Investing In The Liberty Media Empire
- Charter looks interesting through Liberty Broadband.
- LSXMA trades at a discount to SIRI and has optionality.
- Qurate and Formula One are works in progress.
I have invested in Liberty Media (FWONA) (OTCQB:FWONB) for over 20 years and owned each of the different entities in the complex and now is an interesting time to look at the various entities. Before investigating some of the possibilities, it is important to note that the chairman of Liberty John Malone has a Ph.D. in operations management from John Hopkins. Most investors are familiar with Mr. Malone's and Greg Maffei's (CEO of many entities in the complex) deal-making prowess. What is overlooked are the operational improvements over time that take place among the various entities which comprise the empire. Two prime examples would be Sirius Satellite (SIRI) and Live Nation (LYV). When Liberty became involved with each, many years ago, they were not close to what they have now become. The transformation occurred after Liberty installed CEOs - Jim Meyer and Michael Rapino - and got major board representation and control. Each year, revenues, subscribers, and margins improved and churn has been reduced at SIRI. At Live Nation, the technology was revamped and now a large business has been created out of sponsorship and advertising. Much improvement has been made in terms of selling out the different arenas' sections, as well as the consumer experience regarding concessions, so what Live gets at the margin from each event has gone up each year. Malone and Liberty entities are all about improving every area of a business, so efficiency is the priority, and it usually translates into improving margins over time. Also, when an entity has a bad quarter or two like QVC did about a year ago, the problems get fixed. With respect to the current holdings, there are several interesting situations.
First, let’s look at Liberty Broadband (NASDAQ:LBRDA), which is Liberty’s 20 pct ownership piece and voting control of Charter Communications (CHTR). Charter forms a foundation of the Liberty family through both Liberty Broadband and GCI Liberty (GLIBA). GCI owns Charter and also is the dominant cable provider and second-largest wireless telecom provider in Alaska. Charter’s stock was pounded a few weeks ago after its video subscriber losses were seen as more than what the Wall Street community expected. Charter now trades at a little below 10X EV/EBITDA. What is being missed here is that Charter remains an entity which controls logistically-critical markets like New York, Southern California, Dallas, Tampa, and the largest markets in Ohio. The addressable market for Charter is about 50 million households, so the lack of penetration is a big opportunity in the main markets of broadband, small and home office and also advertising. It is about a year away from completing a back-end consolidation that came from combining the Time Warner and Brighthouse assets. Once that is done, capital expenditure goes down dramatically and free cash flow will jump dramatically. The company has a 40-billion dollar business which generates $15 billion in adjusted EBITDA, with room for margin improvement. It is run by Tom Rutledge, regarded as the best cable operator after proving it at other places like Cablevision. Charter could wind up potentially buying something like Altice if Alice continues to have problems, but time will tell. Not that Cox would ever wind up selling either, but if they did, Charter would probably have pole position on that as well.
Wall Street is afraid of cord-cutting and bundling losses, and one analyst in particular continues to make note of Netflix’s (NFLX) subscriber gains. In many cases, Charter benefits from those gains as customers must have the WIFI for that service. So Charter looks quite interesting, especially if you believe Mr. Rutledge will keep taking market share in broadband, and there is some optionality with the potential to build an advertising business, and maybe content as well. The big gains will be through market share and continued operational improvements while stabilizing video subscriber losses, which is what happened over the last few years at Charter before the TW acquisition.
The most compelling situation is probably Liberty Sirius XM (LSXMA). Its market value is currently a little below $15 billion while its ownership piece in SIRI is above 70%, and at the current market value represents a near twenty percent discount to that stake. SIRI is a 5.5-billion dollar business which generates nearly $2.5 billion in cash a year. It has over 33 million subscribers with a real opportunity to continue growing by gains in the new and used car markets, a focus on simplicity and ease of use attracting users through a new app for non-car subscribers, the introduction of video, connected car services, and the growth of their emerging advertising business. There is also optionally with the approximately 20 pct ownership of Pandora Media - where they have a new CEO and a shift in focus on simplicity and more compelling content to attract advertisers, and better target users through automated advertising - recently purchased AdsWizz for that purpose. Other optionality includes Liberty's potential debt position in IheartMedia - Liberty didn't get involved to not have a large seat at the table of an asset that would fit quite well with a number of Liberty properties.
Liberty Global (LILA) is interesting because of the potential for it becoming a powerhouse in Latin America in both broadband and wireless. Its largest division is Cable and Wireless, which provides the fiber optic network in much of the Caribbean for wholesale services. It is the dominant provider in Chile and Puerto Rico, so it took a nice hit last year with the hurricanes. It is currently waiting to close on the acquisition of the largest broadband provider in Costa Rica. The focus will be continued acquisitions and the company has stated they believe they have a 50-billion dollar opportunity - with a market value of $3.5 billion and trading at an EV/EBITDA multiple of below 7 - very interesting.
Qurate Retail Group (QRTEA) is digesting the acquisition of HSNI and its HSN and Cornerstone brands, after acquiring Zulily about two years ago. The business will do about $15 billion in sales and $2 billion of EBITDA, and this is before their integration work with HSN and Cornerstone. An extremely efficient business with low Capex needs, margins will improve as the integration progresses. These businesses do not grow quickly, but trading at less than 10X EV/EBITDA, again, interesting if you believe that over time, which I do, that the combined entity will get more efficient and Zulily will start to grow quicker - plenty of room for acquisitions and new business development, especially in Latin America and in second-tier countries in Europe and Asia.
Finally, Formula 1 (FWONK) is the turnaround situation of the complex as they bought the asset about a year ago. With Chase Carey in charge, the business is solid as it generates a little over $350 million in EBITDA on revenues of about $1.8 billion. Still, this is misleading as the opportunity to grow with investments in a digital platform, an OTT service, building a lucrative and robust advertising and promotions business like what was done at Live Nation, improving the fan experience through better merchandising, adding races, and building a bigger audience to help get more competition for television rights are all front and center. This will take time, but trading near a yearly low, if you believe that Chase and Liberty will execute on their vision, it is quite intriguing.
Charter and Liberty Broadband - Liberty Broadband is totally based on the value of Charter. Charter's competitive landscape is the direct competition of the large telecom carriers in its footprint. As 5-G is heralded as a game changer, to the extent it can take market share from Charter that is a primary competitive threat. Charter's advantage is that it already has a large installed threat and the capital intensity of incrementally adding wireless to its footprint is dramatically lower than what the carriers will have to spend on adding 5-G infrastructure. Just looking at the free cash flow ratios of a cable entity versus what Verizon (VZ), AT&T (T), Sprint (S), and T-Mobile (TMUS) have to spend on acquiring spectrum shows you that the telecoms face huge capital expenditures in rolling out 5-G. Nonetheless, 5-G remains a large concern, along with the potential of video subscriber losses.
For Liberty XM, the concern is that the dominance of the platform in the car and the emergence of the Apple (AAPL) and Google (GOOG) (GOOGL) platforms could dislocate them. With the broad content differentiation, ease of use in the car, more focus on connected services, out of car growth through streaming on the app and video, those are the competitive responses to that issue. Still, large well-funded competitors like Apple and Google are a concern. The other issue would be a slowing of growth of subscribers because of a larger base (over 30 million).
Regarding Qurate group, the issue has been it is a slow-growing company and when discretionary spending trends drop domestically and globally, the various properties suffer. That, along with the idea that Amazon (AMZN) will emerge as a competitive threat in the video aspect of online commerce are issues. Of note is that QVC has made huge strides in adding different platform possibilities like Facebook Live (FB), an additional beauty channel, and distribution on streaming platforms like Roku (ROKU) as a way to help grow the new customer base. Integration issues are also a potential drawback, as well as the length of time it takes to find and enter large markets with income levels that support the video and online shopping market.
LILA faces competitors in various parts of the Caribbean and South America which are willing to take losses in offering wireless service as a way to attract customers. On the macro level, the region's low income levels make adding customers a challenge. The focus will be on the acquisition strategy in markets where the economics are attractive. Currency fluctuations also can be a problem because of the volatility in the foreign exchange market.
Finally, on Formula One, a big potential drawback is changing the cost structure of payments and spending from the teams. Mercedes Benz and Ferrari spend a huge amount of money to have an advantage in the cars from a technology standpoint, and it has made the races boring and non-competitive with those teams winning all the time. Getting those teams to accept new rules on how money can be spent to broaden the competitiveness of the races is a major issue. In addition, trying to grow the audience base and make the events more of a celebration and event will take time and be a challenge. The business is also highly leveraged at 7-8X, and that will have to be addressed in an efficient way as well.
Liberty will report earnings this week and readers should understand the stocks are usually volatile after the report. Those who have difficulty buying something and watching it go down immediately would be best to wait and see the market reaction before considering a purchase. Just a little warning I think needs to be included.
This article was written by
Analyst’s Disclosure: I am/we are long P, LSXMA, LSXMK, QRTEA, LBRDA, LBRDK, LYV, LILA, LILAK, LBTYA, LBTYK. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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