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“.
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.
John Malone continues to create more tracking stocks and spinoffs. Click the diagram below for a larger image.
Liberty Ventures is currently in the process of spinning off Liberty TripAdvisor Holdings.
- TripAdvisor shares (normal shares and supervoting shares) will go from Ventures to TripAdvisor Holdings.
- Holdings will take out a $400M margin loan.
- Holdings will pay Interactive $350M for BuySeasons. (EDIT: This may be wrong. See the bottom of this post.) It will hang onto $50M.
I don’t think that Interactive, Ventures, or TripAdvisor will be that attractive. TripAdvisor has extremely high growth and seems to be a wonderful business. However, its multiple is very high (a P/E ratio of 66). I think that Malone may sell his personal stake in TripAdvisor for something cheaper.
Liberty recently completed the distribution of 2 class C non-voting shares (ticker symbol LMCK) for each LMCA or LMCB share. Now Liberty intends on completing its spinoff of Liberty Broadband (LBRDA/B/K). Each shareholder of LBRDA/B/K will be slated to receive rights (LBRKR) to purchase shares of LBRDK. Liberty Broadband’s S-1 was filed on July 25.
To summarize: I think that both the parent and the spinoff will be attractive stocks. I plan on owning both. It could make sense to be overweight Liberty Broadband.
Both parts will essentially consist of high quality businesses with high growth (Sirius XM and Charter). I don’t believe that this spinoff will result in a special situation where one piece will contain significantly better assets than the other piece. I think that it is a better idea to own both rather than just Liberty Broadband. Because there will be a lot of leverage underlying the companies, it is probably a good idea to diversify.
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
Now that Ventures (see old writeup) is trading, it seems that its price is fair and not particularly undervalued. (I don’t know if I made a mistake as to Venture’s cash balance and how the cash payment on the Motorola debt was handled. Ventures may have ended up with more cash than I thought it would.)
So last time I checked, Ventures had a liquidation value of around $643M. There are roughly 28.6M shares out Ventures outstanding (both A and B, pre-rights offering; the number may be a little off due to buybacks). Ventures at $44.85 gives a market cap of $1.56B. You can divide by 0.9375 to account for the dilution from the rights offering… this gives an adjusted market cap of $1.664B.
The difference between $1.664B and $0.643B can be thought of as the discount on Ventures’ various deferred tax liabilities. That’s a $1021M discount on $2,435M of total deferred tax liabilities. To put it another way, the market is saying that the $2,435M Ventures will have to pay in tax is worth about $1,414M right now. (Or you can say that it is similar to $1,414M in debt with a 8% interest rate due in 7.06 years. Or 6% interest rate debt due in 9.3 years.)
At $20-30 I will probably get interested in Ventures. I guess I am disappointed that it is trading so high. This memo to Liberty Interactive employees suggested a trading price of $20 for LVNTA shares (“20.0 LVNTA Market Price post-distribution”). Damn you efficient markets.
Thesis: Liberty Ventures stock may be undervalued when it starts trading due to its complexity and misleading balance sheet. Ventures has a stated book value of -$1,9871M. After adjusting for the market prices of its investments and its anticipated cash balance, Ventures would have an adjusted book value of around $570M. Making adjustments for its deferred tax liabilities will add a few (to several) million dollars on top of that.