Description

Business Description: Liberty Broadband is a public company created by Malone to fund his investments in Charter Communications (“CHTR”). ~99% of LBDRK’s NAV is CHTR stock. LBDRK controls ~23% of the economic interest and ~25% of the voting interest in Charter.

Thesis:

1.       We believe that Charter is an excellent business and investment.

Through continued execution from best-in-class management running advantaged infrastructure assets, CHTR can generate ~$32 in 2020 fully-taxed FCF per share.

~$32 FCF/share * 16x P/FCF equals ~$510 stock (+50%) by year-end 2019 (~25% IRR).

Our expectations for ~20% FCF/share growth per year is based on:

·         Revenue growth of ~5% (~3% volume, ~2% price), supported by speed upgrades and DOCSIS 3.1 roll-out

·         EBITDA growth of ~7-8% driven by margin expansion from deal synergies and operating improvements

·         Capex declines to low-mid teens as percent of sales

·         Constant leverage at 4.5x Net Debt/EBITDA

·         Ongoing share repurchases

See MarAzul’s write-up from November 2017 for additional detail on the CHTR investment thesis.

2.        We believe that Liberty Broadband is a superior way to invest in Charter.

LBDRK trades at ~11% discount to NAV value. Since inception, the average discount is ~10%. The trough discount was ~17% in February 2016 and the peak discount was ~4%.

Closing the discount to NAV provides an incremental ~12% upside. With CHTR at ~$510 and zero discount to NAV, implies LBDRK trades at ~$145 (+70% upside) by-year end 2019 (~33% IRR).

Over the next 2-years, we believe that there are two catalysts to close the discount to NAV:

·         Stock-for-Stock Exchange

o   A stock-for-stock transaction where CHTR swaps stock with Liberty Broadband at ~0% discount to NAV.

o   The exchange allows Malone to defer his gains and allows CHTR to clean up its share structure and recoup Broadband’s governance power, which gives it the right to have 3 board members.

o   The contemplated structure is similar to the Liberty Entertainment-DTV transaction in 2009.

§  In this transaction, Malone’s Liberty Entertainment, which owned 48% of the voting power and 54% economic interest in DirecTV, was acquired by DTV in a stock-for-stock exchange at a ~2% premium to NAV.

o   We believe that both Malone and Charter would want this to happen:

§  Malone would clearly want to make this exchange happen because he makes a lot of money as the discount to NAV disappears.

§  Charter would likely want to make this happen as well, first to simplify the structure, and second because it’s a good deal for them to swap shares with extra voting and board rights for regular shares at zero premium.

§  We believe it is likely that CHTR will do it if Malone wants it to happen.

·         Rutledge, as well as CHTR’s COO and CFO, are going to get wildly rich from CHTR, in large part thanks to Malone who gave them massive credibility as an investor, enabling them to acquire TWC and authorizing their giant pay packages.

·         We do not believe that CHTR will go out of their way to deny Malone the discount closing conversion when they have little to lose by letting it occur.

·         Acquisition

o   An acquisition of CHTR by a third party.

o   We believe that in an acquisition by a third party, there will likely be simultaneous acquisitions of Liberty Broadband and GCI Liberty to clean up the structure and because Malone will likely insist on it.

Risks:

·         CHTR:

o   Slowing industry broadband growth.

o   5G fixed broadband competition.

·         LBDRK:

o   Liberty Broadband losing its tax-free spin through Skyhook insolvency or other tax-related issues.

o   CHTR does not swap shares with Liberty Broadband.

o   CHTR acquirer does not pursue LBDRK.

We and our affiliates are long Liberty Broadband (LBDRK) and may buy additional shares or sell some or all of our securities, at any time. We have no obligation to inform anybody of any changes in our views of LBDRK. This is not a recommendation to buy or sell securities. Our research should not be taken for certainty. Please conduct your own research and reach your own conclusion.

Catalyst

stock for stock exhange, acquistion, or narrowing of discount