Why Liberty Broadband Corp (LBRDA)(LBRDK) Looks Intriguing?
Owning Liberty Broadband Corp (NASDAQ:LBRDA) (NASDAQ:LBRDK) shares is like having ownership in three companies. That is because of the ownership holding it has in Charter Communications, Inc. (NASDAQ:CHTR) and TruePosition, Inc. and a minority stake in Time Warner Cable Inc (NYSE:TWC). The merger between Charter and Time Warner would undoubtedly boost the value of Liberty’s holding of about 20% in the merged entity. There is no doubt that Liberty played a crucial role in bringing the two companies together for a merger. In a way, owning the company’s stock will look like holding a small group of companies. Therefore, let’s look at how the merger will allow the company to gain.
Though Liberty Broadband Corp (NASDAQ:LBRDA) is a United Kingdom company, it has a tremendous interest in the American cable business. Cable is considered a good business in the United States, with limited competition. As a result, there is a pricing power enjoyed by the participating companies. There has not been much of a difference between the companies on pricing. It is only putting them in a different category. For instance, if Comcast Corporation (NASDAQ:CMCSA) offered 25 MBPS for $39.99 as an initial monthly subscription, Time Warner Cable Inc (NYSE:TWC) provided 20 MBPS at $44.99 for internet only.
The industry is also recession resistant, besides supporting leverages. The past suggests that customers have not reduced their budget even during the recession. Both cable, as well as broadband, was far down on the savings list of the customers. Though customers might hate the cable service provider, they still purchase from them.
Apart from Charter Communications, Inc. (NASDAQ:CHTR) acquiring Time Warner Cable Inc (NYSE:TWC), it has also purchased Bright House. The cable company re-emerged itself from bankruptcy filing in 2009. It was in 2013 that Liberty Broadband Corp (NASDAQ:LBRDA) invested $2.6 billion and acquired 27% stake in Charter. Now the company has risen to acquire Time Warner Cable. It could not have happened without the strong performance independently and with the help of Liberty group. The merger among the three will scale benefits for the New Charter. Currently, Liberty Broadband Corp (NASDAQ:LBRDA) is trading 7 – 10% discount to Charter shares.
There is still a doubt among the section of investors that Charter Communications, Inc. (NASDAQ:CHTR) overpaid Time Warner Cable Inc (NYSE:TWC). Compared to the peers’ acquisition, the amount payable per share is not indicating any overpayment. Among the big business models, synergy sandbagging – management expects 2x while continuing the program of cost escalation. Broadband penetration, as well as ARPU growth, will be the key factors while determining the acquisition price.
The company paid enterprise value / 2015 EBIDA 9.1 of Time Warner Cable Inc (NYSE:TWC). In the case of Bright House, the price was arrived at based on enterprise value / 2014 EBITDA 7.6X. Both included synergies, as well as tax benefits.
Synergies From Different Heads
One of the primary cost synergies is from programming costs a year. The merged entity, or the new Charter Communications, Inc. (NASDAQ:CHTR) would save an estimated $629 in the next year. That will further enhance to $672, $729, and $791 respectively in the following years. Similarly, total other cost reductions are estimated between $150 in the next year to $834 by the fifth year, from the current year. The estimated percentage of savings will be 1% next year and will grow to 2.5%, 3.0%, and 5.0% respectively in the following years.
Liberty Broadband Corp (NASDAQ:LBRDA) pointed out the synergies it made from the Ziggo acquisition that closed in November last year. The original synergy was estimated at $160 million out of which $95 million were operating expense savings. The synergy estimation has been revised upwards by 50%, to $250 million. Similarly, the Altice – Suddenlink deal is estimated to provide 25 – 30% of operating expense savings, excluding programs. Therefore, there is scope for further synergies when the merger between Charter Communications, Inc. (NASDAQ:CHTR), Time Warner Cable Inc (NYSE:TWC), and Bright House happens.
Merged Companies Revenue
The total revenue of the three companies would likely be $37.56 billion in the current year. It is estimated to grow 5.0% to $39.44 billion, 4.9% to $41.36 billion, 4.8% to $43.33 billion, and 5.0% to $45.49 billion in the years leading to 2019. The EBITDA margin is estimated to be 35.7% in the current year, and will keep growing to 38.0% next year and reach 39.0% in 2019. The EBITDA growth rate will be 3.1% in the current year and will more than triple to 11.8% next year. The growth rate will be 6.1%, 5.0%, and 6.1% respectively in the following years leading to 2019.
As a result, the enterprise value of the merged entity will be $119.94 billion next year, $127.28 billion in 2017, and reach $141.84 billion in 2019. Equity value will also reach $68.8 billion in 2019, from $56.99 billion next year. Significantly, share prices are estimated to be $182 next year, $222 in 2017, $260 in 2018, and $312 in 2017, according to ValueX vail.
On a standalone basis, Liberty Broadband Corp (NASDAQ:LBRDA) has already confirmed its 2015 outlook targets. The next-generation TV reach is expanding, and project lightning is expected to ramp in the second half of the current year. The company also expects the second quarter to have witnessed better organic additions.
Whatever growth is achieved by the three companies, namely Charter Communications, Inc. (NASDAQ:CHTR), Time Warner Cable Inc (NYSE:TWC), and Bright House, or the new Charter, will benefit Liberty Broadband Corp (NASDAQ:LBRDA) being the major shareholder. That will undoubtedly add value to the British company. It has its strength on a standalone too. Also, owning the shares will be less risky than any other cable service provider. Therefore, the stock is worth watching for investments.
Disclaimer: The opinions and data expressed herein by the author are not an investment recommendation and are not meant to be relied upon in investment decisions. The author is not acting in an investment advisory capacity, nor is this an investment research report. The author’s opinions expressed herein address only select aspects of potential investment in securities of the company or companies mentioned and cannot be a substitute for comprehensive investment analysis. Any analysis presented herein is illustrative in nature, limited in scope, based on an incomplete set of information, and has limitations to its accuracy. The author recommends that potential and existing investors conduct thorough investment research of their own, including detailed review of the companies’ SEC filings, and consult a qualified investment advisor. The information upon which this material is based was obtained from sources believed to be reliable, but has not been independently verified. Therefore, the author cannot guarantee its accuracy. Any opinions or estimates constitute the author’s best judgment as of the date of publication, and are subject to change without notice.
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