Value Investing

ValueX Vail 2015: Liberty Broadband (LBRDK) – Brennan Asset Management

Patrick Brennan, CFA of Brennan Asset Management and Robert Mori, CFA of Mori Huston Partners presentation on Liberty Broadband Corp (LBRDK) from the ValueX Vail, June 2015.

CHTR Recent History

  • 2009: Charter files/reemerges from bankruptcy:
  • 2012: Tom Rutledge becomes CEO
  • 2013: Liberty invests $2.6B in CHTR (~27%)
  • 2013-2014: CHTR makes series of offers for TWC ($114-$133)
  • 2014: TWC/CMCSA agree to merger for ~$159
  • 2014: CHTR agrees to series of swaps/divestitures with CMCSA
  • 2015: CMCSA withdraws offer under regulatory pressure
  • 2015: CHTR/TWC agree to merger for ~$195

Operation/Financing Dream Team?

  • Tom Rutledge
    • COO Cablevision 2004-2011; CHTR CEO 2012
    • Considered pioneer of triple play offering
    • CVC consistently held highest cable metrics
  • Dr. John Malone
    • CEO TCI Cable 1976-1996
    • One of great capital allocators all time
    • Predicts high teen/low 20% IRR on CHTR/TWC/Bright House

Liberty Broadband Summary

  • CHTR/TWC/Bright House
    • Scale benefits
    • TWC spotty historical performance
    • Broadband growth story
    • Cost synergy sandbagging
    • Cable anywhere traction
    • Mobile wildcard
  • Liberty Broadband=7-10% CHTR Discount

Current LBRDA

Liberty Broadband

  • $4.4B New LBRDA Stock (~78mm shares)
  • LVNTA: $2.4B
  • Coatue, Jana Partners, Soroban Capital: $2.0B
  • Investments funded at LBRDA NAV

Cable=Great Business

  • Limited competition
  • Pricing power
  • Recession resistant/supports leverage
  • Customers hate you but still purchase

Broadband Pricing

Liberty Broadband

  • Cable performance during last recession very stable
  • Cable TV / broadband far down on consumer savings list

Liberty Broadband

  • Overlap with Competing Fiber Offering – FiOS (Verizon) & U-verse (AT&T)

Liberty Broadband

  • High overlap with fiber doesn’t necessarily result in low penetration

Competitor Capital Structure Problem

  • Dividend payouts for VZ/T are high and will be maintained.
  • Capital flexibility for accelerated fiber build-out very limited.
  • Telecoms need capital to buy additional spectrum.

Liberty Broadband

Deal Summary

  • TWC ($78.7 billion)
    • $100 cash/0.5409 share of CHTR or $115 Cash/0.4562
    • $2 billion break-up fee
    • $800 million synergy target
  • Bright House ($10.4 billion)
    • $5.9 billon common units (convert CHTR shares)
    • $2.5 billion preferred units (6% cash coupon/40% conversion premium)
    • $2 billion cash
    • Advance/Newhouse – FL strength

CHTR vs. Competition

Liberty Broadband

Did CHTR Overpay?

Acquisition multiples:

  • TWC: EV/2015 Ebitda 9.1x, incl. synergies & tax benefits 8.3x
  • BHN: EV/2014 Ebitda 7.6x, incl. synergies & tax benefits 6.5x
  • Recent deal comparables:

Liberty Broadband

Major Model Assumptions

  • Synergy sandbagging – ~2x management estimates
  • Continue programming cost escalation
  • Video subscriber loss
  • Broadband penetration/ARPU growth
  • $11B+ NOL gone by end of 2017
  • >=4.0x leverage

Synergy Snapshot

Liberty Broadband

  • Liberty Global – Virgin Media: Closing Mid 2013

Liberty Broadband

  • Liberty Global – Ziggo: Closing Nov 2014
    • Orig. synergy est. $160M: out of which $95M Opex (-24%),
    • Already increased synergy estimate by 50% to $250M

See full presentation below.