John Malone’s Liberty Media Corp (NASDAQ:LMCA) empire has been doing deals at a feverish pace lately, with a recent spinoff of its Starz programming network and the acquisition of a majority stake in Sirius XM Radio Inc (NASDAQ:SIRI). In its latest deal, the company’s founder returned to his roots with a $2.6 billion purchase of a major stake in regional cable provider Charter Communications, Inc. (NASDAQ:CHTR). So, should investors follow Mr. Malone into this cable giant?
Charter is the nation’s fourth largest cable operator, with four million subscribers in a hodgepodge of states that include Michigan, California, and Wisconsin. Since filing for Chapter 11 bankruptcy in 2009, the company has been controlled by three private equity firms, led by Apollo Management. Charter used the bankruptcy process to improve its highly-leveraged financial position and provide funding for its ongoing network upgrade activities.
In FY2012, Charter Communications, Inc. (NASDAQ:CHTR) produced marginally improved financial results, with increases in revenues and adjusted operating income of 4.2% and 0.7%, respectively, versus the prior year. The company’s sales benefited from a small increase in the total number of subscribers and a stable pricing environment for its products. While the number of cable subscribers fell 4%, due to competition from alternative programming choices, Charter offset those losses with increases in its internet and telephone segments.
Despite competition from online video networks and traditional telecommunications providers, Charter Communications, Inc. (NASDAQ:CHTR) has maintained its competitive position in its core markets. The company’s goal is to maximize the number of customers utilizing multiple services, as with its so-called triple-play value proposition, which includes cable, internet, and phone service. Charter Communications, Inc. (NASDAQ:CHTR) has been fairly successful at targeting these customers, with 65% of their subscribers currently opting for multiple services. Given the constantly rising cost of acquiring both programming content and subscribers, the company will increasingly be looking to upsell its existing customer base to generate future profit increases.
Despite a diminished role for cable companies in the current entertainment delivery ecosystem, Liberty obviously sees a solid potential return on its multi-billion purchase price. Liberty received a 27% stake in Charter Communications, Inc. (NASDAQ:CHTR) for its $2.6 billion investment, which valued the company at roughly an 8 EV/EBITDA multiple. The price was not overly expensive, given the large stake and a likely ability to control Charter’s future business and capital allocation decisions.
Liberty will likely follow the same script that it used in its pursuit of Sirius XM Radio Inc (NASDAQ:SIRI). After purchasing a major stake in the satellite radio operator, Liberty slowly acquired additional shares and exerted an increasing amount of control in the board room. While Sirius has been the beneficiary of a surging new vehicle market, its management also made some smart decisions, including the acquisition of talent and the merger with XM Radio in 2008.
In 2012, Sirius XM Radio Inc (NASDAQ:SIRI) enjoyed strong results and continued to leverage its relationship with the leading global automakers, ending the year with almost 24 million subscribers. For the period, the company generated increases in revenues and adjusted operating income of 12.8% and 20.6%, respectively, compared to the prior year. Sirius XM Radio Inc (NASDAQ:SIRI) benefited from a strong increase in new vehicle sales in the U.S., as well a bigger focus on the used vehicle market. In addition, the company achieved a higher operating margin due to its ability to spread its large fixed operating costs across a growing user base. Looking ahead, Sirius XM Radio Inc (NASDAQ:SIRI) expects growth in 2013 as the auto market continues to expand and the company uses its website to expand its services beyond the core auto segment.
Given John Malone’s investment track record, his moves are always worth a detailed review. While cable companies are losing video subscribers to newer platforms, like Netflix, Inc. (NASDAQ:NFLX) and Amazon.com, Inc. (NASDAQ:AMZN) Prime, they are gaining subscribers in the areas of internet and telephone service. However, their economic moats have been reduced due to technological advances, which mean that they will likely need to use less debt in the future. Charter is an interesting developing story, but Liberty provides better diversification through its controlling stakes in an assortment of diverse media businesses. Plus, investors get Malone and company’s management and capital allocation skills at a discounted price. Liberty is one to hold for the long term.
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