GCI Liberty: Stock-for-Stock Deal with Liberty Broadband

How can you be an event-driven investor and not own a couple positions in the Malone universe?  There are people with smarter takes than me on the Liberty complex and cable (Andrew Walker for one), but with the news coming out last week that GCI Liberty (GLIBA) and Liberty Broadband (LBRDA/K) are in talks to merge, it seems timely to take a look at the transaction and what Liberty Broadband might look like after the deal closes.  The talks are only preliminary and not final, but it's safe to say that a transaction is a near certainty to take place as it's long been thought a GLIBA/LBRDA combination which pools together Liberty's investment in Charter Communications (CHTR) would make an eventual consolidation with CHTR simpler.

Quick and incomplete origin stories:

• GCI Liberty is the result of a 2018 deal between Liberty Interactive's Liberty Ventures (old LVNTA) tracking stock merging with General Communications ("GCI", old GNCMA), the largest provider of cable/telecom to Alaska, eliminating the tracking stock structure and creating an asset backed stock with GCI as an operating subsidiary.  As a result, GCI Liberty holds about 70% of its assets in LVNTA's historical investments in CHTR, one as the result of TimeWarner Cable's (TWC) merger with CHTR and then through an investment in Liberty Broadband which in turn funded the cash portion of the acquisition of TWC by CHTR.  GCI Liberty also contains a legacy home-run investment in Lending Tree (TREE), the financial services online marketplace.
• Liberty Broadband also traces its roots similarly, it was a 2014 spinoff of Liberty Media (old LMCA) which held LMCA's stakes in CHTR and TWC, the TWC stake was then folded into CHTR as a result of the above mentioned CHTR/TWC deal, leaving Liberty Broadband as substantially just a pass-thru to CHTR (they have a tiny active trade business to keep the spin tax free).

Creating an NAV for both companies is a fairly straight-forward exercise (saying that, I probably made some mistakes - feel free to point them out - so do your own home work).

The main variable input for GLIBA is how you want to value GCI, the operating subsidiary, I've chosen to use a 9x multiple (essentially the multiple LVNTA paid for it) on TTM EBITDA.  It traded well below that prior to the acquisition, but with the eventual path being a CHTR acquisition, there's some synergies that could be added and thus it seems as fair of a multiple as any to me.  Then there's the exchangeable debt, much of GLIBA's direct Charter investment is pledged to exchangeable bonds that either directly reside on GLIBA's balance sheet or some legacy exchangeables that are at GLIBA's former sister tracker, Qurate Retail Group (QTREA), and GLIBA is responsible for the in-the-money exposure since all the CHTR shares moved over to GLIBA in the hard split.  An exchangeable bond is sort of like a convertible bond, but instead of having the option to convert into the issuers stock (would be GLIBA here as an example), the bondholder has the option to receive shares in another reference security (CHTR in this case, which is in the money at a $370 strike price, thus the liability increases as CHTR's stock continues to perform).  As a result, almost all of GLIBA's CHTR exposure is in LBRDK and featured a "double discount", as shown below, LBRDK trades at a discount to its investment in CHTR and GLIBA traded at a discount to its primary investment in LBRDK.

Liberty Broadband is simpler, as mentioned, it is essentially a pass-thru for CHTR that trades at a mid-teens discount to CHTR.

What might the proforma company look like?

The proposed exchange ratio is 0.58 shares of LBRDK (the non-voting LBRD shares) for every share of GLIBA (so GLIBA share holders go from Class A to Class C, not that it really matters), by combining the two, Liberty Broadband is effectively able to buyback the LBRDK shares GLIBA owns and share the benefit of closing that second layer of discount between the two shareholder groups in a stock-for-stock merger.  GCI Liberty shareholders naturally receive most of that benefit, GLIBA goes from having a ~$83 NAV per share to a ~$90 NAV per share (on the GLIBA sharecount), Liberty Broadband shareholders get a smaller benefit moving from ~$155 to ~$157.

Other thoughts:

• Obviously I'm missing any analysis on CHTR, others have covered it in great detail, they're the second largest cable provider in the U.S., financially they utilize Malone's levered equity strategy: levered 4.5x and use FCF to buy back stock in order to maintain that leverage.
• No thoughts on the ultimate timing of a CHTR takeout, but I sleep pretty well knowing that's the eventual path, Malone has a history of consolidating these investment HoldCo's back into the operating company (Direct TV and Expedia are good examples).  As a result of LBRDK's ~25% ownership stake, Liberty gets 3 seats on the board, appointed the current management team, seems likely that their influence will result in the closing of the discount in a tax efficient manner.
• GLIBP is a big beneficiary to the combination, the preferred shareholders gain a whole lot more equity cushion below them and keep the elevated 7% dividend rate.

Disclosure: I own shares of GLIBA