This article is authored by MOI Global instructor Patrick Brennan, founder and portfolio manager of Brennan Asset Management, based in Napa, CA, which utilizes a concentrated value investing strategy. Patrick is an instructor at Best Ideas 2018, the fully online conference featuring more than one hundred expert instructors from the MOI Global membership community.
In a market that has moved in a single direction over the past two years, it has often been difficult for value investors to find opportunities. That said, we see two interesting opportunities within the Liberty Media complex. Liberty Global (LGI) is a dominant cable operator in Europe with its five largest markets in the UK, Netherlands, Belgium, Germany and Switzerland. In 2015, LGI created a tracking stock (LILAK) that corresponds to the value of its Puerto Rican and Chilean cable systems. LILAK subsequently executed a complicated and controversial merger with Cable & Wireless (CWC) in 2016, partially funding the deal with LGI stock. LGI shareholders hated that their stock was used to finance a purchase that many would find difficult to hold. Meanwhile, LILAK shareholders suffered significant losses because of LILAK’s poor initial execution following the closing of the transaction. Both LGI and LILAK have frustrated shareholder bases that have suffered as the broader market has risen over 35% the past two years. But, when LILAK is formally separated from LGI later this month and becomes an asset-backed company, sentiment may change. This separation, along with company specific catalysts, creates a compelling opportunity for those willing to dig into the complicated names.
Before discussing the specifics of each company, it is worth first stepping back to look at the cable industry from a higher level. Within cable markets, there are typically only a couple of companies that offer similar services. Often, the incumbent provider is a former government entity and/or monopolist and therefore is frequently less nimble/efficient versus cable competitors. Cable companies’ initial investments in coaxial/fiber offered speeds superior to incumbent carriers’ copper networks and the value of the pipe already in the ground increased as zoning rights, work permits, and franchise politics became more difficult over time. So, an industry characterized by barriers to entry/limited number of competitors/pricing power certainly makes an interesting investment backdrop.
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