I tried to figure out what the CWC merger structure was about. You can access my spreadsheet here: https://docs.google.com/spreadsheets/d/1c_31Z-eoxXAPc1TfeOMjgdirZu-nk54DHwGKXSlOao8/edit?usp=sharing
- The way the merger is structured is that the Recommended Offer gives you the most value from a merger arbitrage perspective. However, you will get a very low mix of LiLaC shares. What Malone is doing here is luring institutional investors into taking a high proportion of Global shares rather than taking (relatively) undervalued LiLaC shares.
- Since the merger details were announced, Liberty Global has fallen by about a fifth. So you should do your own homework as to the relative valuation between Global and LiLaC.
Piracy is going to get a lot better in the future.
- Internet speeds will get faster due to Moore’s Law.
- Open source software will get better as contributors keep adding code.
My belief is that many of the dynamics that played out for the music industry will play out for piracy. Piracy itself is a form of competition. Content companies will be forced to compete with their own content. The companies that will fare best against piracy are the ones who can put together an offering that is more compelling than piracy (e.g. Netflix).
In the long run, I think that most of the industry will be dominated by a small handful of Internet TV services with big content libraries and excellent software. Content companies will increasingly need to become good at software. Usually software markets are dominated by a small handful of companies. If that’s the case for Internet TV, then many of the traditional players will be losers.
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.
The future winners of Internet TV will likely be the companies that can:
- Intelligently buy undervalued content.
- Achieve scale (or have scale).
- Create good software
There are different approaches to billing users for Internet usage. This post looks at the ways in which ISPs might raise prices and implement price tiering for its customers.
John Malone continues to create more tracking stocks and spinoffs. Click the diagram below for a larger image.
There are parts of the cable industry where scale is a massive advantage.
- On the content side, a broadcast network or cable channel with scale is incredibly profitable and is very difficult to compete against. Scale allows dominant companies to outspend their competitors on content because their per-viewer costs are lower. Because they have better content, they retain their dominant market share. Historically, it has been extremely difficult for competitors to compete against superior scale.
- On the infrastructure side, a lot of equipment and software costs come from the fixed cost of R&D. Scale allows a cable company to purchase in bulk and to get reduced pricing on set-top boxes, cable modems, and other equipment.
While Liberty Global largely owns cable systems (with a mishmash of other assets from its various acquisitions), it is also looking to use its subscriber base to get into the content game.
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.
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
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: