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Liberty Media


giofranchi
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Liberty Media is near 52-week high. And generally I don’t like buying things at 52-week high. LMCA, though, seems to be an exception. Please, take a look at the presentation in attachment: on slide n.4 you see that LMCA’s portfolio is worth $11,540 million at market value. If you subtract $541 million of debt, you are left with an $11 billion portfolio. On slide n.7 you see that operating earnings for the past 12 months were $594 million. Interest expenses for the past 12 months were $33 million, and the tax regimen LMCA is subject to is 28%. That leaves us with a net income for the past 12 months equal to $400 million. If we use a multiple of 6.66, it means we are getting a 15% return after taxes the first year of our investment: $400 million x 6.66 = $2,664 million. Given the fact I am inclined to think that Mr. Malone wouldn’t keep an investment portfolio if he weren’t expecting it to compound at least at 15% a year, it seems to me that, as long as LMCA’s market capitalization doesn’t exceeds $11 billion + $2.6 billion = $13.6 billion, we have got the chance to partner with Mr. Malone at very satisfactorily rates of return on our investment. As of last Friday LMCA’s market capitalization was $13.11 billion. The largest investment by far in LMCA’s portfolio is SiriusXM, which is an impressive business. FCFs it generated during the last 5 years are as follows: 2008 $(552) million; 2009 $185 million; 2010 $210 million; 2011 $416 million; 2012E $700 million. It has already grown very fast, but Mr. Malone thinks there is still a lot more growth that can be accomplished.

So, what am I missing here? A very high-quality business, near 52-week high, that gives us the chance to partner with one of the most accomplished businessmen and investors in America, and provides us with an expected 15% CAGR for our investment? Sounds too good to be true! Anyone knows LMCA well? If some of you have followed it for a long time, do you find something wrong with my reasoning?

Thank you in advance,

 

giofranchi

Q3-12-Conf-Call-Slides-LMC-Final.pdf

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Guest rimm_never_sleeps

if I were doing this exercise, I would carefully deconstruct the operating earnings of $594m to make sure there are no one time items and other lumpiness that enhanced the figure. I would want to make sure that's true operating earnings that can be counted on year after year. I took a quick look at their disclosures and could not find the source of all those operating earnings (other than Starz). I would also do an analysis of what Malone and Maffei did on the repurchase front of this equity to try to get a sense of the maximum price they have paid in the last year.

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if I were doing this exercise, I would carefully deconstruct the operating earnings of $594m to make sure there are no one time items and other lumpiness that enhanced the figure. I would want to make sure that's true operating earnings that can be counted on year after year. I took a quick look at their disclosures and could not find the source of all those operating earnings (other than Starz). I would also do an analysis of what Malone and Maffei did on the repurchase front of this equity to try to get a sense of the maximum price they have paid in the last year.

 

Thank you, rimm_never_sleeps!

I think that Operating Income is so variable from year to year because of Mr. Malone’s “nice habit” to create value through spin-offs of numerous businesses. Operating Income is generated by businesses Liberty Media possesses in their entirety, as opposed to “Dividend and interest income”, “Share of earnings of affiliates”, and “Realized and unrealized gains on financial instruments”, that are generated by their portfolio of investments. Today the most significant business they possess 100% is Starz, and that’s why the great majority of operating earnings are coming from Starz. Right now Mr. Malone and Mr. Maffei are in the process to spin-off Starz, while they seem intent to purchase the entirety of SiriusXM (of which they already own 49,2%).

Also, they usually target high-growth companies: for instance, Starz increased Adjusted OIBDA at a 16,7% CAGR from 2009 to 2012. So, also the operating profits it generated increased much from 2009 to 2012.

Given the very dynamic nature of Liberty Media, my only intent was to assign a tentative value to what I would be buying today. Knowing that tomorrow the whole company might be quite different, but also believing that Mr. Malone and Mr. Maffei would always strive and do their best to increase its value at a satisfactory rate.

 

giofranchi

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Guest rimm_never_sleeps

understood. but what happened in q4 2011 where ebit was $230m greater than Starz ebit? that's what I am getting at. also I don't believe they plan to spin off Starz. They just merged it into Lmca. I believe they will sell Starz. I do expect them to spin off Sirius. make sure you deconstruct their share repurchases. you will gain lots of insight into their feelings on overall valuation.

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make sure you deconstruct their share repurchases. you will gain lots of insight into their feelings on overall valuation.

 

Yes, very good advice indeed! I will certainly do it asap!

Thank you very much,

 

giofranchi

 

 

 

rimm_never_sleeps,

I have checked out and here is what I have found:

Q3 2012: share repurchased $22.3 million, average price $105.72,

Q2 2012: share repurchased $95.9 million, average price $85.03,

Q1 2012: share repurchased $120.1 million, average price $86.53,

Q4 2011: share repurchased $37.3 million, average price $76.72,

Q3 2011: share repurchased $50.7 million, average price $62.85,

Q2 2011: share repurchased $4.3 million, average price $78.27,

Q1 2011: share repurchased $31 million, average price 72.34.

Actually, in Q3 2012 the amount of money spent in share repurchases was much lower than in Q2 and Q1 2012, nonetheless they didn’t stop buying back shares. Moreover, the amount of money spent during Q3 2012 in share repurchases was very much in line with the money spent during 2011 for the same purpose ($30.8 million per quarter on average). Even though the stock price in 2011 was much lower.

They are constantly increasing their stake in Sirius, so it is reasonable that, after buying a lot of shares back in Q1 and Q2 2012, they decided to allocate less capital to share repurchases in Q3 2012.

This is what Mr. Steven Bregman had to comment about LMCA on last August 28, 2012:

 

“The price right now is probably about $104 a share. If I think about a company in terms of the quality of the business platform, and I might say that in terms of cable channels—not cable infrastructure, which he left quite a long time ago and sold to AT&T, which was a fool for buying it from him—that’s on the right side of the content divide. There’s a lot of foment in the media and technology sector.

It’s really a very, very high quality business, with a very, very long product lifecycle. It’s got a lot of intangible assets associated with it, a lot of free cash flow. It’s a wonderful business in terms of quality of platform. It is bizarrely priced. It’s really a wonderful investment. In terms of risk/reward profile, I would say that comes near the top in terms of selection.”

 

My best guess is that, if at $104 LMCA was “near the top in terms of selection”, at $109 it might still turn out to be a pretty good investment.

 

As always, though, I would buy leaving a lot of room to average down aggressively, as soon as the market gives me the chance to buy more at lower prices.

 

giofranchi

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Hi Gio,

 

Malone is somebody I really love to follow. These guys are so active in managing value, so there are always lots of moving parts. But therefore I think you should look at it from that angle as well. You should bear in mind that there will be lots of action around Sirius, its not going to be buy-and-hold. They´ll most likelly lever Starz up and spin it off, as well.

 

Therefore, some sort of sum-of-parts analysis would, in my opinion, be more appropriate.

 

I´d also recommend taking a look at LINTA. I don´t think there are that many e-commerce (/tv-commerce) cos that manage the same operating margin as QVC does.

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Hi Sportgamma,

actually I tried to give a value to their cable operators business (Starz), while admitting that valuing their portfolio of investments is hard. And the reason is exactly what you have written:

 

These guys are so active in managing value, so there are always lots of moving parts. But therefore I think you should look at it from that angle as well. You should bear in mind that there will be lots of action around Sirius, its not going to be buy-and-hold.

 

Anyway, their track record as value creators is extremely good (just yesterday Cristopher1 suggested me to read “Cable Cowboy”, which I have bought and contains this amazing feat in the first chapter: TCI share price enjoyed a 45% CAGR from 1974 to 1997! Awesome!) and I said I am just confident they will unlock much value from their current portfolio of investments going forward. In attachment you find the list of all their investments as of September 17,2012:

“Liberty Media Corporation owns interests in a broad range of media, communications and entertainment businesses. Those interests include subsidiaries Starz, LLC, Atlanta National League Baseball Club, Inc., and TruePosition, Inc., interests in Sirius XM Radio Inc., Live Nation Entertainment, Inc. and Barnes & Noble, Inc., and minority equity investments in Time Warner Inc., Time Warner Cable Inc. and Viacom Inc.”

A sum of the parts analysis might be possible, but certainly is not easy to do! For instance, I think TruePosition has a very bright future, it is an asset I like very much to own. But how to properly value it? They have a portfolio of high-growth companies and they can afford to invest that way, because of a lifetime of experience in the media sector, which gives them a true competitive advantage. But what about me? I confess I don’t feel I am very good at valuing high-growth businesses in the media sector…

Like most of my investments, I think the business is good, I think the sector has bright prospects, I pay very much attention to the price, but finally also LMCA is most of all a jockey bet: I think I am partnering with outstanding individuals.

 

Thank you for the LINTA suggestion: I will surely check it out!

 

giofranchi

LMC-Asset-list-effective-9-17-2012.pdf

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Guest rimm_never_sleeps

Judging from this data, (thanks for doing the work) I think it's safe to say they love liberty in the $85 range. They like it in the $105 range. I don't think you can go too far wrong buying any John Malone controlled company. the question for me is are there better values out there? My own sense is that linta is probably cheaper at today's prices.

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This is nice to see:

 

Sirius XM Radio announces $2B stock repurchase program and special cash dividend of $0.05/share

Thursday, December 06, 2012 01:03:44 PM (GMT)

 

 

The board has approved a $2B common stock repurchase program.

Liberty Media Corporation, the beneficial owner of approximately 49.8% of the company's stock, has indicated that it will participate in the company's share repurchases on a pro rata basis so that its relative ownership interest will not be affected by the program.

The company will fund the repurchases through cash on hand, future cash flow from operations and borrowings under its revolving credit facility.

The board also declared a special cash dividend in the amount of $0.05 per share of common stock, payable 28-Dec; record 18-Dec.

The company's preferred stock will participate in the dividend on an as-converted basis in accordance with its terms.

The total amount of the cash dividend is expected to be approximately $325M.

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This is nice to see:

 

Sirius XM Radio announces $2B stock repurchase program and special cash dividend of $0.05/share

Thursday, December 06, 2012 01:03:44 PM (GMT)

 

 

The board has approved a $2B common stock repurchase program.

Liberty Media Corporation, the beneficial owner of approximately 49.8% of the company's stock, has indicated that it will participate in the company's share repurchases on a pro rata basis so that its relative ownership interest will not be affected by the program.

The company will fund the repurchases through cash on hand, future cash flow from operations and borrowings under its revolving credit facility.

The board also declared a special cash dividend in the amount of $0.05 per share of common stock, payable 28-Dec; record 18-Dec.

The company's preferred stock will participate in the dividend on an as-converted basis in accordance with its terms.

The total amount of the cash dividend is expected to be approximately $325M.

 

Yes! Thank you for posting!

 

giofranchi

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http://online.wsj.com/article/SB10001424127887323501404578161211614586512.html

Starz's parent, Liberty Media Corp., LMCA +0.80% has said it will spin off the TV channel as a separate company. Once the spinoff is complete, which the person said could be in early January, Starz plans to promptly begin discussions with potential buyers. Tax rules prevent talks with a buyer earlier.

 

That sale plan influenced Starz's decision to not aggressively bid against Netflix, the person said. Netflix's deal with Disney is worth $300 million a year, up $100 million from what Starz is paying, the Journal reported on Tuesday.

 

"Some buyers wouldn't want to take over a company that's burdened with giant cost increases," the person said Wednesday.

 

 

http://si.wsj.net/public/resources/images/MK-BW347_STARZ_G_20120808175410.jpg

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STEVEN BREGMAN: Well, I like the Malone company. One of John Malone’s many publicly traded companies is known as Liberty Media. As you might know, he trades securities kind of like playing Hearts. If Wall Street likes a certain type of business or a piece of paper, he’ll sell it to them. If they don’t like it, and it’s cheap enough, he might buy it back.

 

Liberty Media, which underwent some recent capital changes, is undergoing some new capital changes. To keep it simple, their basic operating business is the Starz and Encore cable channels. It’s one of the more successful cable channel properties around. Starz itself has some 54 million subscribers. They get new subscribers every year, sometimes more, sometimes fewer, but let’s say it grows on the order of 5%. It produces tremendous amounts of free cash flow.

 

John Malone has an extraordinary record for value creation over many, many periods of time, in many different companies. It’s not by accident; it’s too long a period of time. His capabilities are well known. Technically, if you look at the balance sheet, you’ll see some small amount of debt, but it’s truly de minimis. Cash, net of all the debt, is quite a large number at well over $1 billion.

 

The company owns shares in Time Warner, Sprint, Sirius Satellite Radio, and so forth. Just as an exercise, you could subtract the value of all the securities and cash from the stock market capitalization and, as of the last time I did it with a little bit of care a few months ago, depending on the day or the week in terms of the price of the stock, you might actually be paying only one, two, three, or zero times the earnings of the cable channel.

 

Malone is not a passive investor; he’s an active investor. If the earnings from the cable channel business were priced anything like comparable companies, the stock would be much higher. But there are layers to it. Even the exercise I just described is a little too simplistic, because John Malone, although he periodically hedges many of these equity ownerships he’s received over time, such as the Time Warner or the Sprint, he does not choose to hedge Sirius Satellite Radio. In fact, he’s endeavoring to buy more. And he is buying more to get control of it. The question is: is that worth very much?

 

On a P/E basis, to some analysts, Sirius Satellite Radio might look like a high P/E stock. But it’s only now achieving a certain scale economy that has been over a decade in the making. If you go back three years ago, on a free cash flow basis, that company lost a half a billion dollars. Then, a couple of years ago, it was sort of at break-even. A year ago, it made $100 million and, this past year, it made $500 million. That’s a $1 billion swing in just a few years. It’s only now achieving a certain scale economy. It should be a lot bigger, and be worth a lot more, in the future. And this is a large market capitalization company.

 

The price right now is probably about $104 a share. If I think about a company in terms of the quality of the business platform, and I might say that in terms of cable channels—not cable infrastructure, which he left quite a long time ago and sold to AT&T, which was a fool for buying it from him—that’s on the right side of the content divide. There’s a lot of foment in the media and technology sector.

 

It’s really a very, very high quality business, with a very, very long product lifecycle. It’s got a lot of intangible assets associated with it, a lot of free cash flow. It’s a wonderful business in terms of quality of platform. It is bizarrely priced. It’s really a wonderful investment. In terms of risk/reward profile, I would say that comes near the top in terms of selection.

 

2012 FRMO Transcript

http://www.frmocorp.com/_content/letters/2012_FRMO_Transcript.pdf

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Some Starz news: it plans to sell itself ASAP after the upcoming spin.  Also, we have some rationale for why Netflix was able to outbid them for Disney content.  (I've heard some analyst griping that Starz is losing too much content.)

 

Starz, the premium cable channel that was outbid by Netflix Inc. for rights to Disney movies, plans to look for a buyer in as little as a month, said a person familiar with the matter.  Starz's parent, Liberty Media Corp., has said it will spin off the TV channel as a separate company. Once the spinoff is complete, which the person said could be in early January, Starz plans to promptly begin discussions with potential buyers. Tax rules prevent talks with a buyer earlier.

 

Starz, which also has a major studio deal with Sony Corp.'s Sony Pictures, said it plans to use money saved from the Disney deal to help finance more original series.

 

Knowing how Netflix operates, they probably grossly overpaid Disney.  Good discipline on Starz's part.

 

http://online.wsj.com/article/SB10001424127887323501404578161211614586512.html#

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