(LMCA) Is there hidden value in TruePosition?

I’m interested in the value of TruePosition since it may be a vehicle for hiding value in the proposed Liberty Broadband spinoff.  The real story seems to be complicated.

1. The core business seems to be in decline.
2. I have my doubts about Craig Waggy, the new CEO.  He was associated with improper accounting at Gemstar-TV Guide International.  The SEC brought a civil action against him.  Waggy paid a $25k civil penalty.
3. The company has upside from patent trolling and from suing other companies for antitrust.

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John Malone’s insider trading

I’ve been trying to figure out why Malone sold shares of LMCA a few days ago.  (I don’t have a great answer.)  A year ago he bought a smaller number of shares in LMCA at prices very similar to his recent sale.

Note that you should not necessarily read too much into Malone’s insider trading.  In the market panic of 2008/9, you should have bought Liberty Capital (to make several times your money) despite Malone’s massive insider selling (due to a suspected margin call).  Some of his trades represent an immaterial portion of his overall stake in that particular company.  He may be simply “painting the tape” in the hopes that other people read too much into insider trading.

Here is a compilation of John Malone’s insider trading based on his SEC filings.

(LMCA) Investment Company Act

I did not understand the Investment Company Act before.  This set of regulations would be extremely onerous for Liberty Media if it were deemed to be an “investment company”.  In particular, Liberty would likely run into problems with the following:

(Malone) Tracking stocks versus spinoffs

Advantages of spinoffs

Spinoffs can hurt bondholders if the debt covenants are weak and allow the company to spin off significant assets backing the debt.  This benefits the equity as the spin-off that is unencumbered with debt can issue debt at lower rates.

Spinoffs make a company easier to understand and allow more institutional investors to own the stock (e.g. sector/industry-specific funds).  This may increase the share price.  This can generate value if the stock is used as acquisition currency in rolling up poorly-managed companies (e.g. LBYTA).

Advantages of tracking stocks

LMCA update May 2014

Previously, I predicted that Liberty would repurchase its shares.  I was dead wrong.  Instead of buying back shares, Liberty decided to buy $124.5M in Charter shares at around $138.8 per share (press release).

I believe that Malone wants to play defensively by gaining more voting control over Charter and ensuring that Tom Rutledge can run the business without interference from other Charter shareholders.  (I honestly can’t think of any other reason why LMCA would buy CHTR shares instead of LMCA.  In the past, Liberty has bought back shares in the $110-$130+ range.  Its stocks have gone up since then so Liberty’s intrinsic value is higher now than in the past.)

LMCA’s 1.375% Cash Convertible Notes due 2023

Here’s what I think is going on with these notes.

1. They are tax advantaged.
2. The Black-Scholes options pricing model has some flaws over long time periods.  To some degree, Liberty is on the wrong side of it.  However, the tax benefits likely outweigh the disadvantages.
3. I suspect that the covenants on the debt are weak.

(LMCA/LBTYA) Malone’s cable strategy

Here’s how I see it.

Some people are superstars at operating a cable company while the majority of people are bad at it.  One way to figure out who the superstars are is to figure out how much money is made per home passed.  Liberty’s investor day presentation uses adjusted EBITDA per home passed, which is a rough proxy for this.  (I would prefer to subtract maintenance capex from adjusted EBITDA.)  Each home passed represents a potential customer.  Good operators will turn a high percentage of its homes passed into customers and sell them as many services as possible (television, premium channels, Internet, voice, video-on-demand, etc.).

Liberty’s investor day presentation (PDF) compares various cable companies: