38cjxsde635anttomvn6z8h-wpengine.netdna-ssl.com€¦ · BAM Disclosures In BAM’s investment...
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Patrick Brennan Portfolio Manager, Brennan Asset Management
Transcript of 38cjxsde635anttomvn6z8h-wpengine.netdna-ssl.com€¦ · BAM Disclosures In BAM’s investment...
Patrick Brennan Portfolio Manager, Brennan Asset Management
CHTR Via LBRDK/GLIBA: Double Discount US Cable
Patrick Brennan, CFABest Ideas 2018
Hosted by MOI GlobalJune 2018
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BAM Disclosures In BAM’s investment decision making process involves a number of different factors, not just those discussed in this document. The views expressed in this material are subject to ongoing evaluation and could change at any time. Past performance is not indicative of future results, which may vary. The value of investments and the income derived from investments can go down as well as up. It shall not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities mentioned here. While BAM seeks to design a portfolio which reflects appropriate risk and return features, portfolio characteristics may deviate from those of the benchmark. Although BAM follows the same investment strategy for each advisory client with similar investment objectives and financial condition, differences in client holdings are dictated by variations in clients’ investment guidelines and risk tolerances. BAM may continue to hold a certain security in one client account while selling it for another client account when client guidelines or risk tolerances mandate a sale for a particular client. In some cases, consistent with client objectives and risk, BAM may purchase a security for one client while selling it for another. Consistent with specific client objectives and risk tolerance, clients’ trades may be executed at different times and at different prices. Each of these factors influences the overall performance of the investment strategies followed by the Firm. Nothing herein should be construed as a solicitation or offer, or recommendation to buy or sell any security, or as an offer to provide advisory services in any jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. The material provided herein is for informational purposes only. Before engaging BAM, prospective clients are strongly urged to perform additional due diligence, to ask additional questions of BAM as they deem appropriate, and to discuss any prospective investment with their legal and tax advisers.Contact information
Patrick Brennan, CFABrennan Asset Management, [email protected]
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BAMStrategy
• All-cap strategy: 12-20 total names• Top 10 names: 70-80% of portfolio• 3-5+ year holding period
• Eat our own cooking
• Media/telecom, specialty financials and consumer discretionary focus
• Own under-followed or under-owned because of complexity issues
• Investments include documented areas of inefficiency including:
• Spinoffs/Thrift Conversions • Liberty Media Complex• Owner/Operator Businesses
• Generally looking for 15-20%+ IRRs on base case scenarios over 3-5 year time period
BAM is a registered investment advisor based in Napa, CA. BAM manages money through separate accounts and a private fund.
Brennan Asset Management, LLC (BAM)
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A Brief History of Time
LCAPA
LINTA
LMDIALSTZA
QVCA
LVNTA
LIBERTY
LIBERTY
Greg Maffei joins Liberty, March 2006
Modern iteration of Liberty beginswith May 10, 2006 creation of LCAPA/ LINTA tracking stocks
1999
2004
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2006
2011
2012
2008
ASCENT CAPITAL GROUP INC
2008
2009
2009
2009
2011
2012
2001
1999
1999
1998
2016
2014
LILA/K(LibertyLILAK)
2014
LSXMA/K(LibertySirius)
BATRA/K(LibertyBraves)
FWONA/K(LibertyMedia)
2014
Octagon shapes represent tracking stock while company logos show asset-backed companies
2016
2016
2016
2016
2013
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2015
2015
2009
2015
2018
2018
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Liberty Structure Summary
Berkshire rules:
1: Don’t lose money2: Don’t forget about rule number 1
Liberty additions:
3: Don’t willingly pay taxes when spinoffs, tracking stock and share repurchases are readily usable4: Don’t forget about rule number 3
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Repeatable Inefficiency• Trackers/Spinoffs create uneconomic selling
• Indices often cannot own trackers• Normal spinoff selling• Exposure limits – how many Liberty names do I own?!
• Liberty companies screen poorly• Negative GAAP earnings• Too much leverage (private equity capital structure)• No dividend in yield starved world• Too many minority interests• Too much work: How do I explain this to clients/portfolio
managers?• Crossover industry/market cap inefficiencies
• “I cover telecom not retail (QVC), travel (EXPE/TRIP), hotels (ILG)”• “I am large-cap investor (CHTR/SIRI/LBTYK) and can’t own these
spins (GLIBA/LBRDK/LILAK)• Malone vs. Malone 6
Recent Liberty Underperformance
Performance 12/31/17 – 06/08/181
Performance 12/31/15 – 06/08/182
1 LILAK starting price as of 07/02/15; LBTYK shares adjusted for LILAK distribution 2 GLIBA returns adjusted for CHUBA/LEXEA spins and assume GLIBA shares purchased with cash in lieu of fractional shares
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-16.0%
10.5%
2.6%
-19.1%
-25.4%
-1.2%
4.8%
-30% -25% -20% -15% -10% -5% 0% 5% 10% 15%
Liberty Global
LILAK
Discovery Communications
QVC
GCI Communications
Berkshire Hathaway
S&P 500
-27.4%
-48.9%
-13.9%
-21.6%
11.6%
48.7%
42.9%
-60% -40% -20% 0% 20% 40% 60%
Liberty Global
LILAK
Discovery Communications
QVC
GCI Communications
Berkshire Hathaway
S&P 500
Recent Liberty Underperformance
• Liberty entities are often the perfect screen for what investors DO NOT want to own currently• No dividends • Complicated• Selective operational issues
• Company specific issues• Foreign Exchange (DISCA/LBTYK/LILAK)• Cord Cutting (DISCA/LBTYK/LBRDA/GLIBA)• Malone vs. Malone (GLIBA/QRTEA and LBTYA/LILAK)• Short-term operational weakness (LBTYA/LILAK/QRTEA)
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Cable is a Good Business…Around the Globe
• Better Product/Few Competitors/High Barriers to entry• Fiber/HFC faster than copper• Difficult, expensive to replicate (Building permits/franchise
rights/angry neighbors)…ask GOOG• Utilityesque with pricing power• Predictable cash flow• Demand for Data (IDC: 10x 2013-2020)• Unburdened by dividends/investment grade
• Widows and orphans vs. Cable cowboys• Value obscured by reporting…and Liberty entities
• Depreciation vs. maintenance capex• Liberty entities add more confusion
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CHTR 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• 2016: CHTR/TWC Merger closes
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Operational/Capital Allocation 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
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CHTR Concerns
• Nielsen’s Law vs. “Fast Enough”• Broadband pricing power?
• Video Cord cutting• Integration/Credibility vs. Acceleration in trends• Margin vs. Cost accounting
• 5G Threat • VZ vs. World• Urban vs. Everywhere else
• Mobile• Growth Driver or Expense increase?• Cost savings vs. Inertia
• Valuation• EBITDA vs. Leveraged free cash flow• Merger possibility dead?
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Broadband Opportunity
Nielsen’s Law: High-end connection speed grows 50% per year
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Annualized Growth
10 yearCAGR
Nielsen's law
Internet bandwidth 50% 57.0x
Moore's law
Computer power 60% 100.0x
Data usage: great secular growth stories…History suggests speed
eventually utilized
…but visibility on 1G+ applications is poor
hence recent 30-100M “fast enough”
Broadband Opportunity
CHTR has larger DSL overlap (>50%) vs. other cable names
• T will increase fiber rollout to at least 12.5 million homes by 2019• CHTR still increase broadband subs ~0.8mm-1.1mm over next 3-5 years
assuming: • ~50-55% share in fiber markets • 70-85% share in DSL markets
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Broadband Opportunity
• Visibility on 50%+ internet penetration appears high…• Greg Maffei has stated that penetration as high as 60% evenutally
doable
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2014 2015 2016 2017 2018E 2019E 2020E 2021E 2022E
High Speed Data Penetration (Resi) 38.5% 41.2% 43.4% 45.0% 47.0% 49.0% 50.0% 51.0% 52.0%
Internet Subs (Resi) 18.40 19.91 21.37 22.55 23.79 25.08 25.87 26.68 27.50
Additions 1.51 1.46 1.17 1.24 1.29 0.79 0.81 0.82
CHTR offers minimum speeds of 100M in
50%+ of its footprint…200M: 25%
Cord Cutting issues
• NFLX and others have gained as MSO’s have lost…• Larger players: Less worse than smaller ones (still negative)• No material acceleration in Q1 despite stock selloff…lagging
indicator?
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-10.0%
-5.0%
0.0%
5.0%
10.0%
15.0%
20.0%
25.0%
30.0%
35.0%
40.0%
45.0%
Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 Q3 17 Q4 17 Q1 18
Y-Y Change Largest MSOs Y-Y Change NFLX
Source: Bloomberg/Company Filings; MSOs Include Altice, AT&T, Comcast, Cox, Dish, Charter and Verizon
Cord Cutting Considerations• Few dispute cord cutting continues
• …but Tom Rutledge was arguably one• Credibility?: “A couple of million doesn’t impact plan” vs. “We
plan on growing total subscribers”• CHTR Q1 results (-122,000) impacted by “non-pay
disconnects”…likely impacts Q2 numbers as well• Integration generally smooth…this was hiccup
• We expect video losses to accelerate but large cable better than small• Q1 2018 actually showed stabilization in trends…does this
continue?• Video is profitable…but much less so than broadband
• Margins getting worse• Cable: Leverage despite programming deleverage…changes at
higher losses• Wide discretion in allocating costs
• CHTR Stream($22)/Choice ($25)• Appeal to cord cutters? 17
Cord Cutting: Accelerating?
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MS 2018 8th Annual Streaming Video Survey (3,100 Adults 18+)
Large percentage still
considering cutting the
cord…but fewer than previous
years
Cord Cutting Surveys
Churn highest among new vMVPD
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MS 2018 8th Annual Streaming Video Survey (3,100 Adults 18+)
Cord Cutting Margin Impact
2014 2015 2016 2017 2018E
Programming Costs $8,105 $8,953 $9,614 $10,596 $11,370 Residential Video Customers 17.1 17.1 16.8 16.5 16.2Change in Resi Video Customers -0.3% -1.3% -1.7% -2.1%
Programming Costs Per Sub (r) $39.13 $43.66 $47.27 $52.91 $57.88Programming Costs Per Sub (c+ r) $38.39 $42.79 $46.23 $51.59 $56.23
Increase in Cost Per Sub 11% 8% 12% 9%
Programming Costs/Total Revenue 22.8% 23.9% 24.0% 25.5% 26.0%Implied Gross Margin Video 49.0% 44.1% 41.3% 36.3% 33.7%
Total EBITDA Margin (Pre-Wireless) 35.9% 34.8% 36.1% 36.8% 37.6%
EBITDA Margin has occurred despite deleverage from largest
expense
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Increasing video costs per sub has lowered video gross margins
Unit Economics: Double vs. Single
Implication: Cord cutting more negative for CHTR
vs. CMCSA
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CHTR CMCSA
Double Play
BroadbandOnly
Double Play
Broadband Only
Video ARPU $90 $0 104 $0Gross Margin 40% 40% 49% 49%Video Gross Profit $36 $0 $51 $0
Broadband ARPU $54 $65 $53 $101Gross Margin % 95% 95% 95% 95%Broadband Gross Profit $51 $62 $50 $96Total Gross Profit $87 $62 $101 $96
Depreciation $9 $3 $9 $3Pre-Tax Operating Profit $78 $59 $92 $93
Source: Company Data/Bloomberg/MS Research
Unit Economics: Double vs. Single
But this analysis assumes one ignores promotions
(3 year lock)
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$30 TV$7 HD Box$35 Promotional Fee (3 Years)$9 Broadcast Fee$81 Total Video
$65 Broadband
$146 Total Double Play
…and doesn’t account for video margins
deteriorating (higher programming costs)
CHTRDouble
PlayBroadband
OnlyVideo ARPU $90 $0Gross Margin 40% 40%Video Gross Profit $36 $0
Broadband ARPU $54 $65Gross Margin % 95% 95%Broadband Gross Profit $51 $62Total Gross Profit $87 $62
Depreciation $9 $3Pre-Tax Operating Profit $78 $59
Unit Economics: Double vs. Single
…Assuming more permanent video discounting paints different picture
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…Lower pricing should result in faster customer acquisition…and
discourage overbuilding
CHTRDouble
PlayBroadband
OnlyVideo ARPU $55 $0Gross Margin 34% 34%Video Gross Profit $19 $0
Broadband ARPU $54 $65Gross Margin % 95% 95%Broadband Gross Profit $51 $62Total Gross Profit $70 $62
Depreciation $9 $3Pre-Tax Operating Profit $61 $59
Pre-Tax Operating Profit (With 50% Promotional) $67 $59
Pre-Tax Operating Profit (With 100% Promotional) $61 $59
Margin vs. Cost Accounting
The cost to service video customers is far
higher but exact allocation unknown…
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Higher video losses: Lower cost to
service…and eventually programming leverage
2014 2015 2016 2017Programming $8,105 $8,953 $9,614 $10,596 Regulatory, Connectivity, and Produced Content $2,058 $2,065 $2,093 $2,064
Cost Service Customers $6,935 $7,216 $7,414 $7,239 Marketing $2,117 $2,306 $2,964 $3,036 MobileTransition Costs $14 $72 $156 $124 Other $3,648 $3,778 $3,318 $3,221 Total Operating Costs $22,877 $24,390 $25,559 $26,280
Total EBITDA $12,773 $13,004 $14,464 $15,301
Programming/Revenue 22.8% 23.9% 24.0% 25.5%EBITDA Margin 35.9% 34.8% 36.1% 36.8%
Margin expansion has occurred despite
deleverage on highest expense (programming)
Cord Cutting: Video Drives CPE
Largest portion of Capex spend is CPE, which is
heavily skewed towards video set-top boxes
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2014 2015 2016 2017CPE $2,961 $2,650 $2,761 $3,385 Scalable Infrastructure $1,626 $1,702 $2,009 $2,007 Line Extentions $907 $977 $1,005 $1,176 Total Success Based $5,494 $5,329 $5,775 $6,568 Upgrade/Rebuild $469 $594 $610 $572 Support Capital $1,089 $1,046 $1,160 $1,541 Total Capex $7,052 $6,969 $7,545 $8,681
Capex/Revenue 20% 19% 19% 21%
CPE 42% 38% 37% 39%Scalable Infrastructure 23% 24% 27% 23%Line Extensions 13% 14% 13% 14%Total Success Based 78% 76% 77% 76%Upgrade/Rebuild 7% 9% 8% 7%Support Capital 15% 15% 15% 18%Total Capex 100% 100% 100% 100% Larger video losses likely
means lower capexExpense/Capex
reductions suggest lower impact FCF/share
5G Considerations
• Lots of research suggests…bigger bark than bite• Many believe issues with LOS/fiber backhaul/costs• Issues with neighborhoods (“blight on my property), city
councils (“access to utility pole with cost you”)• Issues with handsets – complicated/expensive/timing
uncertain• Most comfort? If 5G transformational, why T buying TWX and
VZ try to purchase CHTR? • But perhaps VZ knows something or technology changes?
• Best chance with 5G is in dense urban areas…CHTR underrepresented
• If VZ hits 30mm rollout…perhaps <1mm CHTR cable subs at risk…by 2022
• Unlikely but possible threat vs. lower valuation26
5G Thoughts
• “What are you gaining economically by having wireless drop between node and building when wiring inside building?” T May 2018
• "For the general residential broadband solution, the economics for us don't seem to work” T May 2018
• “Without rain, without wind, without leaves, without physical structures in-between, it (28 GHz millimeter wave spectrum) works really well” CHTR Feb 2018
• ”(do wireless) shareholder really understand the amount of capital required to essentially build a cable network from scratch…where wireless drop is inferior to wireline drop?” CHTR Feb 2018
• “What would millimeter wave cost? You would need ~6mm sites to cover US based on typical reach of millimeter wave…at cost $250,000 to build a site. You’re looking at a cost of $1.5 trillion to build out –never going to happen.” TMUS/S April 2018
• “Consumers will find no material difference between the two technologies (5G vs. LTE)” Huawei April 2018
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5G: Line of Sight Issue
Many (outside of VZ) believe Line of site issues
(trees/weather) will drastically reduce 5G speed…
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5G: Line of Sight Issue
29ARRIS Cable Labs 2017 Can a Fixed Wireless Last 100m Connection Really Compete with a Wired Connection and Will 5G Really Enable this Opportunity?
…which was confirmed via a field test by ARRIS/ Cable Labs
5G: Line of Sight Issue
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Tarana’s Residential LoS Availability study Reprinted in RCR Wireless News. The analysis used Google Earth’s well-calibrated 3D building and foliage data, evaluating LoS availability as a function of base station height and support for fixed-access customer premises equipment (CPE) deployment modes in windows, on eaves, or on rooftops. The study included 8,219 occupied structures in the 35 neighborhoods and 3,736 individual observations of LoS across the 3 CPE installation modes
GOOG Earth + 35 ResiNeighborhoods at 500ft= Lots of Obstructed Views
FTTH vs. Wireless Drop
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When is wireless drop better than FTTH? Only in dense areas…and assuming everything else works
Fiber to Node Drop Cost (include CPE) Comment
Tucows $1,250 $300 Marketing/Labor on CPE?
Liberty Global £650 £240 75% <25 meters…33% 3 year…Marketing/Labor
Fios $1,200 $800 ~1% return Urban FTTH $1,153 $760Suburban FTTH $2,050 $760Rural FTTH $2,499 $2,500 Higher cost for FTTH
Penetration Rate 30% 40% 50%Tucows $4,467 $3,425 $2,800Liberty Global $3,249 $2,518 $2,079Fios $4,800 $3,800 $3,200Urban FTTH $4,603 $3,643 $3,066Suburban FTTH $7,593 $5,885 $4,860Rural FTTH $10,830 $8,748 $7,498
Capex CPE Opex Equipment Life
Total Tower Cost
FTTH CostHomes/Tower to choose 5G over
FTTH
5G - 28 GHz $22,500 $650 $4,200 7 $51,900 $760 68.29
Assuming ~$800 for the FTTH drop and 200m of required tower/radio
distance, wireless better than 5G in <15%
of country
Sources: ARRIS Cable Labs 2017 Can a Fixed Wireless Last 100m Connection Really Compete with a Wired Connection and Will 5G Really Enable this Opportunity?, VantagePoint Evaluating 5G Wireless Technology as a Complement or Substitute for Wireline Broadband, company filings, and internal models
5G: Best Chance? Largest DMAs…CHTR Underrepresented
CHTR: ~9% fewer total broadband subscribers than CMCSA but ~50% fewer in 25 largest DMAs
and…limited overlapping telecom market in top 25
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DMA Rank DMA Name Total BB Subs
% of Nielsen TV HHs
MSO Incumbent MSO
Incumbent MSO Share Telco Incumbent
TelcoIncumbent Telco Share
Nielsen TV HHS
1 New York, NY 6,667,919 90% ATUS 2,568,536 39% VZ 2,077,955 31% 7,368,3202 Los Angeles, CA 4,866,753 89% CHTR 2,756,976 57% T 920,862 19% 5,489,8103 Chicago, IL 2,882,379 83% CMCSA 1,726,758 60% T 891,972 31% 3,475,2204 Philadelpia, PA 2,672,665 92% CMCSA 1,400,406 52% VZ 1,003,258 38% 2,917,920
10 Boston, MA 2,378,348 99% CMCSA 1,424,563 60% VZ 592,692 25% 2,411,2508 San Francisco, CA 2,250,220 91% CMCSA 1,523,563 68% T 630,656 28% 2,484,6906 Washingon, DC 2,127,899 87% CMCSA 750,463 35% VZ 976,562 46% 2,443,6409 Atlanta, GA 2,120,724 89% CMCSA 895,912 42% T 800,309 38% 2,385,7305 Dallas, TX 2,078,697 79% CHTR 767,249 37% T 781,384 38% 2,646,3707 Houston TX 1,767,071 74% CMCSA 821,646 46% T 720,410 41% 2,373,700
12 Seattle, WA 1,668,675 94% CMCSA 1,114,736 67% CTL 236,477 14% 1,766,07013 Tampa, FL 1,586,867 85% CHTR 938,845 59% FTR 461,972 29% 1,859,82014 Detroit, MI 1,507,757 82% CMCSA 736,664 49% T 399,911 27% 1,828,23018 Orlando, FL 1,368,828 92% CHTR 928,702 68% T 164,107 12% 1,489,71015 Minneapolis, MN 1,352,611 78% CMCSA 577,086 43% CTL 333,344 25% 1,723,21011 Phoenix, AZ 1,352,430 73% COX 753,372 56% CTL 441,098 33% 1,848,85019 Cleveland, OH 1,346,688 90% CHTR 694,054 52% T 332,739 25% 1,493,16017 Denver, CO 1,340,359 85% CMCSA 815,977 61% CTL 434,604 32% 1,576,09016 Miami, FL 1,284,464 77% CMCSA 741,984 58% T 452,165 35% 1,660,02020 Sacramento, CA 1,157,276 86% CMCSA 630,019 54% T 339,969 29% 1,349,99022 Portland, OR 1,040,874 92% CMCSA 619,305 59% CTL 195,579 19% 1,136,32029 San Diego, CA 1,017,167 96% COX 560,453 55% T 262,286 26% 1,055,03025 Raleigh, NC 1,016,421 90% CHTR 670,090 66% CTL 133,645 13% 1,131,46023 Charlotte, NC 989,432 85% CHTR 613,271 62% T 214,646 22% 1,168,61026 Baltimore, MD 972,753 88% CMCSA 502,047 52% VZ 400,476 41% 1,099,890
48,815,277 87% 25,523,677 52% 14,199,078 29% 56,184,110
Source: SNL Kagan, Nielsen
CHTR Mobile Offering
• Expected to launch June 30 this year• MVNO on VZ Network• Pricing mirrors CMCSA offering
• CMCSA: Breakeven at MSD penetration of broadband base• Costs hit income statement expenses vs. capex
• Goal: Reduce churn for broadband customers…not profit maximizer• Telenet (Belgium) as model?
• Announced Mobile Operating Platform with CMCSA in April 2018• Now: Focused on design/development backend
systems…but could be start of larger partnership?• Enhances offering in enterprise business market• Possible Wifi sharing agreement Xfinity/CMCSA? • Joint bid for mobile assets?• …or CMCSA too distracted? 33
CHTR Mobile
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Unlimited Per Gig2017
EBITDA Margin
3 Year Avg EBITDA Margin
AT&T1 $120 $20.00 39.4% 39.0%
Verizon2 $130$13.13-$21.25 44.1% 43.5%
Tmobile3, 4 $120 x 27.6% 26.7%Sprint5, 6 $100 $8.13 30.9% 25.2%
CHTR/CMCSA Mobile7 $90 $12.00 40.3% 40.4%
Can CMCSA/CHTR build scale on MVNO? Cost savings are
real…but inertia is powerful
All plans are pre-tax unless otherwise noted and are quoted for 2 lines and assume auto pay; per GB based upon data offering available (i.e., some offer 4GB, others 5G, others 8G)1 Per GB=$100 for 5G2 Per GB=$85 for 4G or $105 for 8G3 Receive $10.99 Netflix subscription per month taking unlimited down to $109 - taxes are included. Including the value of each, the price would be approximately $1004 Tmobile would not initially sell per gig; when we asked on CMCSA pricing, they offered us two lines for $100 at 2G per line or $25 per G5 The "unlimited" plan covers 23G of data6 Per GB=$65 for 4G; If a customer goes beyond 4G, he/she can purchase 1G for $15. Sprint fiscal year ends 03/317 CMCSA margins are for its cable business
2018 Harris Poll: Cable Hatred Extends Beyond Investors…Issue for Attracting Mobile Subs
RQ measures how companies are perceived in modern culture
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Good News: CHTR increased 6 slots since 2015
Bad News: They are 86/100
CHTR: Rolling LBO• 2-4% Top-line Growth
• ~100 bp internet penetration expansion• 3-4%+ annual video losses…costs per sub HSD-MSD• HSD Commercial Growth (14% revenue in 2017)
• ~7-8% EBITDA Growth • Margin expands to CMCSA levels by 2020 (pre-wireless – 50 bp drag
from wireless 18-20)• Leverage on programming (assuming higher video
disconnects)2020+…higher topline/less margin if disconnects less• 40%+ Free cash flow per share growth
• $30+ FCF Per share 2020…materially higher 2021+ as capex drops/wireless drag lessens/leverage programming
• Capex declines to CMCSA levels• 4-4.5x Leverage• Limited cash taxes
• Merger progress• Fully digitized footprint yearend (80/40% TWC/BH Q1 18)• 1G by year end (45% Q1 18)• Packaging complete 2019 (55% Q1 18)
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Cable Comps: Programming Costs
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2012 2013 2014 2015 2016 2017 2018E 2019E 2020ETWC (Resi/Com) 22.3% 22.5% 22.9% 24.0%CHTR (Resi/Com) 24.5% 26.3% 27.0% 27.5% 24.0% 25.5% 26.0% 26.3% 25.6%CMCSA 21.2% 21.8% 22.2% 22.4% 23.1% 24.6%CVC 25.6% 27.6% 28.2% 29.1% 34.2% 34.2%Suddenlink 29.0% 28.5%
2012 2013 2014 2015 2016 2017 2018E 2019E 2020ETWC (Resi/Com) $32.75 $35.14 $38.92 $43.07
CHTR (Resi/Com) $38.66 $42.08 $47.24 $50.93 $46.23 $51.59 $56.23 $60.73 $63.77
CMCSA(Resi/Com) $30.59 $33.42 $36.40 $39.18 $43.01 $47.95
CVC $39.95 $44.98 $49.54 $54.83 $76.43 $79.32
Suddenlink $55.02 $58.80
Pro-Forma CHTR/TWC shown in 2016/2017Programming costs on residential video basis for CVC/Suddenlink versus residential and commercial for others
Cable Comps: EBITDA Metrics Converge
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EBITDA/Revenue2012 2013 2014 2015 2016 2017 2018E 2019E 2020E
TWC 36.6% 36.1% 36.1% 34.3%CHTR (Pre-Wireless) 33.6% 35.0% 35.0% 34.9% 36.1% 36.8% 37.6% 38.2% 39.7%CMCSA 41.0% 41.1% 41.0% 40.6% 40.2% 40.3%CVC 32.8% 31.2% 31.7% 30.3% 33.4% 41.3%Suddenlink 44.9% 47.1%
EBITDA/Homes Passed2012 2013 2014 2015 2016 2017 2018E 2019E 2020E
TWC $264.65 $268.42 $272.68 $264.99CHTR (Pre/Wireless) $217.78 $223.81 $249.81 $266.90 $296.45 $308.26 $326.44 $341.04 $365.40 CMCSA $307.57 $321.59 $333.59 $344.87 $358.77 $372.71CVC $363.20 $347.45 $363.80 $349.10 $430.98 $535.23Suddenlink $341.70 $365.52
ARPU (Average Customers, Includes Commercial - Total Revenue)12 Months Ended
2012 2013 2014 2015 2016 2017 2018E 2019E 2020ETWC $119.82 $121.89 $125.87 $127.08
CHTR $126.53 $120.32 $123.84 $125.09 $130.14 $129.77 $130.91 $131.08 $133.03
CMCSA $125.46 $131.22 $137.04 $142.86 $148.18 $151.11
CVC $140.81 $144.80 $152.96 $156.11 $175.33 $176.40
Suddenlink $123.86 $126.85
Pro-Forma CHTR/TWC shown in 2016/2017
Cable Comps: Capex Metrics Converge
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Capex/Revenue2012 2013 2014 2015 2016 2017 2018E 2019E 2020E
TWC 14.5% 14.5% 18.0% 18.8%CHTR 21.8% 22.4% 24.4% 18.9% 18.9% 20.9% 19.5% 16.0% 15.0%CMCSA 12.4% 12.9% 13.9% 15.0% 15.2% 15.1%CVC (Resi cable only) 15.5% 14.5% 12.9% 11.8% 10.4% 10.9%Suddenlink 13.7% 12.0%
Capex/Homes Passed2012 2013 2014 2015 2016 2017 2018E 2019E 2020E
TWC (Resi/Com) $104.69 $107.57 $135.78 $144.77CHTR $141.06 $142.91 $173.93 $144.18 $154.64 $174.89 $169.34 $145.69 $142.03CMCSA $93.11 $100.99 $113.44 $127.54 $135.52 $140.00CVC $171.71 $161.13 $147.52 $135.57 $134.11 $140.88 Suddenlink $104.10 $93.28
Pro-Forma CHTR/TWC shown in 2016/2017
Cable Comps: Penetration Rates
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Pro-Forma CHTR/TWC shown in 2016/2017Penetration rates are on residential basis for CVC/Suddenlink versus residential and commercial for CMCSA, TWC< legacy CHTR, and pro-forma CHTRCMCSA 2017 residential video, internet and phone penetration rates are 37%, 42% and 18% respectively.
Video Penetration2012 2013 2014 2015 2016 2017 2018E 2019E 2020E
TWC (Resi/Com) 41% 38% 36% 36%CHTR (Resi/Com) 35% 34% 34% 35% 35% 34% 33% 32% 30%CMCSA (Resi/Com) 43% 42% 41% 40% 40% 39%CVC 58% 56% 53% 51% 47% 46%Suddenlink 34% 32% 30%
Internet Penetration2012 2013 2014 2015 2016 2017 2018E 2019E 2020E
TWC (Resi/Com) 39% 39% 40% 43%CHTR (Resi/Com) 34% 37% 41% 45% 46% 48% 50% 52% 53%CMCSA (Resi/Com) 36% 38% 40% 42% 44% 45%CVC 55% 55% 55% 50% 51% 52%Suddenlink 38% 39% 40%
Voice Penetration2012 2013 2014 2015 2016 2017 2018E 2019E 2020E
TWC (Resi/Com) 18% 17% 18% 22%CHTR 19% 20% 22% 23% 23% 23% 22% 22% 22%CMCSA (Resi/Com) 19% 20% 21% 21% 21% 20%CVC 45% 45% 44% 40% 38% 38%TWC (Resi/Com) 18% 17% 18% 22%
Proxy vs. RealityDelay in merger closing
makes it helpful to compare with one year lag
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…CHTR forecast likely underestimated degree of cord cutting but (all else equal) would likely mean
lower expenses/capex
CHTR Forecasts - Pro-Forma 2015E 2016E 2017E 2018E 2019E
Revenue $37,507 $39,503 $42,209 $45,690 $49,283 EBITDA $13,328 $14,556 $15,974 $17,811 $19,541 EBITDA Margin 36% 37% 38% 39% 40%Capex ($6,516) ($6,463) ($6,916) ($6,479) ($5,829)Capex/Revenue 17.4% 16.4% 16.4% 14.2% 11.8%
CHTR Actual/Our Forecast 2015 2016 2017 2018E 2019ERevenue $37,394 $40,023 $41,581 $43,716 $45,482 EBITDA (Pre-Wireless) $13,004 $14,464 $15,301 $16,434 $17,357 EBITDA Margin 35% 36% 37% 37.6% 38.2%Capex ($6,969) ($7,545) ($8,681) ($8,525) ($7,277)Capex/Revenue 19% 19% 21% 20% 16%
CHTR: Debt
• Leverage of 4.5x as of 03/31/18• Weighted average interest rate of 5.4% as of 03/31/18
• Vs. expected EBITDA growth of ~7-8%• “If growth rate faster…value infinite”
• Weighted average tenor of ~10 years• Even assuming incremental annual borrowings of
$4-5B over next five years at higher rates, not a large increase in total funding costs
• Recession resistant business• How big a drag should debt cause on leveraged cash
flow valuations?
42
Tax Discussion
• $10.9 Billion NOL• From CHTR disclosure, company doesn’t expect to pay cash taxes until
2021 at earliest…• We would take over and suspect many underestimating how powerful tax
reform is for CHTR FCF• Of current $10.5B of depreciation, roughly $3B (and declining) is
related to merger and therefore not-deductible• $7-8 depreciation + $7-$9 billion capex=$14-$15B shield BEFORE
interest deduction ($3.5-$4.5B)…on EBITDA stream expected to reach ~$20-$21 billion by 2021
• Large portion of CHTR income shielded before lower tax rate and NOLs…
• Possible no taxes beyond 2023 (2021 guidance)• Caveat: Do not know the exact tax vs. GAAP depreciation schedule…so we
show some cash burden in 2022 • If CHTR maintains 4-4.5x leverage, FCF per share likely much higher than
many expect43
CHTR Multiple?
• Cable Private Market Multiple Higher Than Public…4 parties approached CHTR about deal in 2017
• Investors have historically used EV/EBITDA metrics to value cable companies…
• But…Lower interest rates/capex/tax rates/buybacks have increased leveraged free cash flow per share…
44
Adjusted Price/FCF EV/EBITDA
2018E 2019E 2020E 2018E 2019E 2020ECMCSA 12.3x 10.9x 9.3x 6.8x 6.3x 5.7xDISH 0.5x 0.9x 0.8x 4.7x 5.0x 5.2xLBTYA 12.6x 13.5x 11.5x 7.7x 7.3x 6.9xCHTR 19.0x 12.2x 8.7x 9.1x 8.7x 8.0xATUS NA NA NA 7.7x 7.3x 7.0xCABO NA NA NA 9.9x 10.0x 9.7x
DISCA 7.5x 5.5x 5.0x 8.4x 6.7x 6.3x
Source: Internal models (CHTR), Bloomberg, MS Research
CHTR Multiple? Discovery Dilemma
• DISCK currently trades at ~6x 2019E EV/EBITDA and 5-6x 2019E free cash flow per share…
• But DISCA doesn’t have broadband AND has substantial exposure to cord cutting/warrants much lower multiple?• Yes, so if DISCA ~20% FCF yield…CHTR 10%? • …and DISCK investment grade
• Possible CHTR multiple anchored to hated media sector…• Who is incremental buyer of CHTR stock?…CHTR
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LRBRDK/GLIBA: CHTR at Discount
• Increased IRR buying first/second derivative LBRKD/GLIBA• DTV (LBRDK)• SIRI (LSXMA)• TRIP (LTRPA)…non-discount
• Concentrated effort to get NAV• Long history narrowing/eliminating discounts
(LBRDK/DTV)• Reps/Warranties LBRDK’s CHTR Shares
• Likely GLIBA/LBRDK combine• Timing likely 2 years but could happen sooner• CHTR will buyback lots of shares
• Basis risk/Widening Discount Possible• Larger discount GCI vs. Pure Play LBRDK• GCI basis risk: GCI + TREE
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LRBRDK:
47
Charter 54.07 $295.61 $15,984Cash $78 Cash from options $116
Total Assets $16,178Margin Loans ($497)NAV $15,681
LBRDA/LBRDK Outstanding 184.1
NAV Per Share $85.16LBRDK Current Price $76.50Current % of NAV 89.8%
LBRDK Typical Discount: ~7-12%
GLIBA: Larger Discount…More Variables
• GCI Communications• Alaskan quad-play cable operator: ~$300mm EBITDA,
~125K data subs, ~219,000 wireless subs• Allowed asset backed stock
• GCI Considerations• Recession now…rebound in 2019/2020? (Oil)• Universal Service Fund/Urban High Cost Support: $10-
$13mm headwind on ~$300mm EBITDA• Cost savings (Billing systems/network
improvement/procurement)• Capex reductions
• Does it move needle for CHTR?• GM: Asking for premium for CHTR shares…settle for NAV• What multiple for GCI?• Large equipment savings…Rate card savings likely less than
people think ($51-$52)48
GLIBA:
49
GCI $2,807TREE 3.22 $248.25 $799LBRDK 42.68 $76.50 $3,265CHTR Exchangeable (QRTEA Reatribution) 2.20 $295.61 $650CHTR Exchangeable (June 2018) 1.12 $295.61 $331CHTR (Owned) 2.03 $295.61 $600Other Assets (evite/giggle) $40Exchangeable cash $41503/31/18 Cash $403Total Cash $818
Asset Value $9,311
CHTR Exchangeable (QRTEA Reatribution) -$280.00CHTR Exchangeable (June 2018) -$331.10Acquired GCI Net Debt -$1,478Other DebtLBRDK Margin Loan -$1,000Tax Liability $0Preferred Shares -$183
Net Value $6,040
Shares Outstanding 109.8
NAV $55.03GLIBA Price $44.77Price/NAV 81.4%
GLIBA: Larger discount to
LBRDK warranted
given moving pieces
GLIBA:
50
GLIBA: More work…but
possibly buying CHTR at implied
~$220
(Equal Weight Discount)Implied LBRDK Price Per GLIBA Share $24.20 Number of shares of GLIBA 109.8Value of LBRDK $2,656 Per Share Implied Value LBRDK $62.24 -Cash LBRDK Share ($0.42)-True Position LBRDK Share $0.00 +Debt LBRDK Share $2.70 Implied CHTR Price Per LBRDK Share $64.51 Number of LBRDK Shares 184.1 Implied Value of CHTR Stake $11,879 Number of CHTR Shares Held by LBRDK 54.1 Value of CHTR per LBRDK Share $219.69
Current LBRDK Price $76.50 Current CHTR Price $295.61
Implied Discount to LBRDK Price 18.6%Implied Discount to CHTR Price 25.7%
CHTR IRRs: CHTR Purchase
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2017 2018 2019 2020 2021 2022
EBITDA (post wireless) $15,301 $16,334 $16,957 $18,502 $20,109 $21,637 Assumed Multiple 9.0x 9.0x 9.0x 9.0x 9.0x 9.0xEnterprise Value $137,709 $147,003 $152,614 $166,515 $180,977 $194,733
Implied EV/Customer $5,166 $5,196 $5,547 $5,902 $6,216
Less Net Debt $68,382 $73,382 $76,982 $81,482 $85,982 $90,482 Equity Value $69,327 $73,621 $75,632 $85,033 $94,995 $104,251 Shares Outstanding (avg) 297 260 234 209 184 161
Value Per Share $234 $283 $323 $407 $517 $647
Free Cash Flow Per Share $10.81 $15.50 $24.11 $33.77 $46.53 $54.22 Implied Multiple Per Share 21.6x 18.3x 13.4x 12.1x 11.1x 11.9xImplied IRR -8% 6% 14% 17% 19%CHTR Price $295.0Leverage 4.5x 4.5x 4.4x 4.3x 4.2x
We assume CHTR buys back shares at 20% CAGR increase in stock price…if pessimism remains,
share count will be meaningfully lower
CHTR IRRs: LBRDK/GLIBA Purchase
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Assumes midpoint of
LBRDK (-10%) and GLIBA
(-20%) discounts
2017 2018 2019 2020 2021 2022
EBITDA (post wireless) $15,301 $16,334 $16,957 $18,502 $20,109 $21,637 Assumed Multiple 9.0x 9.0x 9.0x 9.0x 9.0x 9.0xEnterprise Value $137,709 $147,003 $152,614 $166,515 $180,977 $194,733
Implied EV/Customer $5,166 $5,196 $5,547 $5,902 $6,216
Less Net Debt $68,382 $73,382 $76,982 $81,482 $85,982 $90,482 Equity Value $69,327 $73,621 $75,632 $85,033 $94,995 $104,251
Shares Outstanding (avg) 296.7 260.3 233.8 208.7 183.6 161.1
Value Per Share $234 $283 $323 $407 $517 $647
Free Cash Flow Per Share $10.81 $15.50 $24.11 $33.77 $46.53 $54.22 Implied Multiple Per Share 21.6x 18.3x 13.4x 12.1x 11.1x 11.9xImplied IRR 27% 18% 21% 23% 23%CHTR Price $251 Leverage 4.5x 4.5x 4.4x 4.3x 4.2x
Rutledge Compensation Summary
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2016 Grant gives 700 million reasons to turn down $450+ offer?
Option/Shares Strike Value at $600 Value at $290 Description
325,512 $289.76 $101 $0 2016 Option325,512 $364.97 $77 $0 2016 Option325,512 $455.66 $47 $0 2016 Option325,512 $496.58 $34 $0 2016 Option325,512 $564.04 $12 $0 2016 Option
1,627,560 $270 $0 Total 2016 Options
60,280 $455.66 $36 $0 2016 RSU60,280 $496.58 $36 $0 2016 RSU60,280 $564.04 $36 $0 2016 RSU
180,840 $109 $0 Total RSU
1,808,400 $378 $0 2016 Grant Value
668,378 $408 $128 Earlier Grants
265,257 $159 $77 Underlying Shares
$946 $205 Total Value
Cable Comps: EV/Customer
Enterprise Value/Customer
Current CHTR $5,384CHTR at 9x 2020E $5,547
Brighthouse (CHTR Purchase) $4,100
Time Warner Cable (CHTR Purchase) $5,200
Suddenlink (Altice Purchase) $6,067
Cablevision (Altice Purchase) $5,679
Ziggo (LGI Purchase) $5,074
Verizon FiOS Rollout $4,000
Implied Lightning UK Rollout $2,600
Low interest rates have inflated acquisition prices…but
Getting permits/construction crews/digging streets and dealing with
upset residents is very expensive and will not get easier over time….
VZ, S, ATUS and 1 mystery party approached CHTR in 2017…If sold, it won’t
be at 9x EBITDA
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CHTR Risks:
• New Technology• If not 5G, something else (Bezo’s Rockets, etc.)
• Regulatory Issues • Some 5G tension healthy…avoid congressional committees• New presidential administration less friendly to cable
• Breakdown in Nielsen’s Law• Fast enough longer than anticipated• Less recession resiliency?
• No slowdown in programming costs per sub• Mark-to-Market
• Leveraged investment…6x possible?• “Risk off” Underperformance• Widening spreads on LBRDK/GLIBA
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Contact Information
Patrick Brennan, CFABrennan Asset Management, LLC
W W W. B R E N N A N V A L U E . C O M
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Cord Cutting Surveys
NFLX common among cable subs…and larger (and lower
churning) amount of new growth
57
MS 2018 8th Annual Streaming Video Survey (3,100 Adults 18+)
