvalue6%
6.Starz(STRZA/STRZB),votingpower33%,economicvalue6%
7.Discovery(DISCA/DISCB/DISCK),votingpower29%,economicvalue5%
8.AscentCapital(ASCMA/ASCMB),votingpower16%,economicvalue4%
9.Lionsgate(LGF),3%stake
InsidertradesSoifyoulookatMalonesinsidertradingyouseehimsellingsmallpiecesofhisholdingsalmostallthetime.Checkthetradesfromopeninsider.comNoticethattheresabugthatshowsthathessellingAshareswheninrealityhessellingnonvotingCshares.
Ipersonallywouldntlooktoomuchintohissmall,$15msells.
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Forexample,hisLibertyMediastakeisworthsomethinglike$1.21.3billion,soifhesellslike$5mworth,thatsaslittleas0.4%ofhisholdings.Becausehiscompaniesdontpaydividends,sellingistheonlywaytogetcashoutofthemsoitmakessense.
Ithinkthatsfair.Themansalready74yearsold,sowhynotbuysomethingnicewhileyoustillcan?Ofcourseifhedsellabigstakeinacompany,thatwouldwarrantforcloserexamination.(Heusuallytriestoswapthemtoavoidpayingtaxes,though)
Ifhebuyssomething(whichIthinkissomewhatunlikelywithoutbigdistressinprices),thatssomethingdefinitelyworthlookinginto.LasttimeheboughtwasLMCAinJune2013$2mworth.Lastbiggerbuyshedidwasin2012.
LibertyMediaCorporation(LMCA/LMCB/LMCK)Since2006,includingallthespinoffs,LMChascompoundedatroughly30%CAGR.AlotofthisisbecauseoftheirincrediblyprofitableinvestmentinSiriusXM,whichhassofarbeena20+baggerin5yearsorso.
LibertyMediaisbasicallyahighlyconcentratedfundwhereyoullgettoinvestalongsidearguablythebestcable/mediainvestoroperatorever.Youcouldofcoursebuywhathebuysandmostlikelycomeoffwell,butyoudbemissingouton,forexampleaccretivebuybacks,possiblefuturedealsattheLMCandtheVivendisettlement(moreonthatbelow).
LMCAownsover50%ofSIRIandconsolidatestheiroperationsintheirbalancesheets.Inadditiontothat,SIRIstrueprofitabilityisstillmaskedasithashighfreecashflowbutrelativelylowearnings.Thismakesthecompanylookrichlyvaluedwhentherealitymightbesomethingelseentirely.
AtthetimeofwritingLibertyMediaconsistsoffollowingassets(figuresfromQ1/2015):
SiriusXM(SIRI)57.8%ownershipLiveNationEntertainment(LYV)~27%ownership
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100%ofAtlantaBraves,Forbesthinkstheyareworthover$1bn,buttakeitforwhatitsworth.LMCboughtthemfor$400msoImfairlysuretheyareworthatleastthatmuch.+Smallstakesinvariousthings,seethefullassetlisthereInaddition,LibertyMediashouldbegettingaround~$1bnfromtheirlawsuitagainstVivendi.Vivendihasappealedsoitstakingmoretime,eventhoughthelegalbattlehasalreadylastedoveradecade.Latestnewsisthattheyexpecttogetthecashsometimenextyear.
SiriusXMGoinglongLMCmeansgoinglongSIRI,soitswisetohavesomeideahowitis.BecauseIdontwanttomakethispostmoremassivethanitalreadyis,ImgoingtocoverwhatIthinkarethemostimportantpointsaboutSIRI:
1. Marketcapat$3.73/shareis~$20.5bnmarketcap2. Targeting4xEBITDAleverage(Malonehassaiditsgrowingsofast
itshardtokeepappropriatelylevered)3. TheyarebuyingbackmassiveamountsofshareswithFCF+debt4. FreecashflowforQ1/2015was$276m,up24%.Whatsmore
amazingisthatpershareFCFwasup36%.IbelieveFCFestimatefor2015is$1.25bnwhichwouldput2015FCFyieldto6%
Longstoryshort,ifSIRIcankeepgrowingatsimilarrates,itsundervalued.
FewreasonswhyMalonelikesit:
Ithasscalableplatformduetofixedcosts.WitheachincrementalsubscribertheirmarginsgrowandFCFgrowsfasterthantopline.Subscribermodelbringsstabilityandenablesuseofhigherleverage,enhancingreturnsGoodgrowthprospects:Usedcarmarket,goodrelationshipswithOEMs(seeforexampleNissanconnectrollingouton2016)Thebestoperatingmodelintheindustry,drivenbyexclusivecontent
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Unique,monopolylikesatelliteandspectrumassetsandthusthemodelishard/impossibleforcompetitorstoreplicate.ItssomucheasierforSiriustoreplicatethecompetitorsmodelsthanviceversa.ArtistsandcontentproducerswanttogetpaidandSiriusmakesthatpossiblebyactuallymakingsufficientamountofmoneytopaythem.OEMrelationshipsIfIremembercorrectly,SIRIisinstalledin70%ofnewcars.
ThoughtsonrisksIthinkstreamingservicesofferingfreestreaming(Spotify,Pandora)wouldhavetodosomethingdifferenttodisruptSiriusXMsoIdontseethoseasthreats.Theyalsocantproduce(asmuch)exclusivecontentbecauseoftheinferiorityoftheiroperatingmodel.
IneverwanttounderestimateApplesoIthinktheymightbeabletoleveragetheirexistingecosystemtocreateameaningfulcompetitor(Applemusic),especiallyiftheycangetgoodexclusivecontent.IthinkthisiscurrentlythebiggestthreattoSIRI,butwellsee.IbelieveSiriushasaclearleadhereanditsgoingtobetoughforAppletodisruptthem.
TheproblemwithApplemusicmostlyisthatasfarasIunderstand,itsnotadirectcompetitortoSiriusincarrealestate..notyetatleast.Ibelieveyoucantstreammusicasefficientlyviainternetduetowireless/cellularlimitations?Thismightchangeinthefuturethoughonce/ifwirelessinfrastructuregrows.
ThebiggestthreattoSIRIwouldbeaservicethathassimilareaseofuseandexclusivecontentwheretheserviceprovidercanpaythecontentproducersaswellasSIRIdoes.Infact,theydhavetodosomethingconsiderablybetterbecauseSiriusisalreadysodeeplyingrainedtotheirtargetmarket.
LawsuitsThereareongoinglawsuitsoversomepre1972songsthattheyveplayed.IdontknowwhethertheycanbemateriallastthatIheardtheycouldpaysomethinglike$200m,whichwouldntbetoobad.Ofcoursethisdoesnt
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meanthatthepossiblesettlementwontbehigher,butthisisoneofthosethingsthatshouldbeconsideredwheninvestinginthis.
Another,morerecentarticleonthis.
SIRItaxfreedividendstoLMC?SIRIisbuyingstockbacksuperaggressively,wecanestimatethatitwouldtake23yearsforSIRI(debtassisted)buybackstopushLMCownershipabove80%.
Afterowning80%ofSIRI,dividendswillbetaxfreeanditwouldgiveMaffei/Malonecombodirectaccesstocash.IftheNAVdiscountpersiststheyllprobablyjustbuybacksstockwhichwouldbemoreefficientthanSIRIbuyingitsstock.
OnepartthatIlikemoreaboutLMCincontrasttoowningtheirholdingsstraightisthatyouvegotthesmartestpeopleonthebusinessoverseeingwhatyouown.IvelistenedandreadabouttheseguyssothatIknowthattheylldotherightthingandIdontnecessarilyhavetowonderwhetherIshouldsellornot.
ResourcesforSIRIPunchcardsblogpostonSiriusXMSIRIcalltranscriptsonSeekingalphaTherewasrecentlyaSApostonSiriusXMCanada,whichisworthlookinginto
LiveNationEntertainment(LYV)LiveNationEntertainmentisthebiggestplayerinlivemusicindustry.Itlikelyhasawidemoatbecauseoftheflywheelfromcontrollingeveryaspectoftheprocess:theysellthetickets,bookthevenues,paytheartists,collecttherevenuesfromadvertisingandareintheprocessofmonetizingtheliveconcertsviapartnerships.
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Ibelievetheydonthaveanymeaningfulcompetitors,sotheykeepongrowinganditshardifnotimpossibletobuildscale(costeffectively)becausetheindustryissostronglycontrolledbyLYV.
LYVisgrowingitsownersearningsatnicerate.ItwillbenicetoseewhatLMCplanstodowiththeirstake:forexampletherewillprobablybesomesynergiesbetweenSIRIandLYV.MalonehasreportedlybeenintalkswithVivendiwithUniversalinmindsotheyaretryingtofindpiecestocomplementtheirexistingmusiccenteredecosystem.
Forfurtherinformation+valuation,IreferyoutoLiveNationEntertainmentAnUnregulatedMonopoly?
OtherresourcesVICwriteupsfrom2011and2013
VivendilawsuitLibertytooksomestockaspaymentfromVivendiforsomeassetsinearly2000s,butVivendifailedtodisclosethattheywereinthemidstofaliquiditycrisis.
AtthetrialVivendisdefencewasthatLibertywastoostupidtodoadequatejobofdiligencesotheydeservedtogetdefrauded.
Whoknows..Itmightwork!MaloneonVivendisdefence
ThelatestnewsonthiswasheardintheQ4/2014quartercall:
SohopefullywewillhavethisresolvedprobablybyearlynextyearatleastinfrontoftheSecondCircuit.
SoifIunderstoodcorrectly,wecouldexpectforcashsometime(early?)next
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year.
RoughsumofpartsImtotallynotgoingtogothrougheverylittlepiecewhattheyownsoImgoingtousefiguresprovidedbythispresentation.ThefiguresaredatedatApril1stsotheyarefairlyrecent:
HeresmyquickspreadsheetwhereIusetheirpublicassetsvalue(April1st),tookVivendijudgementintoaccountandupdatedSIRIsvalue:
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BythetimeImeditingthis(andbythetimeyouarereadingthis),thisisunfortunatelyalreadyoldnews.Itdoeshowevergivesomesensehowitlooks.
Soincluding$1bnVivendijudgement,theroughNAVdiscountduringthattimewas>20%.
TakeintoconsiderationthatwithLMCtheresacorporatelayerwhichprobablyshouldbecapitalizedandthusthestockshouldbeexpectedtotradeunderNAVinthefutureaswell.IdontthinkthoughthattheNAVdiscountshouldbeashighasitcurrentlyis.
IdounderstandthoughthatthemarketdoesntgiveanyvaluetotheVivendijudgementsimplybecauseitssoeasytoforget.Inadditiontothatitsuncertainwhen/iftheresgoingtobeapayment.
LibertyBroadband(LBRDA/LBRDB/LBRDK)
Highspeedinternetisverysticky.Peopleloveit.Ithinktheywouldgiveupfoodbeforetheywouldgiveuptheinternet.
LibertyBroadbandisbasicallyaholdingcompanythatowns>25%ofCharterpreTWCdeal.
BeforetheTWCdeal,thisiswhattheyown:
Charter28.84mshares,valueat$171.80/shareis~$4.95bnTWC2.36mshares,valueat$180/shareis~$423m(Thesewillallbeconvertedtonewchartershares)Truepositionseebelow$700mincashwhichis/willbeinvestedinnewCHTR$300mdebttoLibertyMediaTheyalsohadTWCcalloptionswritten,whichaccordingtoQ1filingswerefairlyvaluedat$71.5m.Idontknow/understandhowtheseworkwiththeTWCmergersoImgoingtotreatthemwiththeirfairvalue.
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Truepositiondevelopsandmarketstechnologyforlocatingphonesanddevicesonthecellularnetwork.IpersonallyhavenoideawhatTruepositionisworthitsAdjustedOIBDAfor2014wasnegative$3m.GlennChanhadanexcellentpostonit,butImnotassigningitanyvaluejusttobesafe.
IthinkitspossiblethatTruepositionsvalueisntinitoperations,butinthefactthatitsanoperatingbusiness.Section355exchange,aformoftaxfreedistributiontoshareholders,apparentlyrequirestheretobeanoperatingbusiness.SounlessImmistaken,theywouldnthavebeenabletospinLBRDtaxfreeoutofLMCwithoutTrueposition.
Roughsumofparts
ThistooisalreadyoldnewsbecausethepricessurgedreallyfastafterIhaddone/writtenthese,whichisreallyirritating.
CornerofBerkshireandFairfaxLBRDA
Charter&TWCdealTounderstandLBRD,youhavetounderstandCharter,whichisbuyingout
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bothTWCandBrightHouseNetworksintherecentlyannounceddeal.
Togetthedealdone,LVNTAand3rdpartyinvestorssuchasSorobanandJanapartners(whoalsohappenstobeonthesmartinvestorslist)investinLBRDKstockat$56.23/shareandproceedswillbeusedinvestinginthenewCharter.Thislooksfairforexistingshareholdersasyoucaninvestinthesamesharescurrentlyatlowerprice.
ThisdealhasbeenwrittenkindaextensivelybyseveralwritersandIthinkIveseenatleastfewspreadsheetsregardingthedeal,itsverygoodideatoproduceyourownbecause1.youlearnsomethingintheprocess2.youdevelopmoreconvictiontotheideabecauseyouunderstanditbetter.
Charterisvaluedat10.5xEV/EBITDATWCwillbeboughtat$55.62bn/$22.69debt>$78.31bnEVandabout$8bnEBITDA.EV/EBITDAis9.8x.Adjustedforsynergies,EV/EBITDAforTWCiscalculatedat8.3x
EvenwithoutsynergiesthedealisaccretiveforCharter.ThebestpartofthisdealisthatTWCassetsaremismanagedandtheyarebroughtunderTomRutledge,whowillimprovetheoperations.
Greatpostsonthedeal:
ValueVenturepost17MilepostSATrevorChangpost
AndheresmyattemptinvaluingproformaCharter:
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Revenuegrowthisagiven,butwhythemarginexpansion?
1. Fixedcosts2. Broadbandcustomersarehighermarginthanvideocustomersandare
growingfasterthanvideocustomersaredeclining(Rutledgealsohashistoryofdramaticallyreducingvideochurn)
Asfortaxes,IrememberreadingthattheNewCharteriseffectivelyshelteredfromtaxesuntil2019duetoNOLs,steppingupacquiredassets,capexetc.
Ivelaidouttwocases,9xEV/EBITDAvaluationand10xEV/EBITDA.Ifshare
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pricegoeslower,buybackswillbemoreaccretive,soIthinkitsnotthatbigofadealinthelongterm.
Ithinkthatthemostlikelyoutcomeissomewherebetween13.518%CAGRinthemediumterm.Inthelongtermwellprobablyseelowmidteensreturns,dependingonwhetherMalonesrightwithcableorwhethersomethingelsehappens.
WhatIloveaboutcableisthatitsaplayintooneofthemegatrendsthatIseebeinghugeinthefuture.
Alsonoticethatmymarginandgrowthassumptionsareabitlowerthansomepeoples,sotheremightbesomeupsidetothesescenariosifRutledgemanagestopullmarginsover40%andgrowthhigherthanmiddigitsp.a.
Therealitywillalwaysbedifferentfrommodels,forexamplebecauseRutledgewillbeinvestingmoreforthelongterm,soFCF/earningswilllikelybelowerandthustheremightbelessbuybacks.Inanycase,IbelievethatMalonedidntbullshituswhenhesaidduringLiberty2015AGMthathethoughtthedealwillhavehighteensIRR.
Inadditiontoallthese,theremightbesomeadditionalupsideifcapexwillbelowerinthefuture.MymodelassumesthatthecapexwillstaythesameinrelationtoproformaEBITDA/EBITDAcapexratio.
TomRutledgeIfyouvefollowedCharterforawhile,youveprobablyheardthatRutledgeisconsideredthebestoperatorinthebusiness.Butwhy?
BeforeMalonerecruitedRutledgetoCharter,hewastheCOOofCablevision.Duringhistenurethere,Cablevisionachievedthebestoperatingmetricsintheindustry.Hesworkedincableindustryformostofhislifeandherosetohiscurrentpositionfrominstallingequipmenttocustomerhomes.
WhenhejoinedCharter,herecruitedmostofhisteamfromCablevision.
MaloneisveryimpressedwithRutledgeandwhathedidwithCHTR,for
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example:
1. Simplifyingtheservicewithonepackage>thishelpscustomernottocallthemmuchsothattheydontneedmuchpeopleatcustomerservicing,whichinturndriveshighermargins
2. Goingalldigitalwheretheycanoffer50mbminimumserviceatreasonablepriceandwiththebenefitthatwhendataconsumptionisincreasing,theyhavenoproblemwiththecapacity.
3. Withfixedtelephonehesaidthattheyaregoingtopriceitsothatpeoplecantsayno.
Ithinkresultsspeakforthemselves.Rutledgehasbeentheonlycableguygrowingsystematicallyinhighsingledigits.
Miscellaneous,interestingnotesonCHTR/TWC
ManyinvestorsbelievethatallhouseholdsintheU.S.havehighspeedinternet.Infact,50%ofU.S.householdsusecableorfiberinternet,20%ofU.S.householdsuseDSLinternet,and30%ofU.S.householdsdonothavebroadbandinternet.Asrecentlyas2012,U.S.cablecompaniessuchasComcast,TimeWarnerCable,andCharterallhadmorevideosubscribersthaninternetsubscribers.
Inotherwords,broadbandinternetisahugeopportunityinthefuture,especiallyasdataspeed/capacitydemandgrows.
Someotherpointstobenoted:
TWCisyettoconvertalldigital.Theyhavealreadystartedthisprocessandonceitscompleted,itwillbeadrivertoenhancetheperformanceofthecombinedcompany.Malonethinksthatitwilltake3yearstocompletethisprocessatTWC/BHN,butitwillbeworthit.Thedealwilllikelygothroughfasterthanpeoplethinkbecausethethreecompanieshavealreadybeenexaminedbythe
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regulatoryentitiessotheprocessshouldbemorestraightforward.Internetconnectivityisveryhighmargin,whichwilldrivemarginexpansioninthefutureforcablecompanies.BrightHousealreadyhasawirelessservicewitharound45khotspotsinFlorida,couldaccelerateChartersexpansionefforts.TWChasatechnologycalledHotspot2.0,whichenablesbroadbandcustomerstohaveaseamlessexperiencewiththeiraccesspoints.OverlapwithFiOSisminimalwithbothCharterandTWCunder4%withFiOS(VZ)acrossgeographicfootprintvs.CVC/CMCSA/TWCat45%/15%/12%Itmighttake~3yearsforthebiggestresultstostarttoshowup.ThereasonforthisisthatRutledgeplanstounifythecombinedcompanysproductofferingsetc.+upgradetheanalogsystemsduringthetime.ThismightnotbepossibletodowithoutstrongcontrolfromLibertybecauseitrequiresalongtermview.FromwhatIvereadandunderstood,thesettopboxesthatCHTRisdeploying(Worldbox),ismilesaheadofcompetitors.Forexample,itsbackwardscompatible,cloudbased,theycanhavemultiplesuppliersbecauseoftheirownsecuritytechnologyuseddrivinglowercostsetc.
CablescompetitiveadvantageCablehasanadvantagewithbroadbandagainstDSLbasedincumbentprovidersbecausecablerequiresconsiderablylessincrementalcapitaltoincreasespeedsontheirservice.
ThisadvantagehastobeusedasfastaspossibletoensurelastingcompetitivepositionandthisiswhyChartersRutledgehasbeeninvestingforthefuture,sacrificingfreecashflowintheshortterm.
Anotherthingthatsafactoristhatthetelcoshavecommittedtoahighdividendpolicy,whichrestrictstheirabilitytoinvestininfrastructureaswell.
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Itcostsabout$3,400tomakeaneworupgradedconnectiontoasingleaveragesuburbancustomer,includinginfrastructure,lineextensionsandhomeinstallation.Sincetheaveragemarginperhouseholdis$50to$100permonth,thepaybackcaneasilytakemorethansixyears.
(sourceforabovequote)
Mobile/wifiopportunity
Datademandonwirelessnetworksaregoingtocreateascarcitysituationincreasingly,wheremoreandmoreofdatawillhavetobedownloadedthroughterrestialnetworks.
Maloneisvisioningthatcableisgoingtocreateanationwidewifinetwork,wheredevicesaregoingtoworkseamlesslywhethertheyareathomeorelsewhere.
Ultimatelythesenetworkswillhavetoworktogethereithercooperativelyorthroughconsolidation.
Hementionedthatwificostperbithasthepotentialtobecheaperthanthecellularspectrumcost.ThisisinterestingbecauseMarkMasseymentionedinhisinterviewthatLibertyGlobalisintheprocessofmakingits15m+customermodemsintoWIFIhotspotsthatcanbeaccessedbyallcustomers,creatingawifinetworkforthebenefitofthecustomers.(IthinkIvereadthoughthattheHorizonwifirangeiskindashitty)
Myguessis,thegovernmentwouldbegreatlypleasediftherewasathirdmeaningfulalternativetothetwodominantwirelesscompanies.
OnethingthatpeoplehavemissedwiththeTWC,isthatduetohistoricalquirk,theyhaveaperpetualrighttobeingaMVNO(MobileVirtualNetwork
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Operator).Charterdidnthavetheserights,butthroughtheTWCdealtheydobyextension.
Thebestthingaboutthisisthatbecausethecostsarelargelyfixed,thiswillbebothagrowthandmarginexpansionopportunity.Italsohasthepotentialtocreatealotofvalueforthecustomerwithpossiblequadplayswhereallcommunicationsishandledthroughthecablecompany,creatingevenmorestickiercustomerrelationships.
VODMalonetalkedalsointheAGMaboutvideoondemand(VOD)andhowthecablecompaniesfailedtocapitalizeonthat,whichultimatelyledtotheemergenceofNetflixandHulu.
Hestillbelievesthatbyleveragingtheirexistingdistributionsystem,itstillcouldbeanopportunity.
TheultimategoalFromwhatIvegathered,makingtheconsumerstickyandsecuringtheleadershippositionwithnewproductsandofferingbetterservicethantelcosisMalonesultimategoalwithcable.
Hewantscabletobetheonestopforcommunicationsbybundlingallofittogether:bestbroadbandspeedatthebestprice,cheapwififorseamlessexperienceinandoutofhome,mobileplayasMVNOandmaybemakingacompetitiveVODproducttocompetewithNFLXandHulu.(+somethingIforget)
Theinfrastructureofcableofferssomanypossibilitiesinthedataheavyworldoftomorrowanditcurrentlyhasaleadwhichmustbetakenadvantageofbeforecompetitorscatchup.
LetshavealookatMalonesinternationalcableoperations:
LibertyGlobal(LBTYA/LBTYB/LBTYK)
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LibertyGlobalconsistsmostlyofoperationsinEurope,wheretheyarealreadypastthebiggestconsolidationphase.
Itskindabigatover$42bnmarketcap@$47.9/share,~881.79mshares.
AsforthevaluationIthinkitsaround10xEV/EBITDA,with5xEBITDAleverage.
Again,Imnotgoingtogoindetailherebecausetheressimplynotmuchtosay:alotofwhatshappeningwithCharterisapplicabletoLibertyGlobal,thoughIthinkRutledgeisbetterCEOthanFries.
Ibelievethattheyaremostlydonewithbigdeals(likeFrieshassaid),butIdneverruleoutthechanceforthemtodoamegadealifagoodopportunitypresentsitself.MaybeMalonewillfigurehowtogetthebananaoutofthejar(inotherwords,doadealwithVodafone)
HimtalkingaboutVodafone:
Theprincipalbarriertous,andImtalkingphilosophicallyhereImnotmakinganoffertoanybodyphilosophically,youhaveadifferentviewofhowalargecompanyshouldcapitalizeitself,Malonesaid.Theirphilosophyislowleverage,lowriskandhighcashpayouttotheirshareholders.Iprefertogrowequityvalue.
FromMalonespointofview,Vodafoneisruninefficiently.Theresalotofvaluetobecreatedbecausepeoplehaventfiguredouthowtorunthecablesystemsaswellashedoes.
Sowhatsnext?Cableconsolidation,accordingtoFriesisprettymuchdoneinEurope,sothenextlogicalthingafterhorizontalexpansionisverticalintegrationandfocusingonpenetrations(whicharerelativelylow)andoperationalprowess.IbelieveLibertyGlobalwillbeparticipatingincreasinglymoreinthecontentsideandtheyvealreadydonesomeJVdealswithDiscovery.
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[edit]Also,seecablepenetrationcomparisontablefurtherdowntoseetheLBTYAspotentialintermsofincreasedpenetrationrates.
Horizonsettopboxproblems?TherehasbeensomeconcernsthatLibertyGlobalsnewHorizonboxsucks.ThereareseveralthreadsthatcanbefoundonGooglewherepeoplearecomplainingaboutit.
Evenasrecentlyas7monthsago,therewasaredditthreadwherepeoplejustslammeditdownandIcantotallyunderstandthat:nothingmakesmemoremadthanusingsomethingregularlythathasashittyuserinterface.
ThesilverliningherecouldbethatLGIcanupdatetheboxesremotelyandapparentlytheyvemanagedtofixsomeproblems,butIfinditweirdhowtheyrolledoutaboxEuropewidewhichpeopleconsideradisasteruserinterfacewise.
ThismightnotbematerialtoLGIespeciallyiftheymanagetofixthebiggestshortcomingsbutIdohopethattheygettheirshittogetherwithit.
IdidfindthislittlepiecewhichtalksabouttheirnewboxwhichislaunchinginNetherlandsinconnectionwithZiggoacquisition:LibertyGlobalhadgottenalotofcomplaintsabouttheoldboxsotheyapparentlymanagedtoaddressthecompaintsandupgradedit.Thisissomewhatencouraging.
LibertyGlobalLatinAmericaandCaribbean(LILA/LILAB/LILAK)AboutaweekagoLibertyGlobalcreatedatrackingstockfortheirLatinAmericaandCaribbeanoperations(LiLAC).
Forstarters,checkouttheLiLACpresentation.
LILAKownsfollowingassets:
VTR,ThebiggestcablesysteminChile60%ofLCPR,LibertyCablevisionPuertoRicoajointventurewith
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Cablevision,wheretheyessentiallyhaveamonopolyif/whentheChoiceacquisitioncompletes
LILAKlikelyhasthelongestrunwayintheempire.TensofmillionsofpeopletherearestilladoptingthemodernlifestylesothereshugepotentialforMalone/FriesimplementtheplaybooktherewithmassiveM&A+organicgrowth.
EvenifLiLACforwhateverreasonwouldbecomedistressed,itsstilllegallypartofLibertyGlobalsotheysharethebalancesheet.Idontknowhowthematterwouldbesolvedfromtheperspectiveoftheshareholders,butultimatelyIthinkprovidessomemarginofsafetytotheinvestment.
DespitetheeconomicproblemsinPuertoRico,thecablerevenueshavebeengrowingmostlybecauseoffavorabledemographics:MyimpressionisthatPuertoRicoisstilladevelopingplacewherepeoplearestilladoptingtolifestylefilledwithTV,computersandespeciallytheinternet.Thisshoulddrivehighsingledigitgrowthintheregionforthecablesystemthere.
LiLACmightexperiencesomeproblemswiththeeconomiesofLatinAmerica,butIbelieveonehastothinklongtermaboutthis.IthinkIvereadthattheyhedgesomeoftheircurrencyexposure.
HeresmyattemptinvaluingLILAK:
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TakeintoconsiderationthatearningsinthiscaserepresentsnormalizedFCFwithnormalizedmaintenancecapex.IthinkthatLILAKwillhavehighercapexduetonewbuildopportunitiesandthuslessbuybacks.
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Herearethepopulationpyramids,whichgivesomesenseofthepotentialofthedemographics.
ComparisonofcablepenetrationIbelieveoneofthekeysofjudgingcablecompaniesistheirpenetrationrate:
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Fewnotes:
LiLACpenetrationlookmature,butmostgrowthcomesfromfavorabledemographicsbecausemostpeopledontevenownacomputeryetLibertyGlobalhasagreatopportunitywithInternetpenetration,thoughImnotsurewiththeindividualcountrieshowthemarketsarethere.LGIhasgoodinteractiveserviceabouttheiroperationsintheirwebversionof2014AnnualReport.
AtfirstsightyoumightnoticethattheProFormaCharterspenetrationratesarehighlysimilartoComcasts.Itrepresentshowintrinsicallydependentthe
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futureperformanceofthecompanyisofRutledge.
Bonus:CWCArticle:MalonetotakestakeinCWC
CWCisaUKbasedcableandwirelesscompanyoperatingintheLatinAmerica.TheyrecentlyacquiredColumbusandapparentlythetransactionmadeMaloneamajorshareholderinthecompany.
CWCappointedThadYorktotheirboardofdirectors,whoisthemanagerofMalonespersonalbusinessentities.
ThadheldseniorpositionsatTelecommunicationsInc.(TCI)andTCIInternationalthatrangedfromoperationstofinanceinTCIscableTVbusiness.HestartedinthecabletelevisionbusinessasanInstallerforTCIwhileattendingcollege.
TheressomespeculationthatCWCatsomepointcouldbefoldedintoLILAKandthusMalonecouldendupowningbiggerpercentageofitthannow.
ThisbegsaquestionwhetheryoushouldinvestinCWCtoanticipatethisdeal?Illhavetoworkonthismyself,butheresthequicknumbersonCWC:
EBITDA$585mLTMMarketcap4.368B*69p=3bnGBPor$4.7bnUSDCurrentleverage3.6xEBITDA(target2.53,whichislow,butwillbelikelyuppedifMalonegetscontrol?)Q1netdebt$2366mEV/EBITDA=$7066/$585>12x
With12xEV/EBITDAitlooklikealotofthepotentialisalreadypricedinwhileLILAKistradingunder10x.CurrentlyitseemsthatonvaluationbasistherewouldbemorevalueinLILAK,butoneshouldntunderestimatethefactthatMaloneownsmoreCWCthanLILAK.
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ImprettysurethattherewillbeadealatsomepointandMalonewillownmoreLILAK.
Iftheresoneconclusionthatoneshouldhavehere,itsthatMaloneseesalotofpotentialincableinLatinAmerica.
LibertyInteractiveLibertyInteractiveconsistsoftwotrackingstocks:
1. LibertyVentures(LVNTA/LVNTB)2. QVC(QVCA/QVCB)
TherationaleforthesebeingunderthesameumbrellaislikelybecauseQVCisprofitableandVentureshassomeinvestmentsanddebtwithfavorabletaxattributessoLVNTAcansheltersomeofQVCstaxes.
Quicklookatboth:
LibertyVentures(LVNTA/LVNTB)Thisoneseffectivelyapublichedgefund
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LVNTAconsistsofnumerousequitystakes,whollyoralmostwhollyowneddigitalcommercebusinessesandsomederivativesthenoisystuff.
Thekindofstuffyounormallywouldnttakepublicasitstoocomplicatedandanalystsdontwanttomesswithit
Fewnotes:
1. TheirinvestmentsphilosophyisthekindthatIvegrowntolikealotlately:SeekhighROICbusinesseswithreinvestmentopportunities
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atattractivevaluations.2. Someinvestmentsaretaxdriven(forexample,Greenenergy),
meaningthatwithouttheirfavorabletaxattributestheywouldntbethere.
Thelatestpresentationhadshortdiscussionabouttheircurrentinvestmentsandwhattheyareattemptingtodisrupt.IhighlightedtheonesthatbelongtoLVNTAcurrently:
Theirlatestdealistobuy$2.4bnworthofLBRDKatNAV($56.23)andtheir
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existingTWCstakegetsswappedwithLBRDforequity.ThiskindofreinforceshowattractiveMalonethinksLBRD/newCharteris,thoughIalsothinkthisarrangementwasneededtogetthedealdoneandtoavoidinvestmentcompanyactwhichwoulddemolishthesupervotingsharestructure.
WhatsinterestingaboutVenturesisthattheyaregettingannualcashflowfromQVCbecausetheyshieldsomeofQVCstaxes,thoughcumulativedeferredtaxliabilitygrowsaswell:
Heresmyunderstandingofthewholearrangement:Becauseofthefavorabletaxtreatmentfrombondstheygettoinvestthecashfromtaxshield
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beforehandbeforetheyhavetopaytheliabilitiesbackinfull($5.1bn)in20292031or1416yearsfromnow.
Theyllhavetopaytotalof$5.1bnstartingfrom2029.Beforethistheycaninvestthecashthattheyaregoingtogetbeforehandfromtheirarrangementssoyoullhavetodiscounttheirperformanceuntiltheyhavetopaythetaxliabilitiesback.
Inotherwords,LVNTAiskindofaleveredinvestmentvehicleplay.
SounlessImwrong,theyllhavetopay$7.2bnin20292031andsotodeterminehowmuchLVNTAisworth,youllhavetoestimatehowmuchtheyllbeabletogrowtheircurrentinvestments+taxcashflowtheyaregoingtogetinthemeantime.
HeresasnippetfromthespreadsheetthatImade:
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Imalmost100%surethatIvemadeamistakealongthelinebecauseLVNTAissocomplicated,butitssomething.NoticethattheirleveredstructureresultstoCAGRperformancebeinghigherthantheirgrowthininvestments.
1. Ivaluedtheirecommercebusinessesat$1bn2. Iassignedvalueof0togreenenergyforsafety3. Myhopefullyconservativevaluationfortheirinvestments+businesses
is~$8.5bn4. ItookthecashflowtheygetfromshieldingQVCtaxintoconsideration.5. TakingintoconsiderationMalone&Maffeicombotrackrecord,Ithink
10%growthexpectationininvestmentsmightbetooconservativeand
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thatswhyIputfewdifferentscenariosthere.6. InoticedthatyoucanvaluethisroughlybytakingtheestimatedROIof
LVNTAandadding2%togettheCAGRbecauseofleverage
IfyoulikeExpedia,theirotherinvestmentsandLBRDKatNAV,thiscouldagoodwaytobuyintoit.
Also,takeintoaccountthattheycurrentlyhave~$700mworthofdeferredtaxliabilitiesfromtheirequities,butIwouldntbetooworriedaboutthempayingtaxesunlessnecessary.
Oneoptionthattheyhave,whichtheyalsodidwithTripadvisoristospinofftheholdingsviaReverseMorrisTrust(anotherarticleoninvestopedia)andmonetizethemthatwaytaxfree.
Somerisks:Inadditiontonotinvestingtheircashwellenough,thebondsthataredue2029areexchangeable.Iftheyarecalledunexpectedly(likeifoneofthebondholdersgetstakenoutinM&Aevent),LVNTAhastopaybeforehandfortheliabilities.Thegoodthingisthatthebondholdersareincentivizedtoholduntilmaturity.
Oneoftheproblemsisthatitcanbehardforthemtofindattractiveinvestmentsgoingforward,especiallyifthecurrentbullruncontinues.TheydohavetheoptiontobuybackLVNTAshares,grantedtheyarepricedfairly.
ScenariosformonetizationThisfairlyrecentSumzerowriteuponLVNTAwaswrittenbyapersonwhoseemssmart/knowledgeableandcamewithscenarioswhereLVNTAcouldmonetizetheirassets.Ifyouareinterested,Ihighlyrecommendyoutoreadit.
Malonesellseverythingbutthis?Imightbelookingabittoomuchintoit,butrememberwhenIwroteaboutMalonesinsidertradingwherehessellingbunchofstuffregularly?Well,if
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youcheck,youmightnoticethatforsomereasonhehasntsold/isntsellinganyLVNTA.TheredoesntexistnonvotingsharessothatmightbeonepartofitthoughIdontknow.
NowthatIvegotabitbetterunderstandingofLVNTA,Igetwhysomeonewouldwanttoownthis.Improbablygoingtoinitiateasmallposition,keepfollowingitandtrytounderstanditevenbetter.
QVCGroup(QVCA/QVCB)Forme,QVCisoneoftheleastinterestingpiecesoftheempire.ItconsistsofQVC,aTV/onlinemultichannelretailerandastakeinHSN.
BecauseImnotveryinterestedinit,IllcoverwhatIcancomeupfornowandreferyoutoabetterandmorecomprehensivewriteup:
Slowgrowthletsfaceit,retailingisreallyhardandcompetitive.QVCiswellmanagedandithasgoodprofitability(despite)beingaretailer.AssetlightdriveshighFCFwithverylittlecapitalexpendituresmostofthecashflowgoestoaggressivebuybacks.3xadj.OIBDAleverageContentdrivenforexample,theyareproducing2.5mminutesofhighqualityvideosyearly.Developingonlineshoppingexperienceaggressively,whichisIIRCatleast>50%oftheirsales.Mostoftheirproductsareexclusive,whichcreatesadditionalvaluetocustomersandalsomitigatesAmazonthreat.Customersaresomewhatloyalasmostofthesalesarerepeatpurchases.
MyconclusionisthatQVCisagoodbusiness,butnotasgreatasIconsiderotherspartsofMalonesempiretobe.Asexpecteditswellmanaged,thoughifitwasntitprobablywouldntbethereasitwouldhavebeenswapped/sold
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out.
Thebest(andtheonly)writeupthatIvereadonQVCisbyValueVenturesfrom2013.Highlyrecommendedifyouareinterested.
Discovery(DISCA/DISCB/DISCK)IveactuallywrittenaboutDiscoveryafewmonthsback,butIwouldntrecommendthatposttoanyone.BackthenIunderstoodalotlessaboutthecompanyandtheindustryandIstillfeellikeIdontunderstandeitherofthemwell.
MyimpressionisthatDiscoverysCEOZaslavisprettygoodoperatorandtheyvebuiltscalefairlywell,butyoucanonlydosomuchwithassetsthatlookrelativelymatureatleastintheUS.
InternationalrevenuesarebeexpectedtogrowbothorganicallyandduetoM&Ainthelongterm,butitshardtosayhowmuch.
Scaleisimportant.Yougetmorenegotiationpoweroverdistributorsdependingonhowmuchcontentyouprovide.Inadditiontothat,contentproductioncostsarelargelyfixedsothebusinessenjoyseconomiesofscale.Malonehashintedthattherecouldbeaoncomingcontentconsolidation.
Thebusinessisassetlightmostoftheircostsarerelatedtoproducingcontentandothercostsaremostlyfixed.Thismeansthatthebusinessgeneratesalotoffreecashflow,whichhashistoricallybeenusedtoshrinktheequity.
DISCmakesabout45%ofmoneyfromdistributionandrestfromadvertisingandother,sodistributionissignificantpartoftheirbusiness.Theycandemandmoremoneyfromcableoperatorswhentheybundlealotofchannelstogether(scale)andthesecostshavehistoricallybeenforwardedtocustomers.
IbelieveinthefutureDiscoverysbusinessmightbeunderpressurebecauseinternetcantnecessarilybecontrolledandmonetizedaswellcurrentdistributionsystemsthroughCable.WhenIlookathowpeopleofpeoplein
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their20susingcontentviainternet(andhowIpersonallyuse),thisissomethingthatIthinkhasfairchanceofhappeninginthelongterm.
Becausebundling,accordingtomyunderstanding,isalargepartofDiscoverysbusinessmodel,thetrendofpayingforwhatyouneed(asopposedtopayingforwholepackage)wouldhurtthebottomline.
Channelpopularityanddemandisprobablyamitigatingelement.Discoveryschannelisinthetop5ofcablechannelsandIbelievesomeoftheirotherchannelsfareprettywell.
AsforthevaluationIdonthavemuchinsightsitspricedatabout~18P/FCF,EV/FCFbeingsomewhathigher.IftheycangrowAOIBDAinthelongterm,debtenhancedbuybackswillshrinkequityfastenhancingreturns.Theonlyproblemwithlongtermgrowthisbeforementionedtrends,whichiswhyIdontfeelbullishonthestock.
Starz(STRZA/STRZB)StarzisanentertainmentbrandownsfewpayTVchannels,distributesmovies,seriesanddoesforhire2Danimations.
Itsfinancialsfromthepast4yearsdontlookgood,atleastcomparedtootherpartsoftheempire.
IfoundthisreallygoodanswerfromMalone(fromsomeinterviewmostlikelyin2013),creditstooriononCoB&F:
Starzcangoeitherway.Itcangetbiggerthroughacquisitionoritcangetmergedintosomebodywhocandriveembetter.MyviewisStarzneedstobepartofsomethingbigger.Theyneedacurrencytogetthere.Andsothisgivesthemastockandacurrency.Ifsomebodywantstocomeandmakeaproposalafteritsspunforwhyitwouldbeagreatcombination,youknow,wellbeallearsatthatpoint.
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Inotherwords,Malonewantstosell/swapit.
Asastandaloneitdoesntseemhavemuchpotentialandtheyareapparentlytryingtofindbuyersforthebusiness,butwithoutsuccess.Forthepastyearstheyvestarteddoingoriginalprogramming,whichiftheyhitajackpotwouldprobablyhelpthemalotinfindingabuyer.
Lionsgate(LGF)RecentlyMaloneswappedsomeofhisStarzstakefor3%ofLionsgate.Idontknowwhatheplanstodowithithedidsaythatitslikealearningexperienceforhim:
Imanengineer,whatthehelldoIknowaboutcontent?Tryingtounderstandwheretheseideascomefrom,howtheygetcreatedandproduced.ThedevelopmentofstoriesisreallygoingtobeimportantinthisrandomaccessworldthatReedHastingsisdrivingusinto.
Now,eventhoughMalonestillhasinvestmentsincontent,hedoesntcontrolthemasitcouldpresumablycreateproblemswithregulationduringcableconsolidation(ashesaidinthe2015AGM).IthinkhesalotmoreattractedtocableandLMC.
Thisisntausualinvestmentforhim:makingmoviesisveryexpensiveandthebusinessdoesntenjoywhatMaloneusuallylikesinacompany:moat,customerstickiness,recurringrevenuesetc.
Malonemightbethinkingthatcontentaggregators(likeDiscovery)couldbecomeunderpressureduetorapidexpansionofinternet,whilethosewhodevelop/createthecontent(likeLionsGate)couldkeeponthrivingandperhapsmakemoremoneybecauseoflackofthemiddleman.
Anyways,IthinkthemostplausibleexplanationforthisisthatMalonewantstobenefitfromlikelyoncomingcontentconsolidation(i.e.LGFgetsboughtout)orhethinksthatcontentcreatorsaregoingtoleveragetheinternetheavilyagainstcurrentdistributors.Idontknow.
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ItcouldalsobepossiblethathecouldsomehowleveragetherelationshipwithLGFtoextendtohisother,heavilyskewedintodistributionkindofcompanies.
OfcourseImightbemissingsomekindofanglehereandImeagertoseewhatitis(iftheresone).
WhyDidJohnMaloneinvestinLionsGate?
AscentCapital(ASCMA/ASCMB)NowthisisanoddthingandIalmostmisseditcompletely:Malonenevertalksaboutit,hedoesntsitontheboard..buthestillapparentlyowns~4%ofit.
ItsasecuritymonitoringbusinessIglancedatitanditmighthavepotential,butforthemostpartIdontfeelveryinterestedinitbecausetheressomuchmoreinterestingstuffgoingonwiththeothercompanies.
Ithinkhesnotrequiredtoreporthissells,soitspossiblethathesselling.Cantbesurethoughuntiltheresanewproxystatement.
Bonus:GrupoTelevisa(TV)TelevisaGrupoisthebiggestcable/satellite/mediacompanyinMexicoandSpanishspeakingworld.Apartfromitsamazingassetsandseculartrendopportunity,itsinterestingbecauserecentlytwoMaloneslietunenantsjoinedtheirboard:MikeFries(LibertyGlobalCEO)andDavidZaslav(DiscoveryCEO).
TheresafairlyrecentpresentationbyGameCreekCapital,wheretheyestimateTVstargetpricetobebetween$4557/share.WhatIwanttohighlightfromtheirpresentationaretheassetsthatthecompanyisholding:
7/23/2015 JohnMaloneandHisCable/MediaEmpire
http://www.jnvestor.com/malone/ 48/58
Herearemyquicknotesfromthepresentation,butIhighlyrecommendyoutocheckitoutyourself.
TVhas38%stakeinUnivision,whichisabouttoIPO.TValsocollects12%royaltiesfromUnivisionsrevenues.Asabonus,theroyaltyratewillincreaseto16%+in2018.Theyhaveexcellent,dominantassets:theircable,satelliteandcontentnetworksare#1measuredbymarketshareinMexico.Contentbusinessisslowgrowth,shouldhavesomerunwayleftSkybusinessisgrowingatlowdoubledigits
7/23/2015 JohnMaloneandHisCable/MediaEmpire
http://www.jnvestor.com/malone/ 49/58
CablebusinessisveryhighgrowthandshoulddrivecashflowsstrongerinthefutureCableconsolidationinMexico/LatinAmericaisyettohappenandMikeFriescandefinitelyhelpwiththat.TVtodayremindsofComcastinthelate80s,whichiftrue,couldbeagoodopportunity.TheirassetsmightbeevenbetterasfarasImconcerned.DemographicsofSpanishspeakingworldarealongtermopportunityonlyaround50%ofMexicanspopulationisusinginternet.Verticalintegrationprovidessynergies.Aboutthemanagementteam,Idontreallyknow.TheyhavemanagedtobuildgoodassetsandthecompanyseemstobeingoodshapesoIminclinedtothinkthattheyaregood.TheBODadditionsraisesmyhopesforoptimizingvariousaspectsofthecompany(re:Maloneplaybook).
Ithinkthisimagemakesthedemographicpotentialclear.
7/23/2015 JohnMaloneandHisCable/MediaEmpire
http://www.jnvestor.com/malone/ 50/58
Asfortheconcerns,wearetalkingaboutMexico.Imnotfamiliarwithitatall,butmypreconceptionisthatthereiscorruption,canbelackingincorporategovernanceetc.ThegoodthingisthatTVdoeshavealongoperationalhistory,soasfarasIknowthereisntaprecedentformuchshadystuff.
Eventhoughthecompanyhasgreatassets,theyseemtobeundermanaged.Forexample,theyhavereallylowleveragewhichtheyarejustifyingwithfirepower,butforwhatexactly?
Whatthethingisworththen?Imnotsure,butherearetheprimarynumbers:
(FiguresareaccordingtoQ2presentation)
1. Marketcap:$22.5bn($36.25/share)2. Netdebt~$3bn3. EV/EBITDA~11x/2015accordingtomyspreadsheet,including
estimatedUnivisionstake
TherearealotofmovingpartstheGCCanalysisdoeslookcredible,butIdontreallyunderstandpossible(regulatory?)problemswithMexicoandtherecouldalsobesomethingthatImnottakingintoconsideration.
Operational&financialriskwithTVlookslow,butitsdefinitelynotasoptimizedasMalonescompaniesare,whichhindersthegrowth/profitabilityofthebusinessgoingforward.
Ibelievethatunlesstheircapitalallocationskillsimprove,thebusinesslooks~fairlyvalued.
Asaninterestingsidenote,inLibertyMediasAGM,Malonewasaskedaboutit,buthesubtlyignoredit(implyingthathewouldntwantattentiontoit?).Itspossiblethathesimplyforgottoansweritsincehegavesuchalonganswertotheotherquestion,butitwouldbe..Outofcharacter,letscallitthat.
SoTVcouldbesomesortofbonusforthewholeLibertyfamilyanditlooks
7/23/2015 JohnMaloneandHisCable/MediaEmpire
http://www.jnvestor.com/malone/ 51/58
likeMalonehashiseyesonittosomedegree.
Coincidentally,LiLACtrackingstockstartedjusttradingandthetimingisinterestingtoputitmildly.LiLACspresumedprimarypurposeistorollupLatinAmerica,whichaccordingtotheLiLACpresentationisripeforconsolidation.
2014Businessdescription(includes2014lettertoshareholders)
Whereisthemostvaluerightnow?Takeintoconsiderationthatthesearemyviewsonwheretherecouldbemostvalueandeventhoughtheydoreflecttheeconomy
#1IbelieveinthelongtermLibertyGlobalLatinAmericaandCaribbean(LiLAC)operations(LILA/LILAK)hasthelongestrunwaywithorganicgrowthandaccretiveM&A.IalsothinkofitaslittlebitmoreriskierthanthemorematureassetsinEurope/US.ThestockdroppednicelysinceitstartedtradingpresumablybecauseindexfundsfocusedonEuropearesellingit.Unfortunatelyatthetimeofwritingitsreboundedsome.#2IfSIRIcankeepgrowinginmediumtermaswellasitcurrentlyis,LibertyMediaCorporation(LMCA/LMCK)canbethesecondbestbet(maybeeventhebest)inthemediumterm.Iviewitashigherrisk,higherrewardsituationcomparedtonewCharter,mostlybecauseImunsureofSiriusmoatandwhethertheresone.#3ThethirdbestopportunityIbelieveisinLibertyBroadband/Charter(LBRDA/LBRDK/CHTR),whereMalonehasbeenputtingmoremoneyindirectlythroughLVNTA.LVNTAcouldbeajokerofsorts:itcouldprovetobemorevaluablethanitscurrentmarketcapwouldwarrant,butIbelievetheresmorerisktoo.ItsreallycomplexwiththetaxarrangementsanditsessentiallyabetonMalone&Maffeisabilitytomakegreatinvestmentsbeforetheirliabilitiesareduein15years.LBTYA/K,despitecurrentlybeingthebiggestcompanyoutoftheempire,stilllookslikeithasnicerunwaywithrollingnewproductsand
7/23/2015 JohnMaloneandHisCable/MediaEmpire
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relativelylowinternetpenetration.Contentconsolidationcouldbeanopportunity,butIdontunderstandtheindustryanditsprospectswellenoughtomakeaeducatedguessaboutit.Bonus:TVcouldbeagoodlongtermplayasithasunmatchedassetsandseculargrowthopportunity,butunlesstheircapitalallocationimprovesIbelieveitsfairlyvalued.This(asfarasIknow)isntaMaloneholdingsoitskindofaofftopic,butIthinkitmakesforanicebonus.
Somethingstokeepaneyeon:
1. ThetheoryisthatthebestideasgotowhatMaloneownsthemost,inotherwordsLibertyMediaCorporation(LMCA/LMCK).Hemostlikelyalsoprioritizesthosewhichhecontrolsdirectlybysittingaschairman.
2. Iftheresarightsoffering,participateinit.(Usuallytheydoarightsofferingrelatedtospinoffs)
3. Ifhiscompaniesarebuyingalotofsharesback,theymightbeundervalued.Ibelievethattheymightbuysharesbackeventhoughtheyarefairlyvaluediftheydonthaveanythingelsetoinvestin.
4. Keepaneyeonethespinoffsandtrackingstocksthathiscompaniesdo:forexampleLILA/LILAK
SuccessionMaloneisalready74yearsold,sothatsafactorthathastobetakenintoaccountwhenthinkingaboutfuture.Seeinghimintheinterviewsheseemshealthyandlivelythough,sohesgotthatgoingonforhim.
HehasthoughtaboutsuccessionbygivingtwoofhisCEOs,FriesfromLibertyGlobalandZaslavfromDiscoveryanoptiontopurchasehissupervotingclassBsharesineachcompany.
GregMaffei,whosatthehelmofLibertyMedia,LibertyInteractive
7/23/2015 JohnMaloneandHisCable/MediaEmpire
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(QVC&LVNTA)andChairmanningsomeothercompanieslikeStarz,hasntgottensuchdeal(yet?).IthinkthoughMalonehassaidthathismost/allofhisshareswillgotoatrustandhellprobablygivevotingrightstopeoplehetrusts.
Ibelievetheseguysknowhisplaybook,knowhowtooperate,havecapitalallocationskillsetc.sotheywillkeeponrespectinghislegacy.
IamawareofthefactthattheremightbesomesortofregressiontothemeandependingonhowmuchMaloneparticipatesinthecompanies,butconsideringhowlongrelationshipstheseguyshavehadwithhim,Ithinkthecompanieswillultimatelydofine.
Someresources/interviewsMalone2hourinterviewabouthispastin2001(ifyouvereadCableCowboy,theresnotmuchnewhere)Niceinterviewfrom2010withMaloneaboutcable/mediaindustry2012Maverickslecturemyfavoriteone,Iveprobablywatchedthis56timesCableCowboyMustreadbookifyouareinterestedinhim
Insights,tipsandmiscfromMaloneMostofthesenotesarefromtheMaverick2012lecture:
Ondiligence:
Themostimportantthingaboutthesedealsisplentyoftimefordiligence
Healsomakesagoodpointhowtakingthetimetakesawayfromtheemotion,enthusiasmwhenyouarebuildingthemodelsandexactlywhythedealgoingtowork.
7/23/2015 JohnMaloneandHisCable/MediaEmpire
http://www.jnvestor.com/malone/ 54/58
Theresnoeasyanswerondiligence.Youhavetofigureouttheotherguysbusinessasbestasyoucan.Youhavetousethebestprofessionalsyoucanfindinareaswhereyourownexpertiseislacking.
Onacquisitions:
Whenyoubuyacompany,themostimportantthingistheretentionofthepeoplewhocreatedthevaluethatyouarebuyingtokeep.
Thepeopleyouarebuyingoutmusthaveskininthegameatleastuntilgoodpeoplecanbebroughtintolearnthebusiness.
Ontaxesandtaxefficiency:
Malonehasalmostperversepassioninavoidingtaxes.Forexample,attheirheadquartersthetaxgoupisthebiggestonethattheyhaveandinTCIdaystheirinternaltaxteammetmonthlytodetermineoptimaltaxstrategies.
[Government]isyourpartner,butyoudontwantthemtakingtheirshareearly
Thegovernmentisyourpartnerforlife,theyjustdontgettocometoallthemeetings.Thatstheonlyedgeyougot.
Leverageandtaxefficiencygohandinhand
Ifyouboughttheassetwithcashordebt,yougettostepuptheasset
HegaveagoodexampleofSprint,wheretherewasastartupcompanyandanotherprofitablecompany.Becausetheprofitablecompanysprofitswherepartlytaxshelteredbythestartupslosses,theycouldputtheshelteredcash
7/23/2015 JohnMaloneandHisCable/MediaEmpire
http://www.jnvestor.com/malone/ 55/58
backintobusiness,whichresultedinaveryefficientcapitalstructure.
IfyoulookatQVCandLVNTAcapitalstructure,whereLVNTAshelterssomeofQVCstaxesandgetspaidforit,youcanseethatitsveryefficient.
IntheMaverickslecturehetalksabouttaxessomeandyougetasensethathesbeengivingtaxavoidance/optimizationALOTofthought.
FinalwordsIntheenditwasahugepleasuretodothispostbecauseMaloneissuchafascinatingcharacter.Ibelievethathesisoneofthebestinvestorsofourtime,whichisinterestingconsideringthelackofvisibilitythathegetsingeneral.
AlmosteveryvalueinvestorstudiesBuffettinsomewayeitherdirectlyorindirectly,butyouseealotlesspeoplestudyingMalone.Thisismostlikelybecausehedoesntwrite/educatelikeBuffettdoes,butthatdoesntmeanthattherearentgreatlessonstobelearned.
Anyways,greatman,greatstory,greatinvestor.Whatmoreistheretosay?Ihopethestorycontinuesaslongaspossible.
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FredDJuly21,2015
Greatpost,superboverview!
BusinessCharterCableSpectrumBusinessPhone&Internet.IncreaseYourBusinessROI&Save!
7/23/2015 JohnMaloneandHisCable/MediaEmpire
http://www.jnvestor.com/malone/ 56/58
ReplytoFred
julesJuly21,2015
Thanks
Replytojules
YairJuly21,2015
Thankyouforadetailedpost.
WeallanticipateaninterestratewillrisebytheFED.So,howthoregardthisrise:I.Malonewillfindithardtocuntinuetoleveragehisempire>hiscompeniesstockpriceswillnotoutpreform(comperetomarketaverage)
II.InthelastyearsMalonefulfillhisempirewithenoughcheapmoney,soonlyhiscompetitors(andtherestofthemarketcompenies)willneedtoservehighcostdebt>hiscompeniesstockpriceswilloutpreformcomperetothemarket
ReplytoYair
julesJuly21,2015
Goodpoints,Ibelievethatthebestwaytotrytomeasuretheeffectsofinterestratesistoplayaroundwithratesinaspreadsheetandseehowtheyeffectthecompanies.CantreallysayhowmuchrateshavetoincreaseforMalonescompaniestostarttounderperform.
Replytojules
7/23/2015 JohnMaloneandHisCable/MediaEmpire
http://www.jnvestor.com/malone/ 57/58
innerscorecardJuly21,2015
ThiswastheclearestoverviewofMaloneandLibertythatIhaveread.AndIvereadafewoftheotherones(someofwhichyouhavealludedto).
Lookingforwardtoanyupdates/edits.
Replytoinnerscorecard
julesJuly21,2015
Thanks
Replytojules
HiramPatelJuly21,2015
Thisisafabulouspost.IvebeenmeaningtodooneofthesetokeepmyowninvestmentsinMaloneentitiesorganized.
DoyouthinkLibertyGlobalisfullyorovervalued?
ReplytoHiram
julesJuly21,2015
Ithinkitmightbefairlyvaluedorslightlyundervalued.Ibelievetheyvegotdecentrunwaywithimprovingpenetrations+quadplays+wifiopportunitiesetc.
OtherpartsoftheempirelookmoreinterestingrightnowsoImpersonallynotinvestinginLBTYKattheselevels.
Replytojules
7/23/2015 JohnMaloneandHisCable/MediaEmpire
http://www.jnvestor.com/malone/ 58/58
AnthonyJuly23,2015
DAMN!Wonderfulpost.Verycooltoseesomeoneputitalltogetherinonepost.Keepupthegoodwork
ReplytoAnthony
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