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Chris DeMuth Jr.
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"It's not given to human beings to have such talent that they can just know everything about everything all the time. But it is given to human beings who work hard at it - who look and sift the world for a misplaced bet - that they can occasionally find one." - Charlie Munger I look... More
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  • Think About Your Future. 22 comments
    Feb 28, 2014 3:25 PM | about stocks: STRZA, DTV, BAC, ING, ARCC, KKR, T, DISH, GS

    So it was November of 2008 in the depth of the financial crisis. I had a home on the upper east side of Manhattan with a wife and new baby. Each morning I walked to work at a new hedge fund in midtown called Rangeley Capital on the 17th floor of the Fuller Building between Park and Madison. I'd usually slip into the lobby of the Four Seasons next door for a coffee and fresh baked corn muffin before I checked in on the markets.

    Nothing in the market was doing that well. The voters were turning against capitalism and it was hard to blame them. People made grim jokes about how our windows, unlike those in more modern buildings, could open all the way. I was busily pouring every last dollar that I managed into senior secured debt at prices such that they would have broken even if the US default rate hit 100%. We bought Starz (now STRZA) at -$1.30 per share net of the DIRECTV (NASDAQ:DTV) holdings of Liberty. The problem was that there was such a high hedge fund concentration of owners that had to sell, the price of Liberty plummeted towards $10 despite holding securities worth many times that price. But it would take a while for everything to sort itself out.

    I really did not have any plan B worth mentioning. I could become a professional card player. I could join the circus and perform my knife throwing tricks. However, I lacked the escape that many friends enjoyed. As bankers were getting driven out of work, many discovered that they had always hated finance and were thrilled to be setting off on new careers as crossword puzzle writers and so forth. I, on the other hand, loved finance and didn't seriously consider career alternatives. I wanted this to work so I determined to hang in there through at least 2012 come what may. I would consider no other future until I had a statistically significant run of this new fund.

    Walking home each tough day, I would avert my eyes from the giant tickers flashing from the Bank of America (NYSE:BAC) and ING Groep (NYSE:ING) branches. Incidentally, those huge outdoor tickers proclaiming one's share price were very bad signs. Both Lehman Brothers and Wachovia had recently installed new ones before imploding. But when I glanced at my Blackberry (NASDAQ:BBRY) prices would sometimes catch the corner of my eye by accident. Ares Capital (NASDAQ:ARCC) and KKR Financial (KFN) are both down… again. How could that be? It makes no sense. I guess that prices can do anything for a while.

    And that was right about the time I would turn the corner and face Quiznos. The Quiznos had a big neon sign "MMMM… TOASTY" and at eye level a poster advertising jobs at Quiznos,

    "THINK ABOUT YOUR FUTURE"

    The poster showed a guy wearing a green apron and holding up a massive sandwich next to a face that looked exactly like me. It was haunting. I never before saw anyone including family member who looked more like me. His blue eyes bore into my soul. He smirked a little. He smugly showed me the sandwich that he had freshly made. He beckoned me in. If the loan market and stock market had plummeted again that day, I would shudder as I smelled my future. I tried to break his eye contact, but could not resist a defiant glare back and an, "F your offer, future Quiznos me, DTV is worth at least $40 or $50 per share and I can buy all I want under $25. How do you expect that to last, Quiznos me of the future, huh? Just you wait - AT&T (NYSE:T) will step in and buy it and then who will be standing there smirking?" I was cracking up and could not take that much more of him. I thought about asking for the poster, so that I could put it up at work to permanently taunt my working hours, to stay under his menacing watch.

    It took a full half year for everything to really start to work, six months of hitting the gym, wandering through Central Park at night, and staring down the future Quiznos me every day before the losses were made back, before it became clear that the default rate was well under 100%, and that -$1.30 per share of Starz turned out to be a good price. DTV never got bought by T, but it tripled nonetheless and DISH might be looking at a deal as soon as this coming weekend.

    Meanwhile, every last alternative employer disappeared - Bear Stearns gone, SAC poof, Goldman (NYSE:GS) has friends in high places, but its prop desk can only go out in drag. There was never any point in finding job security because it does not exist. And Quiznos? The poster is gone, they just shut down locations across Manhattan and today they prepared to file for bankruptcy-court protection, unable to pay back their $570 million of debt. Think about your future, Quiznos guy.

    Disclosure: The author is long STRZA, DTV.

    Additional disclosure: Chris DeMuth Jr is a portfolio manager at Rangeley Capital, a partnership that invests with a margin of safety by buying securities at deep discounts to their intrinsic value and unlocking that value through corporate events. In order to maximize total returns for our partners, we reserve the right to make investment decisions regarding any security without further notification except where such notification is required by law.

    Stocks: STRZA, DTV, BAC, ING, ARCC, KKR, T, DISH, GS
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Comments (22)
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  • Wilson Wang
    , contributor
    Comments (857) | Send Message
     
    Wow. Great post. I can only imagine how tough it was to start a hedge fund in 2008.

     

    Much props to you and your partners Chris.
    28 Feb, 04:07 PM Reply Like
  • Whopper Investments
    , contributor
    Comments (178) | Send Message
     
    awesome post chris. As an individual investor whose livelihood wasn't on the line, it was easy to buy in 08/09 (and the debt downgrade in 2010). I can't imagine the increased pressure if your livelihood (and family's) was on the line!
    28 Feb, 04:50 PM Reply Like
  • toddro
    , contributor
    Comments (191) | Send Message
     
    Great write-up. In my business 2008 began in 2011 and I'm still fighting, but I haven't put on the green apron yet…
    28 Feb, 05:19 PM Reply Like
  • retfldoc
    , contributor
    Comments (111) | Send Message
     
    Nice post. The final stage of the crash caught me on the slopes of Aspen with a new girlfriend and margin calls almost daily for awhile. Altitude or otherwise I really couldn't think too straight. Contemplated a return to work but six years out. Amazing how we can sometimes come out of a dive. Sympathy for those that couldn't.
    28 Feb, 11:21 PM Reply Like
  • harrik
    , contributor
    Comments (38) | Send Message
     
    it was a rush,
    falling through the air.
    I didn't know if I would wake up,
    or hit the ground.
    1 Mar, 10:45 AM Reply Like
  • Copious28
    , contributor
    Comments (405) | Send Message
     
    Great post. Your next career could be as a writer, financial, fiction or otherwise.
    1 Mar, 10:47 AM Reply Like
  • JDPhillips
    , contributor
    Comments (71) | Send Message
     
    Thank You Chris-Dave P.
    1 Mar, 10:59 AM Reply Like
  • connellybarnes
    , contributor
    Comments (350) | Send Message
     
    I like Subway sandwiches better :-). Good time to start a fund...
    7 Mar, 10:28 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4371) | Send Message
     
    Author’s reply » AT&T Has Approached DirecTV About Possible Acquisition: http://on.wsj.com/PT3XFi

     

    An AT&T and DirectTV deal would likely be worth at least $40 billion.

     

    AT&T has approached DirecTV about a possible acquisition of the satellite-TV firm, say people familiar with the situation, the latest sign of a possible shake-up in the television industry.

     

    A combination of AT&T with satellite-TV firm DirecTV would create a pay television giant close in size to where Comcast Corp. will be if it completes its pending acquisition of Time Warner Cable.

     

    DirecTV is the second biggest pay TV operator, serving about 20 million customers, while AT&T's landline-based TV business serves about 5.7 million. The nearly 26 million subscribers served by the combined company would compare with Comcast which—with TWC—would serve close to 30 million subscribers.

     

    A deal would likely be worth at least $40 billion, DirecTV's current market capitalization, a fraction of AT&T's $185 billion market capitalization.

     

    AT&T declined to comment. DirecTV declined to comment

     

    The approach has come since Comcast struck its Time Warner Cable deal in February, one of the people said. It is unclear whether the companies are in detailed talks, but another person familiar with the situation said that DirecTV would be open to a deal. The satellite TV industry is facing a slowdown in subscriber growth after years of adding customers. The pay television market in the U.S. is now mature, with about 90% of U.S. households with TV now subscribing to either cable, satellite or phone company-delivered television.

     

    And satellite firms' inability to offer Internet access that is competitive with cable and phone companies is becoming a bigger issue.

     

    Since 2010, DirecTV's rate of subscriber growth in the U.S. has fallen every year, compared with the prior year. Last year, DirecTV lost subscribers in a quarter for the second time ever, in a deeper loss from the year-ago quarter when it saw its first such loss, according to MoffettNathanson LLC data.

     

    Acquisition of DirecTV would give AT&T a national footprint in pay television at a time when the telecom company sees video delivery as core to its future. An acquisition would allow AT&T to offer bundles of wireless and TV services, and could give AT&T new ways to deliver video to its mobile and broadband customers.

     

    AT&T's interest in owning a satellite television provider has been speculated about for years. The telecom carrier has held talks with both Dish Network Corp. and DirecTV in recent years, according to people close to the situation.

     

    AT&T already has a partnership with DirecTV to sell its service in areas where it offers broadband but doesn't offer its U-verse television service.

     

    AT&T, which has grown rapidly from a regional telecommunications firm into one of the U.S. industry's two largest companies via an aggressive merger strategy, had been expected to make its next move into Europe. But Chief Executive Randall Stephenson said at an investor conference earlier this year that Comcast's proposed purchase of Time Warner Cable has shifted his priorities, leading him to refocus on the U.S.

     

    "It's an industry redefining deal from our standpoint," Mr. Stephenson said.

     

    Whether regulators would agree to a DirecTV-AT&T merger is a major question. Comcast's Time Warner Cable deal faces tough regulatory scrutiny and a second pay-TV merger would likely intensify regulatory and political questions surrounding consolidation in the industry.

     

    Any acquisition would likely be evaluated by the Justice Department for its impact on competition and would require approval by the Federal Communications Commission. The companies would have to prove to the FCC that the transaction would be in the public interest and the combined company would be able to offer consumer benefits not possible outside the merger. However, a person familiar with the FCC's thinking predicted the merger would have a solid chance at approval because offering video or voice service alone is viewed as a dying business and the combined company would be in a position to compete with Comcast, the leading cable and broadband provider.

     

    Competition in the broadband market is likely to be the central issue in any review. Observers say the deal would be more likely to gain approval if the combined company can show it would provide competition for Comcast and other cable companies in the high-speed broadband market. A source familiar with antitrust reviews said regulators would likely be concerned about the impact on markets where AT&T already offers high-speed broadband access and pay-TV via its U-Verse project. AT&T may be required to divest DirecTV subscribers in such markets.

     

    Observers also noted that the deal would increase the pressure on Dish Network to enter into a merger with a wired or wireless broadband provider.

     

    Despite DirecTV's recent slowdowns, satellite investors point out that it has continued to outperform its cable rivals. And part of the drop-off in subscriber growth is due to the company's strategic focus on adding only higher-value customers who are less likely to chase discounts and switch providers. One investor called the company's results "outstanding" both "operationally and in terms of share appreciation" thanks to big stock buybacks. But the investor noted that built into the value of DirecTV's shares is some anticipation of the company being acquired in the future.

     

    DirecTV and satellite rival Dish attempted a merger more than a decade ago which was blocked by regulators. Dish has lately approached DirecTV about trying again, say people familiar with the situation, although that approach hasn't led to any serious discussions. While executives from both companies have publicly signaled their continuing interest in the idea, they have also noted that the two companies have taken different strategic routes, and regulatory attitudes to a merger remain unclear

     

    Dish declined to comment.
    1 May, 04:56 AM Reply Like
  • Wilson Wang
    , contributor
    Comments (857) | Send Message
     
    Someone was spot on. Determination and grit works out after all. Congrats Chris.
    1 May, 06:55 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4371) | Send Message
     
    Author’s reply » (DTV) hit a new 52-week high.
    7 May, 01:31 PM Reply Like
  • Wilson Wang
    , contributor
    Comments (857) | Send Message
     
    I've probably read this 10+ times. It really helps me put things in perspective. Thanks again Chris. And if you have any other experiences you want to share, please do. These are priceless.
    14 May, 11:03 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4371) | Send Message
     
    Author’s reply » Worth the wait: AT&T (T) to Acquire DIRECTV (DTV) for a bit over twice my asking price c. 2008: http://bit.ly/1geZAB2
    18 May, 07:16 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4371) | Send Message
     
    Author’s reply » Half a decade later...

     

    Idea
    STARZ (NASDAQ:STRZA) - $28.50
    Posted on 07/15/14 01:57 PM by finn520
    Description

     

    Thesis

     

    Starz (http://bit.ly/1n3g2CA) is a pay television network company that is well-run and trading at a reasonable price, at 9.3x EV/EBITA on 2014 and 8.3x EV/EBITA on 2015. The CEO is longtime HBO senior executive Chris Albrecht and the Chairman is Greg Maffei, CEO of Liberty Media, and the company has long been under the Liberty umbrella. The company has repurchased 10% of shares outstanding in the past year plus, and management has indicated on multiple occassions that there is economic logic to STRZA being part of a company with a larger collection of cable networks due to the resulting cost and revenue synergies. I believe that it is likely that the company gets sold at some point in the next few years at an attractive price to equity holders. At 10x EV/EBITA post-synergy, I can see conservatively see a price in the high $30's per share. In the event this does not occur, I think the company is still reasonably cheap and should see increasing Adj EBITA goign ahead along with rational capital allocation.

     

    Business Description

     

    Starz (http://bit.ly/1n3g2CA) is a media company with three segments: Networks, Distribution, and Animation. The main business is Networks, which is comprised of the Starz and Encore premium pay television channels, which are sold to consumers through wholesale relationships with pay television distributors and have 22.2m and 34.9 million subscribers respectively. Distribution and Animation are minor contributors to profitability and relatively stable and reside in the company due to legacy corporate issues.

     

    Starz has been part of the Liberty empire since its founding by Liberty Media Group in 1991. It existed within Liberty entities over the years in various forms (subsidiary, tracking stock, etc) and had a spin-off to a freestanding public company in January 2013 at $14.15/share. Media vetern Chris Albrecht (longtime senior executive at HBO) joined Starz as President & CEO in January 2010 and is currently running the show, with Greg Maffei, consigliere to John Malone, as Chairman. Malone owns 10% of the company and controls it through supervoting shares.

     

    Starz & Encore are sold through the pay television distribution channel. Simplified, a company like Time Warner Cable or DirecTV sells Starz to its customers, usually as part of a pay channel bundle, and keeps a slice of the revenue and passes the rest on to STRZA. Starz is not available "over-the-top" (online without a pay television subscription) due to the channel conflict that creates with its distribution partners.

     

    STRZA is following the path that HBO and Showtime have blazed and transitioning away from carrying only movies and towards offering more original content. It has a film output deal with Sony that runs through 2021 and a similar deal with Disney that is ending with 2015 releases (with movies from Disney coming through 2016 as a result of how the scheduling works). The Disney deal was taken over by Netflix. STRZA is taking the money saved from the Disney deal and investing it in orignal programming, with a goal of 65-75 hours of original programming per year, up from 28 hours in 2012 and in the same ballpark as HBO and Showtime.

     

    The transition to original programming is a good strategy if it is done well, as HBO, Showtime, and Netflix have illustrated in recent years. There is some risk that such a strategy may become less effective over time as everyone has seen how successful it has been in recent years and is attemping to duplicate it and there is a flood of new original content. However, STRZA has a scale advantage vs. upstarts as one of the few existing fully distributed pay television channels and, combined with its strong management and ability to show R rated content, I think it is well positioned to succeed. I also think that demand for original content is likely to remain high as the current channels successfully evolve to address different niches. Thus far, STRZA has not had any real breakthrough hits with their original programming and I think if they do have one it could considerably change sentiment towards the stock.

     

    The company's financial performance has been strong in recent years, with Adj EBITDAS in the Networks segment growing from $396m in 2009 to $456m in 2013. Total EBITDAS has been even better due to Distirbution moving from a big loss to $24m Adj EBITDAS in 2013.

     

    The business is excellent from a financial perspective with a very high ROIC and net income translating almost directly into FCF. Management has been aggressive and creative in selling international rights to original programming in order to reduce their risk.

     

    The big risk here is that STRZA fails to differentiate itself through quality content, it sees increasing competition, and the company loses subscribers over time. Even in this bad case scenario, I think the decline would be fairly slow.

     

    I don't have a strong opinion about who might acquire STRZA, but I think it would be one of the media conglomerates without a strong pay television channel. FOXA, VIA, CMCSA, or AMC are all candidates. Besides the cost benefits of reduced SG&A, I think there would be meaningful revenue synergies as well, as any one of those companies would have more leverage with distributors due to their larger stable of channels. There was been a decent amount of chatter coming out of the recent Sun Valley conference regarding increased content consolidation required to match the recent distibutor consolidation (CMCSA/TWC, DTV/T, etc). I think we will see movement in this area in the future and that STRZA is likely to be one of the targets.

     

    Catalyst

     

    Hit original series.
    Sale of the company.

     

    - http://bit.ly/1n3gfpr
    29 Aug, 09:57 AM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4371) | Send Message
     
    Author’s reply » Starz Said to Hire Firm to Look for Buyer: http://bit.ly/1vg194v

     

    Starz has retained an investment banking firm to shop the pay-television company, people with knowledge of the matter said.

     

    On Tuesday, Starz met with 21st Century Fox to see if the entertainment company was interested in striking a deal. A person familiar with 21st Century Fox's thinking described the meeting as a courtesy and said there was no interest in buying or investing in Starz. A Starz spokeswoman said the company doesn't comment on rumors and speculation.

     

    News of the meeting was first reported by the Los Angeles Times. (Until last year, 21st Century Fox was part of the same company as News Corp, owner of The Wall Street Journal and Dow Jones Newswires.)

     

    A competitor to Time Warner Inc. 's HBO and CBS Corp.'s Showtime, Starz has struggled to create strong original programming and is also losing access to theatrical movies from Walt Disney Co. starting in 2017. Until 2013, Starz was a unit of cable mogul John Malone's Liberty Media Corp.

     

    Starz has been seen as a potential takeover target since it went public. Its stock closed at $29.58 Tuesday and it has a market capitalization of $3.13 billion. Starz is in about 22 million homes and Encore, a sister channel, is in 35 million homes.

     

    The boutique investment bank LionTree Advisors LLC has been retained by Starz, a person familiar with the matter said. LionTree wasn't immediately available to comment.
    24 Sep, 06:31 AM Reply Like
  • Wilson Wang
    , contributor
    Comments (857) | Send Message
     
    What do you think the takeover range to be?
    24 Sep, 03:03 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4371) | Send Message
     
    Author’s reply » I would sell my shares for $40 each. My sense is that is pretty consistent with most holders' "ask" side of the market. In the weeks ahead, they can firm up the "bid" side of the market, split the difference somewhere in the middle, and see if there is a $37-38ish deal to be struck.
    24 Sep, 03:18 PM Reply Like
  • Wilson Wang
    , contributor
    Comments (857) | Send Message
     
    Discover also seems to be the one that's interested.

     

    Would Disney come into the fray?
    24 Sep, 04:47 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4371) | Send Message
     
    Author’s reply » That is an interesting question. I don't know the answer, but I, for one, would be willing to take some of DIS' money.
    24 Sep, 04:49 PM Reply Like
  • Wilson Wang
    , contributor
    Comments (857) | Send Message
     
    Liontree is an excellent boutique investment bank. How fast do you think it can get a deal done?
    24 Sep, 04:54 PM Reply Like
  • Chris DeMuth Jr.
    , contributor
    Comments (4371) | Send Message
     
    Author’s reply » Announced? 2014. Closed? Q1 of 2015.
    24 Sep, 04:56 PM Reply Like
  • Wilson Wang
    , contributor
    Comments (857) | Send Message
     
    Nice. Q4 is gonna be nice.

     

    Liberty broadband spinoff too.
    24 Sep, 06:24 PM Reply Like
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