John Malone continues to create more tracking stocks and spinoffs. Click the diagram below for a larger image.
Why control matters
Discovery, Liberty Global, and Media all issued a dividend of non-voting C class shares. If any of the Liberty entities use stock to buy other companies, it will use a higher proportion of non-voting shares than voting shares. This reduces the dilution in voting control, ensuring that Malone keeps more voting control over his companies. Control is important because it allows the businesses to invest for the long term. Historically, Malone has seen businesses avoid good long-term investments because some of the owners were too focused on the short-term.
At one point in time, Discovery Communications (which TCI/Liberty invested in) raised money from venture capitalists because it was on the brink of bankruptcy. Later on, the venture capitalists wanted to cash out. Because they wanted to sell stock in an IPO, they wanted Discovery to report high earnings before an IPO. However, Discovery’s other owners wanted it to make investments into more cable channels. Because cable channels lose money initially, this would depress short-term earnings. In the end, the venture capitalists were bought out and Discovery invested in new channels.
At another point in time, Liberty wanted to merge with Bell Atlantic. At the time, Malone thought that the hybrid fiber-coaxial network, digital compression, and computer networking would usher in a new wave of innovation. Phone lines would be able to carry digital video signals and offer high-speed Internet. Coaxial cables would be able to carry voice and Internet services. Malone thought that both cable companies and telcos would need to make significant investments in upgrading their networks. Had the merger gone through, Bell Atlantic would have needed to cut its dividend to fund the capital expenditures. Unfortunately, shareholders did not want the dividend to be cut so the merger failed. If Bell’s CEO were an owner-operator with control over the company, he could have done the right thing and made sensible capital allocation decisions.
New spinoffs and tracking stocks since my last diagram
The last diagram can be found from my April 2013 post:
Liberty Global: There will be a new tracking stock for the “Liberty Latin America and Caribbean Group”. I suspect that LiLAC will be easier to understand than the other tracking stock. Note that Liberty Global is following in the footsteps of the old TCI. The old TCI invested into many cable channels, some of which would later cease operations. Cable channels lost a lot of money in the beginning. In the long run however, the successful ones became incredibly profitable. Liberty Global is taking similar steps but on a smaller scale. It is investing in a new over-the-top service (My Prime) that is likely losing money. It has a Liberty Global Ventures division which has made a number of investments in startups. You probably want to own the tracking stock that owns the miscellaneous assets because it is likely that the stock market is undervaluing those assets. This is especially true because many investors value cable companies based on EBITDA and free cash flow multiples. There should also be hidden value in the non-LiLAC tracker because there is a huge turnaround opportunity in Virgin.
Discovery: As mentioned above, Discovery issued a dividend of non-voting shares.
TripAdvisor Holdings: Ventures’ stake in TripAdvisor A and B shares was spun out as its own stock. Presumably, TripAdvisor Holdings will eventually merge with TRIP and the B shares will be converted into A shares at a premium. Malone likely will not leave money on the table by converting the B shares without a premium, especially given the premium that he paid for those shares.
Interactive / Ventures: Interactive swapped cash and its e-Commerce businesses for shares of Ventures stock. My guess is that Malone no longer has an appetite for buying back more Interactive shares since traditional television viewing is on the decline. Most American cable companies are reporting falling video subscribers. Transferring cash from Interactive to Ventures reduces the amount of cash available for buybacks.
As a pure play home shopping stock, Liberty Interactive may fetch a higher valuation. This could make a QVC/HSN merger more feasible.
*Disclosure: I currently own LMCA and DISCA.