Sometimes the most obvious investment ideas still need a roaring shout-out.
Charter at a double discount
Liberty Broadband (NASDAQ:LBRDA) (NASDAQ:LBRDK) (OTCQB:LBRDB) used to trade at a relatively small discount to NAV for many years. But in recent times this discount has grown to over 30%, while its main asset Charter (CHTR) also looks undervalued. (See my recent Charter thesis here).
In a nutshell, I believe the concerns regarding fiber overbuilds and fixed wireless competition are overblown. Fixed wireless will have some effect in the short term, but won’t remain a large headwind in the future. And fiber will have to price its services much higher than Charter. On the other hand, Charter is rapidly becoming a strong wireless player itself. Over the long term, Charter’s competitors will be hampered by their higher infrastructure costs, giving Charter a durable competitive advantage.
All in all, I think we can safely assume that the current market prices of Liberty Broadband provide us with the opportunity to purchase Charter for much less than 50% of its intrinsic value.
Liberty Broadband overview
One year after having been spun out of Liberty Media in 2014, Liberty Broadband invested $5B in Charter when the latter acquired Time Warner and Brighthouse. The investment came with an agreement to cap its ownership at 26%.
Another Liberty entity, GCI Liberty (GLIBA), which also owned a significant interest in Charter alongside the dominant telecommunications network (broadband and wireless) in Alaska, GCI, was merged with Liberty Broadband in 2020.
Today, Liberty Broadband owns 26% of Charter, worth $17B, GCI (acquired for an EV of $2.7B), less $2.6B of net debt (excluding GCI’s own debt). Hence, the simple calculation would be to exclude both GCI and the net debt, resulting in a NAV very close to the market value of the Charter stake. This NAV of $17B compares to a current market cap of Liberty Broadband around $11.8B, so the initial discount is over 30%.
However, if we consider that Charter is likely worth at the very least $550 per share for a market cap of $92B, Liberty’s stake (and NAV) is worth $24B and the discount reaches 50%.
Liberty entities have a history of smartly profiting from the discounts they usually trade at and ultimately closing them in a tax-efficient manner.
But investors may need many years of patience.
In the case of Liberty Broadband, the company is basically set up for a merger with Charter itself, as its CEO Greg Maffei has explicitly confirmed in several occasions. Effectively, the GCI purchase transformed the business into an “active trader business” for taxation purposes and was the right size and genre to fit Charter’s own M&A appetite. Hence, Liberty Broadband investors are waiting for the day Charter is willing to shoulder Liberty’s debt in exchange for owning GCI, while spinning out the underlying Charter shares to Liberty investors. Alternatively, Charter might also buy out the whole thing and treat it as a huge buyback (unlikely in my opinion, given the huge sums involved and Charter’s own high leverage).
Moreover, there are negotiations underway between Liberty and Charter concerning the 26% ownership cap. Since Liberty has reached the 26% level, ongoing buybacks at Charter force Liberty to sell into the buybacks, which it would rather avoid, given the low share price. However, these transactions also provide cash inflows that fuel buybacks at the Liberty level, creating significant value, as Liberty effectively increases its Charter ownership per share at a 30% discount. Selling Charter for $390 and buying it back for an underlying price of $260 is nothing else than printing money.
This is why Liberty Broadband should outperform Charter – absent an increase of its NAV discount. However, an increasing discount would also increase the value of its repurchases, making its outperformance again more likely.
Catalysts
Unfortunately, there is little to see.
Since Charter has started its large expansion and upgrade investment cycle and reduced its buybacks, an outright acquisition of Liberty Broadband has become even more unlikely than before. And given the low EBITDA growth and already high leverage at Charter, a simple merger and spin-out of the underlying Charter shares to Liberty shareholders also seems unlikely in the near term.
As far as Charter itself is concerned, for many years investors have dreamt of a Comcast (CMCSA) merger with enormous synergy potential. Given that the Sprint-T-Mobile (TMUS) merger was allowed to happen on national scale, the merger of two largely local players should be allowed as well. Both companies already share a common video streaming platform and the same MVNO partner Verizon (VZ), so their common future is basically set. And the fact that they seem to get more competition lately, both from the fiber and the FWA side, does only help the merger proponents. That said, we will have to wait for a more merger-friendly government to see that narrative gain steam again.
Conclusion
The NAV discount is certain and Charter itself is very likely at least somewhat undervalued, so the margin of safety is significant.
On the other hand, short-term gains are unlikely. Charter itself will first need to emerge as a winner from its investment cycle to silence the naysayers, before any sort of revaluation will occur. And Liberty Broadband can do very little to accelerate the process – and will probably only try to exploit patiently the valuation disconnect.
Hence, before investing you should be sure that you like Charter and are willing to hold this stock for years. In the near term it will share the ups and downs with its largest holding. And at some point in time, it will likely be huge outperformer.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.
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