Author Topic: CHTR - Charter Communications  (Read 183683 times)

JoelS

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CHTR - Charter Communications
« on: March 26, 2014, 09:39:59 PM »
There is a good thread on Liberty Media but I thought it would be worth starting a new thread on Charter Communications (if there isn't one already), as a stand alone company or to help analyse the new Liberty tracking stock LBRDA/B which will hold among other things Liberty Media's 27% interest in Charter. So here's my summary, sourced mostly from the company, VIC, interviews, and Brooklyn Investor.. (i'll post up all the sources i've come across at some point)

Charter Communications is a provider of cable television, broadband internet and telephone services to 6.8 million Americans in 29 US states. The Company is minority owned and controlled by Liberty Media, the flagship company of John Malone. Liberty Media acquired a 27% stake in Charter in March 2013 at a price of $95.50 per share, and has the right to increase its stake to 35% ownership between now and June 2016 and 40% ownership after June 2016.  John Malone, by all accounts, is recognised as one of the best CEO and capital allocators of the 20th century. Over 25 years at the helm of TCI, Malone compounded capital at a rate of over 30% before selling to AT&T, whose cable assets were later bought by Charter and Comcast. Malone has achieved a similar rate of return with Liberty Media, originally a spin off from TCI. From May of 2006 through the financial crisis to March 2013, Liberty returned 33% per year. The upshot is a compounding rate of return near 30% for nearly 40 years.

Cable background

Cable is an attractive industry in general. Cable operators have de facto monopolies in that they control the only data connection into the home with enough capacity to serve video, internet and voice simultaneously. Cable provides the highest speeds and will continue to have the highest speed for the least incremental capital. Because data usage is rising exponentially, having the lowest cost basis will become increasingly important. Cable companies are also attractive in that they hold no inventory, have no labour problems and no long term benefit liabilities. The industry norm is two year contracts with annual price increases.

JM quote on cable industry:

“I used to say in the cable industry that if your interest rate was lower than your growth rate, your present value is infinite. That’s why the cable industry created so many rich guys. It was the combination of tax-sheltered cash-flow growth that was, in effect, growing faster than the interest rate under which you could borrow money. If you do any arithmetic at all, the present value calculation tends toward infinity under that thesis.”

Charter

In 2009, Charter Communications went bankrupt. The company suffered from over leverage and poor management virtually from the time of its IPO in 1999. Charter was bought out of bankruptcy by distressed debt and private equity interests including Apollo and Oaktree. They sold their stakes in the company to Malone's Liberty at a significant profit. Charter emerged from bankruptcy with reduced debt and an enormous net operating loss position (at 31st dec 2013, loss carry forwards were $8.3 billion) meaning Charter won't pay tax until at least 2018. Protected by these NOL's, Charter's earnings will flow through to free cash flow, allowing share repurchases or acquisitions.

Today, Charter is levered 4.8x Ebitda. Historically, cable has been able to support up to 5x ebitda due to the utility-like nature of the business. 95% of Charter's debt is due after 2016, with an average duration of 7.4 years and a weighted average cost of debt of 5.6%.

The stock is priced at an EV/Ebitda multiple of about 9.5x. This is higher than peers but arguably justified because the outlook for charter is much better than peers. Tom Rutledge, Charter's CEO since December 2011, is reputedly one of the best operators in the cable business. Rutledge was formerly COO of Cablevision, The US's eighth largest cable operator. Under his leadership, Cablevision achieved some of the best operating metrics in the cable industry, while overseeing a turnaround comparable to Charter. In 2010 Cablevision acquired Bresnan communications, a company which, although much smaller, has similarities to Charter in that both serve mostly rural markets. Rutledge sought to improve Bresnan's EBITDA per serviceable passing (the standard industry metric for measuring the financial performance of a cable company) through a strategy of driving sales and customer service, boosting internet penetration and offering better video products.
In six quarters, EBITDA per serviceable passing at Bresnan rose from $207 to $270.

Rutledge's strategy for Charter is very similar to Bresnan's and to help turn around Charter, he recruited almost his entire team from Cablevision. Rutledge's employment agreement also includes 1.3 million share awards vesting over four years. Today, Charter's EBITDA per serviceable passing sits around $220. The best cable companies in the US show a figure of about $450 EBITDA per passing. If Charter can increase EBITDA to approximately $280 - $300 per home passed per year, free cash flow should grow at a decent clip. Combined with repurchasing shares and incremental borrowing, Charter should be able to shrink the equity of the company substantially over the next 2-3 years.

John Malone on Charter:

"This is a unique opportunity to take this vehicle and grow it; through both superior marketing and promotion, in other words organic growth… which can be exceptionally strong for a number of years… and particularly the rate of growth of free cash flow can be very, very strong, which allows it to then access the leverage market in order to do roll-up transactions, particularly where there are horizontal synergies. So the old TCI formula, horizontal acquisitions, synergies, grow scale and then look to form consortia with other cable companies".

« Last Edit: March 26, 2014, 10:34:35 PM by Parsad »


prevalou

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Re: CHTR - Charter Communications
« Reply #1 on: March 27, 2014, 01:43:41 AM »
EBITDA per passing is an interesting statistic.  When comparing to GNCMA (more than $ 600 EBITDA per  passing), there seems to be a lot more of potential improvement at Charter. So price/EBITDA is lower at GNCMA but potential is a lot higher at CHTR.

yadayada

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Re: CHTR - Charter Communications
« Reply #2 on: March 27, 2014, 06:09:35 AM »
where is the upside? If they increase to 300, then it still trades at like 12-14x FCF with current revenue? If it increases to 375 then it trades at 6.75x FCF. How can you assess the chance they will succeed at this? Seems like alot of the improvement is already priced in?

Also is attaining GCI's level not a bit unrealistic, and isn't their cost structure different with higher cap exp?

Olmsted

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Re: CHTR - Charter Communications
« Reply #3 on: March 27, 2014, 06:24:19 AM »
Oh, the pain!  I bought CHTR warrants post-reorganization for ~6, then sold a couple months later for no explicable reason.  Every time I see a CHTR thread or message, it opens up the wound again.  Quick - bury this thread!  ;)

prevalou

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Re: CHTR - Charter Communications
« Reply #4 on: March 27, 2014, 06:42:53 AM »
if EBITDA per passing is $300, price to ebitda becomes 9.5*220/300=7. If it increases to $375, price to ebitda is 5.57. If it increases to $690 (GNCMA level), it becomes 3 times ebitda.

JoelS

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Re: CHTR - Charter Communications
« Reply #5 on: March 27, 2014, 03:31:26 PM »
where is the upside? If they increase to 300, then it still trades at like 12-14x FCF with current revenue? If it increases to 375 then it trades at 6.75x FCF. How can you assess the chance they will succeed at this? Seems like alot of the improvement is already priced in?

Also is attaining GCI's level not a bit unrealistic, and isn't their cost structure different with higher cap exp?

Attaining GCI's passing figure seems out of reach, at least for the next few years. Getting to $300, on the other hand, doesn't seem so unrealistic. Most of the upside in EBITDA would come from increasing internet penetration in its footprint.. In 2013, Charter provided internet to just over 32% of customers v competitors Time Warner, Comcast and Cablevision all over 36%. (50%+ for Cablevision).

If they can get to $300 per passing at year end 2015, it depends on your assumptions of course, but from 1. 2014 free cash flow, 2. 2015 free cash flow and 3. incremental borrowing to keep leverage at 4.5x ebitda, you end up with c $5bn of cash for Mr Malone and Mr Maffei to use for whatever purpose they deem appropriate.

The current market cap is c $13.1bn. So the free cash looks good in comparison.



yadayada

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Re: CHTR - Charter Communications
« Reply #6 on: March 27, 2014, 05:11:18 PM »
What would cap exp be compared to depreciation?

Because here is what I get. 300$ per passing is 36% higher right? So 36% more ebitda. they had 2.8b$ ebitda in 2013. So x  = 3.8bn$ in ebitda now. - 1.8bn$ in depreciation (how much cap exp is that in reality?, and will this be  higher or lower?) - 850 in interest is 1.15 bn$ in FCF, not counting in taxes. with a market cap of 13 bn$ that doesnt look v cheap?

Also if you think they can get more debt, then you are saying i should buy liberty media? Is that FCF for liberty media? I dont get that part.

Did I do the FCF calculation right?

JoelS

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Re: CHTR - Charter Communications
« Reply #7 on: March 27, 2014, 05:41:55 PM »
What would cap exp be compared to depreciation?

Because here is what I get. 300$ per passing is 36% higher right? So 36% more ebitda. they had 2.8b$ ebitda in 2013. So x  = 3.8bn$ in ebitda now. - 1.8bn$ in depreciation (how much cap exp is that in reality?, and will this be  higher or lower?) - 850 in interest is 1.15 bn$ in FCF, not counting in taxes. with a market cap of 13 bn$ that doesnt look v cheap?

Also if you think they can get more debt, then you are saying i should buy liberty media? Is that FCF for liberty media? I dont get that part.

Did I do the FCF calculation right?

We're in about the same ballpark. So using your figure of 3.8bn, and keeping leverage at 4.5 v 4.8 today (for charter, not liberty) you add about 3.1bn to debt. Maintenance capex should come down as a percentage of revenues in 2015, when the c400m attributed to the digital rollout ends. So you get capital coming down per customer. I think the cash flow yield might be closer to 10% in 2015 - more like 1.3 - 1.4bn.. But that's subjective.

Liberty

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Re: CHTR - Charter Communications
« Reply #8 on: March 28, 2014, 10:38:16 AM »
Quote
Charter Communications has filed legal documents contesting the proposed $42.5bn merger between Time Warner Cable and Comcast, claiming that the deal has been subject to a “flawed process”.

In a filing with the Securities and Exchange Commission on Thursday night, Charter, a cable operator, outlined a series of complaints against the structuring of the deal, with a particular focus on proposed divestitures and the lack of a break-up fee.

“TWC’s process for negotiating and approving the merger was flawed because of the failure of the TWC board of directors to consider and investigate alternatives to the proposed Comcast merger,” the document reads.

“In particular, the TWC board simply refused to meaningfully engage with Charter regarding a potential business combination even after deciding to pursue a transaction with Comcast

http://www.ft.com/intl/cms/s/0/4279ccc4-b671-11e3-b230-00144feabdc0.html#axzz2xHQ55UlE
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tombgrt

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Re: CHTR - Charter Communications
« Reply #9 on: April 12, 2014, 11:19:55 AM »
Haven't look at this yet but just thinking out loud here:

If you assume that "internal/organic growth can be exceptionally strong for a number of years" is possible in combination with increased EBITDA per passing to $300 by the end of 2015/2016 you would get much much higher EBITDA in only a few years. If internal growth is 10%/year* you'd get near $5B EBITDA in 2016! Sure, that would be a very bullish outcome but also one where you could see a double from the current market cap, if not more.

(*likely way too aggressive ;))
« Last Edit: April 12, 2014, 03:28:31 PM by tombgrt »