Liberty Deal Looks Favorable for Charter as Malone Simplifies His Empire -- Barrons.com

Dow Jones11-14 00:17

Andrew Bary

Charter Communications' long-awaited deal to buy Liberty Broadband in an all-stock transaction looks like a win for Charter investors.

Charter effectively will buy Liberty Broadband, whose main asset is a roughly 26% stake in the country's second-largest cable company, at a discount of more than 15% to its net asset value, Barron's estimates.

The Charter-friendly deal bears the imprint of John Malone, 83, who was the controlling shareholder of Liberty Broadband and thus the most influential voice at Charter. Malone has long invested in the cable business dating back to the 1970s.

The cable company had the leverage in the negotiations because there was no other feasible buyer for Liberty Broadband.

Charter investors like the transaction, while Liberty Broadband holders are registering disappointment. Charter stock is up 4.3% at $408.66 Wednesday while Liberty Broadband's nonvoting class shares, which trade under the ticker LBRDK, are down 4.6% at $93.18.

So far this year, Charter is up 3% while Liberty Broadband is 12% higher as the deep discount on Liberty Broadband stocks has narrowed.

The transaction, along with an unrelated one announced Wednesday morning involving Liberty Live Group, a tracking stock for Liberty Media, continues the simplification process of Malone's media empire which also included the merger of Liberty Sirius XM Holdings with Sirius XM Holdings in September. Liberty Live Nation, whose key asset is a roughly 30% stake in Live Nation Entertainment, will transform into a regular corporation from a tracking stock.

Barron's wrote about the likelihood of these deals in a cover article on Malone this past summer. Wall Street has been expecting a Charter/Liberty Broadband deal with the timing and terms of such a transaction being the key questions.

"This is the culmination of twenty years of M&A/financial engineering" at Malone-related entities, said Chris Marangi, a portfolio manager at Gamco, Mario Gabelli's investment firm. He notes that "Malone has been more aggressive in simplifying/surfacing (value) over the last year."

The Charter/Liberty deal is complicated because Charter will acquire Liberty Broadband in an all-stock transaction with Liberty issuing 0.236 share for each Liberty Broadband share. Prior to the closing, Liberty Broadband will spin off an Alaskan cable business, GCI, to its shareholders in a deal that will be taxable to Liberty Broadband holders.

Here's the current math on the deal: Charter would issue 0.236 shares now worth about $94 a share and Liberty Broadband holders would retain the GCI, the Alaskan cable business. That business could be worth $2.5 billion based on analyst estimates less debt of around $1.1 billion. That totals about $1 billion before any taxes, or about $10 per Liberty Broadband share, we estimate. Taxes might be a few dollars per share, one analyst tells Barron's.

The total package could be worth about $104 a share, we estimate. Liberty Broadband may be trading at a 10% discount to that value because the deal isn't expected to close until June 30, 2027 -- a very long period until a closing date -- although an earlier date is possible. It's unclear why the closing date is more than two years away.

Why the disappointment on the Liberty Broadband side? After Charter made an overture to Liberty earlier this year, Liberty Broadband made a counterproposal to Charter in September in which Liberty sought to get 0.29 shares of Charter stock for the entire company. Charter apparently didn't want GCI, perhaps due to antitrust concerns. Liberty Broadband holders probably would have preferred a clean deal for the entire company.

Charter is getting a good deal. It will retire the 45.6 million shares of Charter held by Liberty Broadband and issue about 34 million to Liberty Broadband holders, resulting in a net reduction of 11.5 million shares. It will take on Liberty Broadband's debt unrelated to GCI of about $2.6 billion, part of which could be paid off prior to the deal.

Based on our math, Charter is picking up Liberty Broadband at a discount of between 15% and 20% to its net asset value based on Tuesday's closing prices.

Some Liberty Broadband holders had been hoping for something closer to parity, but Malone appears to have accepted the best deal he could get.

Write to Andrew Bary at andrew.bary@barrons.com

This content was created by Barron's, which is operated by Dow Jones & Co. Barron's is published independently from Dow Jones Newswires and The Wall Street Journal.

 

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November 13, 2024 11:17 ET (16:17 GMT)

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