Back when I last switched jobs, one of my favorite things to do before I interviewed at a firm, was try and reverse engineer their positions. I would sometimes throw a bullet or two on this onto my resume, but would usually at least be able to sprinkle in a couple very relevant questions at the end of the interview. I always really enjoyed doing this, and so as I start to work back towards investing, I figured this was a fun exercise to get into, as well as a great way to harvest new ideas.
One of my favorite managers of all time is Seth Klarman. He is a logical progression of Graham / Buffet, but wrapped up in an pragmatic and asset agnostic fund structure. An interview I found online a couple years ago was also one of the catalysts of my leaving my systematic fund to find a path to a shop doing something more concentrated, idiosyncratic, and asymmetrical. Specifically, the thoughts he shared on price and margin of safety, and their impact on risk, mirrored a lot of my thoughts at the time of options trading. Before I watched that interview for the first time, I hadn’t made the connection between deep value and long vol positions.
Because 13F’s are inherently flawed and backward looking, I wanted to make sure that I am focusing on (i) names that haven’t seen their catalyst yet (e.g., haven’t appreciated significantly in price since the end of the reporting period), and (ii) names that are large enough in the managers portfolio that they have some conviction in the idea.
For Baupost’s most recent 13F filing, I found 5 stocks in particular that I thought may meet this criteria: Liberty Global (LBTYK), Fox Corporation (FOXA), ViaSat (SVAT), Pershing Square Tontine Holdings (PSTH), ViacomCBS (VIAC).
Liberty Global (LBTYK)
I remember vaguely looking at a John Malone company a few years ago as they went through some transition, but it has been some time. As I catch up on reading about their last couple years, it seems that Liberty has burnt both Value investors as well as special sits investors quite a few times. That being said, a recent Value Investors Club post from lays out what I believe to be the math behind Baupost’s interest in Liberty.
Liberty’s operations comprise businesses that provide residential and B2B communications services in (i) the United Kingdom (U.K.) and Ireland through Virgin Media, a wholly-owned subsidiary, (ii) Belgium through Telenet, a 60.8%-owned subsidiary and (iii) Switzerland, Poland and Slovakia through various wholly-owned subsidiaries that we collectively refer to as “UPC Holding.” They also own a 50% noncontrolling interest in a 50:50 JV between Vodafone and Liberty which provides residential and B2B communication services in the Netherlands.
The VIC post lays out the following math: at $22 per share, and 594M shares outstanding, the market cap of ends up at around $13.1B (their math, was as of august). Liberty currently has ~$4.8B cash (their math), various non-core investments of $1.6B (their math), a controlling stake in Telenet worth $2.7B (their math, which they claim could potentially be undervalued at >10% FCF yield), and a 50% JV interest in VodafoneZiggo worth ~$3.2B (their math). That comes out to ~$20 per share (again, their math), which means equity holders are paying $2 per share for the equity value of their holdings in the UK, Switzerland, Poland, and Slovakia, though they throw of substantial FCF to the parent.
I’ll go through these assertions one by one to independently verify.
Cash and other current assets
Looking at their most recent 10-Q, it looks like the cash & eqvs is now $3.8B, but short term assets (which appear to be mostly bond securities) has now ballooned to $2.5B. They also have about ~$0.5B in net trade receivables, and $0.2B in net derivative assets. In total, tangible current assets sit at approximately ~$7B.
Telenet & VodafoneZiggo
Per Telenet’s recent investor relation report, there are 113.8M shares outstanding. With a current market price of €34, that put’s the current market cap at $3.9B, and Liberty’s 60.8% ownership share value of $2.8B (note: I translated to dollars there).
The equity stake in the VodafoneZiggo JV is listed on the most recent 10-Q with a carrying value of $3.2B.
Virgin Media / O2
On May 7th of this year (2020), Liberty entered and agreement with Telefonica to form a 50/50 JV with their UK subsidiary. In 2019, the two generated a combined $4.7B in OCF, and over $2B in FCF pre-interest. Reported target synergies are $620M, but as a I have seem time and time again, these synergies are often aggressive and difficult to actually implement. From prior experience, I’m guessing they is they can get ~2/3 of those, or an additional ~$410M in CF. Therefore, on a post synergy basis, OCF is ~$5.1B.
At EoY 2019, AT&T produced ~$48.6B in OCF. They had $163B in LTD, and a market cap of $297B. They therefore had a EV / OCF mulitple of ~9.8x. Other companies that I’ve spot checked have had similar multiples. But if we stay conservative, and assume an 8.5x multiple to OCF, based on VM02’s $21.8B in Liabilities, Liberties equity share could be worth ~$10.7B.
On top of that, Liberty is expecting to receive a net $1.8B from recapitalizing Virgin Media’s Ireland business, bringing the total deal value to $12.5B
UPC Holdings
After a failed divestiture of UPC Switzerland to Sunrise, Liberty ended up buying out the company so it could force the merger through. This will cost Liberty ~$3.7B in cash, but the combined entity will be far more valuable.
Sunrise did ~$685M in EBITDA in ’19, while UPC Switzerland did ~$630M. Synergies were listed at $300M, and we will once again apply a 1/3 haircut for feasibility. Because this is going to be added to the UPC reporting segment, we will also add in the $215M from Poland and Solvakia. So in sum the segments did $1.5B in EBITDA. Sunrise was taken over at ~8.15 EV to EBITDA, giving an implied EV for the combined group $14.1B.
Liberty is raising $3.5B in notes for both part of the acquisition price, as well as a debt recap for sunrise. Additionally, there is are a $1.3B, a $1.2B, and a $580M on the books for the UPC segment as is. So in total, that gives this segment a post merger capitalized equity value of $3.8B.
Sub-total and what’s left
So far we have (i) $7B in tangible current assets, (ii) a $2.8B share of Telenet, (iii) a $3.2B share of VodafoneZiggo, (iv) a ~$12.5B share of the VM02 joint venture, and (v) $3.8B UPC segment for a sub-total asset value of $29.3B in assets. Notably, this doesn’t include Virgin Media’s Ireland segment.
Because we are using a capitalization methodology, we need to capitalize the ~$171M in “OIBDA” eaten by the central office, as well as deduct a ~$950B loan for the ITV Collar which we have yet to alocate, but after those slight adjustments, we sitll have a justified market cap of $27B, or an implied share price of ~$46 per share.
As these mergers unfold over the next ~year, there is a real catalyst forcing the share increases. Unfortunately, there isn’t an upcoming catalyst to be able to trade around, but this does make sense as a long term investment thesis.
There are definitely some risks to this stock, but overall it seems like a fairly large margin of safety. Even if you were forced to write off half of these investments, you would still come out with a significant opportunity. I’ll probably dig around for a bear case tomorrow and then pull the trigger on this one.
Pershing Square Tontine Holdings (PSTH)
So I’ve been digging on this one for an hour and a bit and I can’t find much. It looks like there was some stock split a few months ago that they were likely targeting, but I can’t be sure and after the fact it doesn’t seem like a large enough catalyst to move it significantly.
Perhaps Klarman is bought into Ackman’s thoughts that there is some brilliant arb bringing tech stocks to market without an IPO? I can’t be sure. But I’m not following the logic on this one, so it’s a pass from me.
Viacom/CBS (VIACA)
This one is trickier. The Viacom/CBS merger which happened in December is just in cyclical decline. People are cutting cords, and it is hitting their advertising, affiliate, and licensing revenue. ~70% of their revenue comes from CBS, CW, and other cable networks (Nickelodeon, Commedy Central, MTV). All of those business lines are in trouble in the medium to long term. The world is just changing, and CBS has struggled to keep up where it counts.
That being said, Viacom/CBS has access to some of the most iconic entertainment brands ever. DC, Turner Classics, Showtime, Harry Potter… On top of that, think about all the land they own in CA, the CNET assets, other buildings and land in NYC.
To properly value this one would require a deep SOTP, and initial signs are pointing towards this being where Baupost is looking. That being said, I don’t have the time tonight to write another SOTP piece. I will follow up soon with additional thoughts (on both VIACA, and the others). Stay tuned.
