Last week, CEOs, dealmakers and big thinkers in the media industry convened in Sun Valley, Idaho for Allen & Co.'s annual media and technology conference. The big news coming out of the conference: Mr. Malone and mergers & acquisitions. According to Mr. Malone, the industry needs to consolidate in order to drive economies of scale. Word on the street is Mr. Malone is interested in buying Time Warner Cable (TWC).
He also thinks satellite operator Dish Network (DISH) should merge with DirecTV (DTV). That's great for business when there are less players: less churn and the opportunity to unlock significant cost savings. That combination would make Dish - DirecTV the second largest broadband provider, behind Comcast (CMCSA).
Sophisticated investors are aware of the opportunity and industry dynamics: Berkshire Hathaway (BRK.A) (BRK.B) recently boosted its stake in DirecTV and initiated a position in Liberty Media. Liberty Media, in turn, purchased a 27% stake in Charter Communications (CHTR) earlier this year, and recently admitted defeat to Vodafone (VOD) in a bid to buy Kabel Deutschland (KBDHF.PK).
One thing is for sure, with all the activity and interest in the sector, mergers & acquisitions should be making headlines for the time to come. Media is becoming a truly global business, especially since satellite technology is allowing for media companies to really scale up.
So, where is an investor to look for a bargain?
- Charter Communication has already risen well above Liberty's $95.50 tender offer for shares.
- DirecTV trades at an all-time high, currently valued at $36 billion.
- Dish Network trades at an all-time high too, valued at $21 billion.
Discerning value investors need to dig a little deeper to find value where investors are not considering it at the moment.
One such place might be in a little known satellite and communications company called ViaSat (VSAT). It too trades at all-time highs, but it is a small cap stock currently valued at $3.1 billion. ViaSat recorded a record $1.1 billion in sales in its latest fiscal year, driven in large part by its growth in broadband subscribers. ViaSat also recently announced that it is launching broadband service for in-flight entertainment on Boeing (BA) aircraft.
It's a small player in the satellite communications business, but appears to be poised for significant growth, considering ViaSat launched the highest capacity satellite in the world in late 2011 and it has plans to launch an even more powerful one in the years to come. Given ViaSat's large total addressable market, one can imagine a market capitalization significantly higher than today.
The new satellite, dubbed ViaSat-2, has some incredible bandwidth capacity and a wide casting net in terms of coverage. Once the satellites are in orbit, increasing subscribers leads to significant free cash flow as the satellites require less capital expenditure to maintain than cable infrastructure.
ViaSat also has a significant government business, providing communications technology to the Department of Defense and other agencies. If you want to learn more about ViaSat, please see an article I previously authored here.
When a visionary and reticent businessman speaks up, I listen. Mr. Malone is signaling to the market that there is value in the media and telecommunications industry.
But, of course, you can lead a horse to water but not make him drink. It's up to investors to seek out bargains in the media industry if they agree with Mr. Malone.