Thoughts on the Charter / Time Warner merger

The CHTR / TWC merger is mostly about rolling up and turning around poorly-managed cable assets.  The bet is on Tom Rutledge (Charter’s current CEO) being able to turnaround poorly-run cable assets.  Ideally, he will get the productivity of the assets similar to or higher than Cablevision, his former employer.  For a deeper dive, see my post on “Malone’s cable strategy“.

charter-EBITDA-per-home-passed

I think that it is likely that Charter is much better off with the merger than without it.  Its shares trade at a premium valuation (relative to TWC), presumably because the market recognizes that Tom Rutledge can squeeze a lot of extra productivity out of cable assets.  Charter shareholders benefit if its shares are used to acquire companies with relatively less expensive shares.

As well, the turnaround game works best when the company consists mainly of poorly-run assets.  Post-turnaround, there is little room for value creation.  Constant takeovers are good for Charter because it dilutes Charter’s ownership of mature post-turnaround assets.

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Liberty Broadband rights: Don’t trade deep-in-the-money derivatives

Liberty Broadband is issuing warrants in its rights offering.  Personally, I would be very careful/hesitant about trading those rights.  There is an arbitrage between the rights and the common stock.  This is the kind of arbitrage that high frequency trading is really good at exploiting.  Suppose that the common stock moves 30 cents in less than a second.  Any limit orders for the rights might be trading at the old price 30 cents away.  Somewhere in that time window, it is possible for somebody with a very fast trading system to calculate the correct value of the rights (which is a deep-in-the-money warrant) and pick off any old orders trading based off of slower quotes.  If very few investors trade that particular deep-in-the-money derivatives, there will be adverse selection.  If your order fills, you will likely be trading with a market maker or HFT who is ripping you off.  For good order execution on derivatives, you want to be trading with other investors and not HFTs.

My rule of thumb is to never trade deep-in-the-money options/warrants.  The way I would avoid being on the wrong side of the arbitrage is to trade the common shares instead of the rights.

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Thoughts on media stocks (CHTR, LBTYA, DISCA, VZ, WWE, NFLX)

Overall, I think that cable companies are extremely well positioned going forward.  The value of the information carried over their pipes will naturally get better due to better content on the Internet, Internet TV getting better, and illegal downloading getting better.  Going forward, I think that video content will be increasingly higher quality and cost less.  This will give cable companies more pricing power.  The cable companies that may do the best are the ones that can raise prices without fear of competition.

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LMCA and LBRDA valuation spreadsheets

LMCA: https://docs.google.com/spreadsheets/d/1Jh4eIMnqoVPMmfSnhzCPmHca8_aKgzdzHafYVxMERbw/edit?usp=sharing

LBRDA: https://docs.google.com/spreadsheets/d/1g1ZIuZWFOS5ep6CsKR0el-Icz6c1R_tGUpip0bsJVtA/edit?usp=sharing
See Liberty Broadband valuation spreadsheet.

Important caveats:

  1. Google Finance might lag behind real-time quotes.
  2. My spreadsheets often contain errors in them.  I make a lot of mistakes.
  3. The valuation of some assets is subjective.  These should be highlighted with a light red background.
  4. Not all of the prices in the LMCA spreadsheet are updated.  The prices for non-American publicly-traded stakes are old.

Links

LMCA/LMCK share class arbitrage