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LINTA - Liberty Interactive


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Liberty Interactive - LINTA:

  • John Malone
  • hidden assets
  • misunderstood
  • cannibal
  • global growth potential
  • close to 100% returns on capital
  • sustainable competitive advantages
  • 10-bagger

 

Liberty Interactive: Misunderstood QVC Assets Mask Value

https://sumzero.com/headlines/consumers_and_retailing/LINTA/188-liberty-interactive-misunderstood-qvc-assets-mask-growing-upside

 

REASONS FOR MISPRICING

LINTA is mispriced because it is largely ignored or misunderstood by many investors:

 

The crown jewel (QVC) has always been buried within a highly-complex organizational structure, off the radar screen of most plain vanilla consumer/internet investors. With the recently-created LINTA/LVNTA tracking stock structure simplicity has increased greatly and should attract more investor interest.

 

Furthermore, QVC is a business that is still not well understood - it is perceived by many to have an aging customer base, be overly dependent on TV ratings, and vulnerable to threats from Amazon and other online competitors. At the QVC analyst day last year, management put out a lot of statistics showing that the age of the QVC customer base, while slightly older than the overall U.S. population, is actually trending younger due to strategic celebrity affiliations, innovative social marketing campaigns, and an emphasis on mobile/e-commerce.

 

Traditional valuation metrics are misleading. EV / EBITDA analysis fails to capture the low maintenance capex requirements of QVC's asset-light model, while P/E overstates the valuation because of the $350 million of annual non-cash amortization charges. More impropriate metrics like EV / Operating Cash Flow or FCF / Equity highlight the true undervaluation of LINTA.

 

LINTA – Everything about it is amazing:

http://oraclefromomaha.wordpress.com/2013/10/08/92/

 

Would you invest in a company that 1) is among the highest quality business franchises in the world, 2) is run by a world-class management with a Buffett-beating long-term track record in value creation, 3) is buying back its own undervalued shares hand over fist, at a growing 10% free cash flow yield, in a world of 3% long-term interest rates and 17 multiple S&P?

 

Liberty Interactive (NASDAQ: LINTA) presents a unique opportunity to participate in the said proposition.

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hellsten thank you very much for the great idea!!! :)

 

could you perhaps explain me the difference between the LINTA stock and the LINTB?

 

thank you

 

You're welcome. All I know is what is said in one of the articles I posted:

 

For small accounts, there also exists a B class super-voting shares (10 votes per share vs. 1 vote per share for the A) which usually trades at a slight discount to the A. These are the shares that Malone owns and there is a very limited float. The B trades by appointment but represents a slightly better value than the A and should trade at a premium in a perfect world.

 

If Malone decides to cash out in bulk or dies, I expect these shares to be bought out at a premium by the company or successive management. Neither event is likely in the next few years, fortunately. I have the B shares in my personal account.

 

Management is financially aligned with shareholders. Chairman John Malone and his wife own 3.1 million shares of Class A and 27.2 million shares of Class B stock, for a combined market value of $720 million. The last time I checked his net worth was in the $6 – $7 billion range so this is a very material holding for him. CEO Greg Maffei owns 2.6 million Class A shares with a market value of $62 million.

 

The difference between Class A and B shares is that each B has 10 votes vs. 1 vote for each A. John Malone owns most of the B shares and has 34.5% of the total votes, making LINTA effectively a controlled company. I’m not concerned about the super-voting structure here; given Malone’s track record the best thing a shareholder can hope for it for him to maintain full control over the company – there is nothing so sweet as a benevolent dictator.

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Any opinions on whether the QVC tracking stock should be better or worse to own than LINTA ?

 

I'm a bit confused about the new tracking stocks.

 

Will LINTA stick around and still include everything, or will it turn into QVCA + the other new ecommerce one? The writeup gave my the impression there would be 3 tracking stocks (LINTA + 2 new ones), but the investor day slides gave me the impression there would be two (LINTA to split into two new ones). It was just a quick look, though. I'll take a deeper look tonight.

 

Update: Ok, to answer my own question, I misread something (LINTA and LVNTA kind of look alike when scanning quickly), and I think LINTA will become two new trackers and disappear. Correct me if that's wrong.

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Any opinions on whether the QVC tracking stock should be better or worse to own than LINTA ?

 

I have no idea, but ItsAValueTrap has written about a similar situation "The tracking stock proposal and history of prior tracking stocks":

http://glennchan.wordpress.com/2012/07/12/special-situation-opportunity-liberty-ventures/

 

This is a classic John Malone situation:

 

A- Tax efficient.  Ventures will generate significant tax deductions and it can apply these deductions to Interactive’s tax return in exchange for cash.  If Ventures was separated as a spinoff (instead of a tracking stock), this would not be possible.

 

B- Using complexity as a weapon against institutional investors so that they might sell stock for less than what it is worth.

 

When the predecessor Liberty company was split out of TCI as a tracking stock in 1995, institutional investors stayed away from Liberty due to its unusually high share price (from an intentional reverse share split), its reported book value (close to 0), and sheer complexity.  In Mark Robichaux’s biography on Malone “Cable Cowboy”, it is noted that even TCI’s founder (Bob Magness) did not understand the deal.  But those who invested in Liberty would have seen their money grow several times.  The financial aspects of the deal are discussed in Joel Greenblatt’s book on special situations investing “You Can Be a Stock Market Genius”.

 

In 2006, Liberty split into two tracking stocks: Liberty Capital and Liberty Interactive.  It was Liberty Capital that was very complicated and difficult to understand.  Originally, Interactive’s current exchangeable debentures were attributed to Liberty Capital.  Prior to Interactive and Capital splitting up in a spin off (breaking the tracking stock structure), Interactive and Capital did a swap so that Interactive was given the exchangeable debentures.  This is because the debentures generate significant tax deductions and Interactive generates far more taxable income than Capital does.  You have to wonder why these debentures were attributed to Capital in the first place.

 

Liberty management talks about giving investors “choice”.  I believe that this will create an opportunity for investors to put their money disproportionately into the more expensive/less undervalued tracking stock of the pair.

 

I guess Olmstedt might know something too:

http://www.stockspinoffs.com/2012/08/13/liberty-interactive-not-a-spinoff-well-sort-of/

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This thread discusses the LINTA and LVNTA split:

http://www.cornerofberkshireandfairfax.ca/forum/investment-ideas/lvnta-liberty-ventures/5/

 

Sportgamma and others correctly identified LVNTA as being undervalued:

But if you brake it up, it seems that ventures is seriously undervalued, despite it consisting solemnly of publicly traded entities :

 

At least that's what the market says; LVNTA is up 121% and LINTA 51% since August, 2012.

 

I guess there's an opportunity in GVC or LINTA. Why else would Malone do it?

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I've actually done very little research on the recent spinoff + new tracking stock.  It seems that:

 

1- Malone's best ideas may continue to go to LMCA over LVNTA.

2- The spinoff should reduce the value of Liberty Interactive's debt, as the debt will be backed by less assets.  You might expect Liberty Interactive or Ventures to buy back some debt at a discount.  Ventures is less likely to buy back debt as most of Ventures' debt is tax advantaged.  I haven't checked where the debt is trading right now.

3- The split is so that some of the tracker stocks can be used as currency for acquisitions.  Malone is always looking to "trade up".  He wants to use the stock to buy stakes in higher quality businesses, or to do arbitrages between the relative value of different companies.

 

Part of me feels that LMCA is where you want to be.  Charter and Sirius XM are wonderful businesses.  QVC and HSN (in LINTA) are good but not as good; they probably won't show much earnings growth in the future.  It's hard to see where the eCommerce businesses are going.  Expedia and TripAdvisor are good businesses but tech can change rapidly.

Out of all the major businesses in Malone's empire, Charter and Sirius may deserve the highest P/E (or EV/EBITDA) mutliples because they are the highest quality.  Then expedia and trip, then eCommerce, then QVC/HSN.

 

*I actually missed out on LINTA, LMCA, and LVNTA.

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  QVC and HSN (in LINTA) are good but not as good; they probably won't show much earnings growth in the future.

 

Could you elaborate a bit on why you think this? International seems like a good growth opportunity, and the high FCF means that even without huge growth in the US they can buy back lots of shares (as they've done historically) and keep the per share value growing nicely.

 

Looks like they have a pretty big moat and very good margins for retail. Seems very high quality at first glance, which is why I'm wondering if you've found negatives I haven't seen yet.

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Looking backwards, they haven't grown earnings much.  When QVC expands internationally, it may have to eat years of losses (and lots of management attention) before an operation becomes profitable.  It's hard for them to expand internationally.  They've saturated their existing markets and may face secular headwinds from less people channel surfing (due to Tivo and PVRs) and in the future less people may watch traditional cable.

 

In comparison, Charter looks like a walk in the park.  All they have to do is to improve their operations and capture more market share.  On top of that, they can consolidate with other cable companies to generate more economies of scale.  This worked in the past for Malone many times.  It'll probably work again.  The CEO at Charter is one of the best in the business.

 

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Thanks.

 

We value QVC at $13.150 billion to $15.350 billion, a range that reflects a 7.0% to 6.0% unlevered free cash flow yield on our estimate for unlevered free cash flow in 2010.  QVC's closest competitor, HSN, is publicly-traded and provides a good point of reference for valuing QVC.  HSN's current market valuation implies a 6.8% LTM unlevered free cash flow yield.  QVC should be valued at a somewhat lower free cash flow yield than HSN due to its superior financial performance, competitive advantages, and incremental growth opportunities (HSN does not have any international presence).  Our valuation range also seems appropriate relative to the 30-year treasury yield of 3.7% and the forward earnings yield on the S&P 500 of 7.7% in light of the fact that QVC is a great business with above average growth opportunities.

 

One can get another point of reference for valuing QVC by looking at the valuation implied by the transaction in which Liberty acquired its controlling interest in QVC from Comcast.  Liberty acquired the 56% of QVC that it did not already own from Comcast in 2003 for $7.9 billion, which implied an equity value for QVC at the time of $14.1 billion and an LTM unlevered free cash flow yield of 3.8%.  Given that QVC has grown since 2003, the terms of the Comcast transaction clearly suggest that our valuation of QVC is conservative.

 

 

We value the eCommerce Businesses at $772.0 million to $1.150 billion.

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http://www.theflyonthewall.com/permalinks/entry.php/LINTA;HSNIid1905727/LINTA;HSNI-Liberty-Interactive-cash-offer-for-HSN-likely-says-Citigroup

 

Liberty Interactive cash offer for HSN likely, says Citigroup

 

Citigroup sees Liberty Interactive (LINTA) making a cash offer for HSN, Inc. (HSNI) as the most likely outcome, and assumes a 20% premium to HSN's equity under a takeover scenario. Citi says two recent moves by Liberty Interactive, namely issuing $400M of exchangeable debt and announcing QVC would reside in its own tracking stock, suggest a merger between QVC and HSN is possible. Citi raised its price target for Liberty Interactive shares to $32.50 from $24.50 and reiterates a Buy rating on the stock, saying it finds the company compelling on a standalone basis.

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"Our upgrade is based largely on the value that we believe will be unlocked from the new tracking stock structure, which we expect to take effect in Q1 2014, and leads to our sum-of-the-parts (SOTP) valuation range of $31-33," analyst Matt Nemer states. "The core QVC asset trades at nearly a 50% discount to industry peer HSNI (10.7x FY2014E FCF vs. 21.0x) despite having what we view as an increasingly promising long-term agenda. At the same time, the new Liberty Digital Commerce tracker isolates the high-growth eCommerce businesses that are often ignored by the Street but on their own will be the 4th largest U.S. listed eCommerce business by revenue."

 

http://www.streetinsider.com/Analyst+Comments/Wells+Fargo+Upgrades+Liberty+Interactive+%28LINTA%29+to+Outperform/8773073.html

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Good overview of LINT here - this dude's been following Malone since the mid-90s.

 

Thank you. John Malone certainly likes to confuse investors and minimize taxes.

 

When all is said and done here, we see the complexity of the announced separation at LINT of the home shopping business and the ecommerce operations tax free via a tracker at LINT as genius.

 

When all is said and done, we think LVNT will eventually be remerged with LINT (QVC), and once again Interactive will have only two trackers rather than three (QVC and LDC).

 

In summary, we view all these LINT announcements as good for investors, especially those with a long investing horizon.
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  • 2 weeks later...

http://ir.libertyinteractive.com/secfiling.cfm?filingid=1355096-13-63&CIK=1355096

 

http://www.businesswire.com/news/home/20131105005850/en/Liberty-Interactive-Corporation-Reports-Quarter-2013-Financial

 

Attributed to Liberty Interactive Group

 

Grew QVC US revenue by 5% and adjusted OIBDA(2) by 9%

QVC US operating income increased by 10%

QVC.com revenue as a percent of total US revenue increased to 41%, a 2 point increase

QVC US mobile penetration was 32% of QVC.com orders

Repurchased $303 million LINTA shares from August 1 to October 31, 2013

Announced plan to create QVC Group and Liberty Digital Commerce Group tracking stocks out of Liberty Interactive Group

 

CEO: “We repurchased $303 million of Liberty Interactive stock from August 1 to October 31, and $854 million year to date.

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  • 2 weeks later...
  • 1 month later...
  • 3 weeks later...

Anyone know where I can find the full LINTA/B holdings of John Malone?

 

On CapitalIQ, it says John Malone owns $75 mil worth of LINTA shares which is 0.5% of shares o/s but I couldn't find anything on the LINTB on either the SEC Form 4's or CapIQ sites.

 

Latest proxy statement says:

 

John C. Malone

 

LINTA     3,359,339 (1)   *     34.5  

LINTB     27,689,711(1)   94.3        

LVNTA     666,117 (1)   1.9        

LVNTB     1,384,750 (1)   94.5

 

(sorry for the weird formatting)

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Commerce Hub ( http://www.retailsolutionsonline.com/doc/commercehub-reaches-b-in-holiday-retail-gmv-at-record-pace-0001) strikes me an interesting and not so well known part of the Liberty Interactive family. They facilitated around 5.5B of transactions last year and handled a record 1B this holiday season. I find it interesting that their client list includes Costco and Walmart and the fact that is a Malone related investment interests me as well. It seems like there is some massive potential here for them to help traditional retailers level the play field with Amazon.

 

So if anyone has any info on them please post to this thread. I am trying to wrap my head around the possibility of them growing to a complete solution for retail logistics, supply-chain and fulfilment. It appears as though currently they are mainly being used by retailers to increase online product mix without holding additional inventory.

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