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Lessons from Liberty Media Investor Day

I always have an interest in learning more about strong cash generating business. It is even more worth it to come across a good summary of one distilling different kind of business.

Take an hour sit comfortably to acquire a perspective that can be applicable to various other business.

Hat Tip to Brooklyn Investor for providing such a great summary of the video cast and the slides (See here).

I thought I would highlight some of the points that stuck with me more, but before I go into them perhaps a good starting ground could be this article here and  this article here on John Malone and Liberty Global.

  • It is interesting to see how a media conglomerate consisting of different business coming together. This looks similar to many of the conglomerate we seen locally in Singapore with the main difference is that John Malone have proved in the past to be a capital allocator more interested in realizing assets intrinsic value rather than buy and failed to create more share holder value
  • They are under no illusion that the main play here is to generate free cash flow. For much business we talked about its EBIT or net profit where capital expenditure equals depreciation, the business metrics here is solely focus on how much free cash flow can be generated. Even the communication to potential investors is as such. How can free cash flow be increase, by more subscribers, by being cost conscious, explaining how future capex can go down due to the nature of industry
  • The delicate play of leverage, specifically net debt to EBITDA less than 4 times. Leveraging up with long term historically record low debt to acquire valuable assets. This would look very risky in my book last time, and still is, but it gives us a yardstick to judge future companies such as APTT, Cityspring, Rickmers, the REITS, China Merchant Pacific, Ezion how safe is their leverage to cash flow generation
  • A thorough disregard on dividends, since if you are John Malone and everyone including yourself think you are the better capital allocator, then capital should be allocated by you. Just like if you feel you are a better capital allocator compared to your parents, why give the majority as  dividends to them
  • A very detailed presentation of Sirius Radio. On first glance or first level thinking, I thought in today’s world of Pandora, Spotify, Rhapsody, where would there be a place for Satellite radio. It is a fundamental problem many suffered due to not being thorough enough in thinking. A better margins than competitors presented, and also the moat in exclusive content that OTT radio services cannot replicate coupled with drivers changing old cars to new cars ensures a strong cash flow. This essentially becomes the cash for a good  capital allocator  to perform their magic
  • Through Charter Communications we learn more about the cable broadband industry,  the tiered structure of content, application and pipe. The presentation presents how a problem can be turned around, but interestingly highlights the advantage when analog is migrated to  digital thus freeing up bandwidth
  • Gives me an insight to a segment that I am not familiar with, that is the live show industry, particularly new revenue channels that is not immediately obvious to me
  • Malone talks about the cable industry, that it is here to stay. But to gain advantage over the content providers they have to have scale to acquire content that eventually provides better margins
  • Malone also highlights that eventually broadband + WIFI, deployed like my vested HKT Trust in Hong Kong, would be a bigger thing than mobile networks we use nowadays. This seems a big thing for him to say
  • Malone also says capex on pure mobile telecom operators are unsustainable if tiered or volume based pricing is not implemented
  • On the question of whether Liberty Media is undervalued or overvalued, Malone provides an insight of the cost he borrowed at (low) and the predictability of leveraged cash flow such that he can afford to lengthen it. The end result is that the intrinsic value he feels the company should be at is much higher
  • Brooklyn Investor made a very interesting point on the high EV/EBITDA of Sirius:  “People look at EV/EBITDA and see something like 24x or whatever it was. And then look at Cablevision at 8x. Yes, SIRI looks expensive, but according to the slides (I should’ve pasted that in my original post), Free cash/EBITDA at SIRI is 77% versus 23% at Cablevision. So SIRI generates 3 times more free cash per EBITDA than Cablevision. So if you divide the 24x by 3, you get 8x (sort of a backward way of comparing EV/FCF). So in that sense, SIRI is not actually that expensive at all. Don’t forget, Malone says that he has "always been a leveraged free cash flow investor". And on a free cash flow basis, SIRI doesn’t look expensive at all.”
  • The main highlight is how Malone explains their fight versus Netflix and the so call App OTT players. Many folks will think Netflix cannot die, they are the future and that eventually cable becomes a dumb pipe. The fact is that you will never be able to watch HD videos comfortably on mobile networks due to tiered or volume pricing. You will need this dumb utility
  • The Netflix can produce original content exclusively to attract subscribers, the content providers now do not need to depend on the pipes like Starhub and Singtel, but for a APP OTT player they will need to ensure they got enough subscribers to create that content profitably. Not all APP OTT can take that. Only Netflix can or a big player that dares to bleed out initially . Netflix is very strong there. And Netflix pioneer the no-pilot-immediately-produce-full-season deal. The content providers love them. And they show the full season at once
  • Malone says Netflix is unsustainable. He argues that the cable operators didn’t work like they used to when they were setting standards and if they achieve scale, there could be some reasonable and unreasonable pressure on OTT players. We suspect that they can throttle specific OTT unless a tariff is being paid.  Netflix is low margin. This could impact

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