John Malone M&A cleanup costs minority investors

Liberty Broadband

15/11/2024 13:00

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By Jonathan Guilford
       NEW YORK, Nov 14 (Reuters Breakingviews) - If you sup’
with the devil, you should have a long spoon. Investors in
Liberty Broadband  LBRDA.O  have re-learned the old adage, after
it struck a roughly $13 billion sale to cable company Charter
Communications  CHTR.O  on Wednesday. Both are outposts of the
empire of John Malone, the “cable cowboy” famed for byzantine
dealmaking. The agreement squeezes investors out of a tight spot
- but charges for the privilege.
    Liberty is less a company than a rounding error in that
empire. It owns 45.6 million shares of Charter, about a quarter
of the $57 billion cable provider, where it appoints three
directors. That’s a bonus for Malone, who has 48% voting
control, reaching a majority when his lieutenants are added.
    The other asset Liberty holds is Alaskan cable operator GCI.
Thing is, the market ascribes it no value. The day talks between
the two sides were disclosed in September, trading prices of
Liberty’s various stock classes valued the enterprise at about
$12.5 billion, yet its Charter shares alone were worth $15.1
billion.
    By merging, Malone can close that gap and simplify Charter’s
governance. The yawning 17% discount is also his opportunity. If
Charter captures the missing value itself, it can buy its own
shares cheap.
    That is what has happened. The deal is entirely in stock:
Liberty shareholders receive 0.236 Charter shares each. In
September, Liberty said it had suggested an exchange ratio of
0.29 shares. That would have been roughly fair and gained some
value for GCI. The agreed offer, though, based on Charter’s
closing price on Tuesday, and adding in about $2.5 billion in
net debt assumed by the buyer, is worth 11%, or roughly $2
billion, less than the stock locked up at Liberty.
    In a twist, GCI will be spun off to shareholders. Assume it
trades at Charter’s 6.6 times multiple of its estimated $369
million in 2025 EBITDA, according to Visible Alpha estimates.
Sub out $1.1 billion of remaining debt, and that’s worth an
extra $1.4 billion.
    It might be enough to secure the required minority
shareholder approval. After all, Liberty stock may have traded
so cheaply on expectations of an outcome like this. The
alternative of voting down the deal may be a return to where the
stock was trading in early September, or about a third below the
accepted offer. Investors might take what they can get, and let
the devil take his due.
    
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    CONTEXT NEWS
    U.S. cable operator Charter Communications on Nov. 13
announced that it had reached a deal to acquire Liberty
Broadband. The seller owns a 26% stake in Charter on a fully
diluted basis, a 16.5% stake in media data analysis company
Comscore, and all of Alaska-based cable provider GCI.
    Liberty Broadband investors are set to receive 0.236 Charter
shares for each of their shares, while also receiving spun-out
subsidiary GCI. The deal is conditional on approval of
shareholders other than John Malone and insiders, who
collectively control a majority of Liberty Broadband.

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Liberty Broadband stock had sagged below Charter's    https://reut.rs/3AG6zDe
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 (Editing by Rob Cyran and Pranav Kiran)
 ((For previous columns by the author, Reuters customers can
click on  GUILFORD/  
Jonathan.Guilford@thomsonreuters.com))