Q3 2013 Liberty Media Corp Earnings Conference Call

Nov 05, 2013 AM EST
FWONA - Liberty Media Corp
Q3 2013 Liberty Media Corp Earnings Conference Call
Nov 05, 2013 / 08:15PM GMT 

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Corporate Participants
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   *  Courtnee Ulrich
      Liberty Media Corporation - VP, IR 
   *  Greg Maffei
      Liberty Media Corporation - President and CEO
   *  Chris Shean
      Liberty Media Corporation - SVP, CFO
   *  Rich Baer
      HSBC - Senior VP & General Counsel

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Conference Call Participants
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   *  Doug Mitchelson
      Deutsche Bank - Analyst
   *  Barton Crockett
      Lazard Capital Markets - Analyst
   *  Vijay Jayant
      ISI Group - Analyst
   *  Ben Swinburne
      Morgan Stanley - Analyst
   *  Matthew Harrigan
      Wunderlich Securities, Inc - Analyst
   *  Bryan Kraft
      Evercore Partners - Analyst
   *  John Tinker
      Maxim Group - Analyst
   *  Kannan Venkateshwar
      Barclays Capital - Analyst

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Presentation
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Operator   [1]
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 Good day, everyone, and welcome to the Liberty Media Corporation third-quarter earnings conference call. Today's call is being recorded.

 At this time, for opening remarks and introductions, I would like to turn the call over to Courtnee Ulrich, Vice President of Investor Relations. Please go ahead, ma'am.

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 Courtnee Ulrich,  Liberty Media Corporation - VP, IR    [2]
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 Before we begin, we would like to remind everyone that this call includes certain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

 Including statements about business strategies, market potential, future financial performance, new service and product launches, the proposed stock repurchases by SiriusXM, including repurchases of SiriusXM stock from us, and other matters that are not historical facts.

 These forward-looking statements involve many risks and uncertainties that could cause actual results to differ materially from those expressed or implied by such statements, including without limitation, possible changes in market acceptance of new products or services, competitive issues, regulatory issues, [status connections] of the conditions to SiriusXM's repurchase of stock from us, and continued access to capital on terms acceptable to Liberty Media.

 These forward-looking statements speak only up to the date of this call and Liberty Media expressly disclaims any obligation or undertaking to disseminate any updates or revisions to any forward-looking statement contained herein, to reflect any change in Liberty Media's expectations with regard thereto, or any change in events, conditions or circumstances on which any such statement is based.

 On today's call we will discuss certain non-GAAP financial measures, including adjusted OIBDA. The required definitions and reconciliations, preliminary note and Schedules 1-3 can be found at the end of this presentation. With that I'd like to introduce Greg Maffei, Liberty's President and CEO.

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [3]
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 Thank you, Courtnee. Good afternoon. Besides myself, today we have speaking on the call our of CFO, Chris Shean. And other executives are available to answer questions. On to some of the operating highlights at some of our larger partner companies.

 SiriusXM had excellent third-quarter results. Subscribers increased to 25.6 million. Revenue was up 11%. Adjusted EBITDA was up 21%. And they did an excellent job of managing their balance sheet in the quarter and throughout the year.

 Sirius repurchased close to $1.6 billion in January 1 through September 30, and then subsequent to the quarter end, LMC and SiriusXM reached an agreement whereby Sirius would repurchase $500 million of Siri stock from Liberty over the next six months. Live Nation will be reporting results later this afternoon.

 And at Charter, they had excellent results that they reported this morning that well outpaced the industry on almost all metrics. They improved product and customer service, they drove revenue and accelerated free cash flow generation.

 Our residential revenues were up 5% on a pro forma basis, commercial revenues were up 20% on a pro forma basis, and third-quarter cash flow was positive by $132 million, versus a $17 million loss in the third quarter last year.

 Charter continues to invest in its all-digital initiative and improved service levels for new and existing customers, driving continued improvement on a year-over-year basis, both in residential and commercial relationships, and PSU growth trends, and setting up for future growth. Residential PSUs were up 46,000 on a pro forma basis, 100,000 on an actual basis, and commercial PSUs were up 12,000 on a pro forma basis.

 Turning back to Liberty for a sec, I wanted to recap some of the series of announcements we made around our Investor Day, and two major impacts from them. First, we acquired 5.2% of our outstanding shares through a 355 tax-free exchange with Comcast.

 We exchanged 6.3 million shares of LMCA for a subsidiary of ours that held leisure arts, our CNBC revenue-sharing agreement, and $417 million in cash. We still, post-transaction, have $327 million share repurchase authorization that was outside that exchange and was not considered part of the share repurchase program and is still in place. We also issued around the time of our Investor Day, $1 billion principal amount of 1 3/8% cash convertible senior notes that are due in 2023. That issue was upside from $500 million.

 We like thinking about those two transactions in a paired fashion. Through the CNBC deal, on a very tax efficient basis, we acquired 6.3 million shares for about $132.

 Through the 10 year convertible bond deal and a related bond warrant, we now have a negative after-tax cost of carry on those bonds, and if our stock appreciates efficiently, we will have effectively sold stock at just over $255, capturing about a $690 million spread on the 5.6 million shares that underlie that bond. We think that's a pretty attractive value creation exercise and increases our NAV substantially.

 Pro forma, also importantly, the bond deal and our share sale back to SiriusXM, would eliminate all of our existing margin debt and actually leave us with just under $300 million of cash, also $750 million undrawn on our revolver, and a substantial amount of debt-raising capacity for future investments.

 With that, let me turn it over to Chris Shean to talk about our financial results.

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 Chris Shean,  Liberty Media Corporation - SVP, CFO   [4]
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 Thanks, Greg. Just a reminder that given our ownership of over 50% now of Siri, their results are now consolidated in our financial statements.

 The combination of consolidating Sirius and the presentation of Starz as discontinued operations has caused our income statement to be a bit choppy and somewhat confusing. We suggest you go straight to the SiriusXM financial statements and their results on their website and their publicly filed documents in your evaluation of our position of Siri.

 At quarter end, Liberty had cash and liquid investments of $1.2 billion, and principal amount of debt of $4.8 billion. This includes both cash and debt balances of SiriusXM.

 In addition, it includes the margin loans that we entered into as part of the Charter Communications investment. The $4.8 billion in debt does not include the $1 billion of convertible senior notes that we just recently issued in October. With that summary I'll hand it back over to Greg.

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [5]
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 Thanks, Chris. So we're pleased with the results of all of our businesses and the performance of our investments. We appreciate your continued interest in Liberty Media. And with that, Operator, I'd like to open it up for questions.

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Questions and Answers
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Operator   [1]
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 Yes. Thank you.

 (Operator Instructions)

 We'll go first to Doug Mitchelson with Deutsche Bank.

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 Doug Mitchelson,  Deutsche Bank - Analyst   [2]
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 Thanks so much. I just actually had sort of one question, Greg.

 I was hoping if we just went through the exercise, if there was something that was just absolutely fantastic that you could do that required a lot of capital, what's sort of the maximum amount of capital that you guys would be comfortable raising out of Liberty capital.

 You said $750 million undrawn and $300 million in cash, plus, you said, significant debt raising capacity. I guess I'm focusing on that debt raising capacity part. How much could you raise if you really, really wanted to?

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [3]
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 Well, I think we have many available resources. You pointed out the two that I mentioned.

 If you think more broadly about margin loans that we have capacity for, we have a position in SiriusXM which is well over $10 billion. We have a position in Charter which is approaching $4 billion. We have a position in Live Nation which is approaching $1 billion. Those are all available for margin if we so chose.

 I think we could also raise longer forms of debt capacity. We saw the demand for our convert that was originally supposed to be $500 million and was upsized to twice that level. I think there would be a lot of other demand for different series and maturities of forms of debt. And lastly, I believe we could, for the right opportunity, find debt, equity or near equity-like securities and raise them.

 I also point out we have some sister companies who have available cash, have not yet found an attractive home for that cash, and could be sources of capital. So I don't think there's any shortage of places for us or ways for us to raise capital.

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 Doug Mitchelson,  Deutsche Bank - Analyst   [4]
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 All right. Great. That answers it for me. Thank you.

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Operator   [5]
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 We'll go next to Barton Crockett with FBR Capital Markets.

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 Barton Crockett,  Lazard Capital Markets - Analyst   [6]
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 Hello. Thanks for taking my question.

 I wanted to ask about the repurchase situation with SiriusXM and a couple of things around that. One, just kind of nuts and bolts, you guys have set a range of $3.64 to $4.18. Why those prices? What's the logic there?

 And then a little bit broader. Could you remind us how much of the high basis shares do you have remaining at Siri, and what's your current thinking about how long it might take to sell them back to Sirius? And what then? At that point, do you stop? Or would you maybe sell the low basis shares as well at some point?

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [7]
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 So, on the range there, that was a negotiated range, and that's where we ended up. On the high basis shares, we spent about $1.6 billion to $1.7 billion, I think $1.65 billion buying them. That's since run to something like $2.3 billion. We'll have sold back $500 million. So we're probably back at about $1.8 billion of high basis shares, something like that.

 We have no announced plan or intent to sell more shares back, high basis or low basis. I think it's virtually impossible to imagine we would sell any low basis shares given that we really have literally no basis in those shares. So we may at some point consider something in the high basis, but I -- highly unlikely we'd do anything with the low basis.

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 Barton Crockett,  Lazard Capital Markets - Analyst   [8]
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 Okay. But with the trend set to sell the $500 million here, do you stop there or is the expectation that you would continue to sell high basis shares after getting through this immediate transaction?

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [9]
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 Barton, I don't -- as I think I said a second ago we have no plan or intent to do anything with those shares today. We had a reason, for our own balance sheet management issues, to clean up the margin debt we had taken on to purchase the Charter position. We've done that.

 We feel well set up on our own balance sheet. I've talked just a second ago about the various ways we could raise cash. And I guess I could have pointed out, that could also include sale of high basis Siri stock, but that's certainly not in our plans.

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 Barton Crockett,  Lazard Capital Markets - Analyst   [10]
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 Okay. Great. Thank you.

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Operator   [11]
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 We'll go next to Vijay Jayant with the International Strategy and Investment group.

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 Vijay Jayant,  ISI Group - Analyst   [12]
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 Couple questions. Greg, you mentioned sister companies. Does that include Liberty Global as a source of liquidity if you needed it?

 And second, you're Chairman of both Sirius and Live Nation. Could you talk about potential synergies and them working together on more content? Is anything in the works? Anything you could talk about there? Thanks.

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [13]
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 We have not gone downstairs and talked to Mike Fries about his willingness to come into US cable or into other kinds of opportunities yet, but he's always been a savvy investor and so he seems to be willing to take toeholds, so maybe we should talk to him. But we have not gone down there yet.

 On synergies, I think there has been a spate of renewed discussions between SiriusXM and Live Nation. You would expect, while both have their own sets of interests and their own sets of shareholders to whom they must answer. Beyond Liberty, there are potentials out there around promotion, around ticketing, around Live Nation kinds of channels that are all worth examining and are being examined with renewed interest.

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 Vijay Jayant,  ISI Group - Analyst   [14]
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 Thank you.

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Operator   [15]
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 We'll go next to Ben Swinburne with Morgan Stanley.

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 Ben Swinburne,  Morgan Stanley - Analyst   [16]
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 Thanks. Chris, you might have mentioned this in the numbers in the prepared remarks, but just to double check, how much of the margin debt is left pro forma for the Comcast, and the, more importantly, the convert raise?

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [17]
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 This is Greg. I'll answer. I think I mentioned it. Pro forma for the Comcast transaction, which was obviously an expenditure of about $417 million of cash, the raise that we did in the bond offering net of the bond warrant cost and fees and expenses and the like and the money we raised from Sirius, pro forma for all of those transactions, we will not only have no outstanding margin debt, we'll actually have about a $300 million cash balance, just under $300 million.

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 Ben Swinburne,  Morgan Stanley - Analyst   [18]
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 So the margin debt's gone but you still have that, I think it was, $750 million that was attached to the margin capacity?

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [19]
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 Yes, in effect it's revolver capacity as a form of margin debt.

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 Ben Swinburne,  Morgan Stanley - Analyst   [20]
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 Got it. Got it. Perfect.

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [21]
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 And then, I think if we really wanted to raise capital against that, we would probably go out and be able to achieve a much larger facility if that was our goal. That's just a remnant of what we won't have paid off, and which is the withdrawal --

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 Ben Swinburne,  Morgan Stanley - Analyst   [22]
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 Understood. And then Greg, when you think about the investment in Charter, which obviously has been a home run here year-to-date pretty quickly, there's clearly and obviously some embedded value in that stock, in Time Warner Cable stock around a transaction.

 In the off chance a transaction doesn't happen which, is not something we're going to talk about, but just stay with me for a second. (laughter) How do you think about the value of that investment?

 Do you guys save powder and think you could buy that on some kind of pullback if the stock pulls in because there's a synergy number in there, or do you disagree with my assertion that there is one, you think it's attractive here to buy more? What's your thought on that investment and how the M&A piece plays into how you guys think about investing? I know you have some standstills and stuff, but over time those come off.

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [23]
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 To your point, I think to reiterate, we have a 27.3% position today, or something like that, with our warrants. I think our standstill is 35%, and somewhere down the road 40%. We have plenty of capacity available, repurchase capacity, if we so chose.

 Look, I think there's probably some amount of -- candidly, there's some amount of expectation that stock price around a transaction and the synergy values that are there. That having been said, the results this morning, in my belief, indicate that this is a great asset that is growing.

 Management's doing a wonderful job of investing in an all-digital network, seeing the results of that improved growth, improved cash flow, improved demand both for high speed and for video and for basic, or slow the rates of decline in some of those.

 And so speculating on what the market -- how the market will value a stock is something that you guys get to do. If you are just looking to make a fundamental investment, I think if it got ahead of itself on merger synergies or expectations, that's not perfect, but I think this company's going to grow into that valuation if that's the case.

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 Ben Swinburne,  Morgan Stanley - Analyst   [24]
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 Thanks a lot.

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Operator   [25]
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 We'll go next to Matthew Harrigan with Wunderlich Securities.

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 Matthew Harrigan,  Wunderlich Securities, Inc - Analyst   [26]
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 Thank you. I thought one of the nice things on the Charter call was the point that M&A -- it's nice that you get some tax efficiencies and the cost synergies and all that, but the real impetus is on the growth side.

 Your Charter seems to have been really successful in resetting itself, even though I sometimes think consumer perceptions can be pretty sticky. If you were dealing with the situation where you had more of a large market MSO, do you think you could do that in a similar manner? Or do you think you'd have to do something like license X1, and other new products, and just put a lot more grist to a rebranding effort?

 And then secondly, this may actually be naive from a tax-restructural or self-dealing vantage point, but is there a way that SiriusXM could just start paying a very large dividend, and you could securitize that as a mode of raising capital?

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [27]
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 So, let me talk a little bit about the MSOs. I think we, Liberty, have been vocal believers in consolidation, and that consolidation comes not only from cost synergies, but from the ability to federate and work more closely together as an industry. And whether that involves initiatives like licensing X1 or trying to build a nationwide offering in telephony -- on the business telephony or business services or whether that's true in home automation, we think there's a lot to be said for that.

 I think the Charter team has shown that you can turn around perspective by smart investment and smart operations. You can turn around perspective of your customers without that. But the real opportunity, the next opportunity is to help the whole industry work together and we're firm believers in that. And recognize that Comcast has spent a lot of smart money invested in software, and we should try and leverage that and try and leverage everybody's scale where possible.

 On the second point about SiriusXM paying a dividend, I'm not sure how we could utilize their NOL on a dividend. They paid a dividend, which you may recall, they paid a fairly small one at year-end 2012. Our tax treatment on that, given the DRD, is actually fairly advantageous, but I'm not sure how that utilizes their NOL.

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 Matthew Harrigan,  Wunderlich Securities, Inc - Analyst   [28]
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 Got it. Thanks, Greg.

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Operator   [29]
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 We'll go next to Bryan Kraft with Evercore.

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 Bryan Kraft,  Evercore Partners - Analyst   [30]
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 Hi. Thanks. So two questions. One, what is Liberty's and your institutional view on the credit markets, and how are you asking your portfolio companies to position themselves in the context of that view?

 And then secondly, is Liberty Media still evaluating businesses to invest in outside of cable for new investments, or is the strategy now solely cable-focused? Thank you.

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [31]
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 On the debt side, I think if you look both across Liberty Media, and Liberty interactive, we have been out extending maturities and trying to range as much long-term debt and capital as we can. I think QVC has probably done about 4 issues over the last 18 months, 2 years. SiriusXM has probably done at least four issues.

 We just did the long convert. We're firm believers in trying to extend those maturities as much as possible. Laura, did I forget any, or did anybody else's-- Laura Baldi, our Assistant Treasurer -- I'm looking at if we forget anybody else's issuance. But clearly we've been pushing as much as possible to do that.

 This is a great time on a historical basis on capital raising. If we haven't tagged the absolute bottom, we can't be that far off of it. Seems like safe rather than sorry.

 As far as looking at other investments outside of cable, across Liberty, including at LMCA, we've been looking at a host of things, both domestically and internationally, some transport or distribution type assets, and some that are content type assets, so a host of things.

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 Bryan Kraft,  Evercore Partners - Analyst   [32]
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 Great. Thanks, Greg.

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Operator   [33]
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 We'll go next to John Tinker with Maxim.

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 John Tinker,  Maxim Group - Analyst   [34]
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 Thank you. Two brief questions. Can you just remind us where you stand with the Vivendi lawsuit? And secondly, how long has the -- how long does Time Warner Cable own the broadcast rights to the Atlanta Braves for?

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [35]
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 I'll take the latter and I'll let Rich, our General Counsel, answer the former. Time Warner Cable does not own, as I recall the broadcast rights for the Braves. We have a piece that is with FOX, and a piece that's with Time Warner, and through a form of some of their -- but none of it's Time Warner Cable. And those deals run out 2027 as I recall. Is that right?

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 Rich Baer,  HSBC - Senior VP & General Counsel   [36]
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 2027.

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [37]
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 2027. Rich, you want to comment on Vivendi.

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 Rich Baer,  HSBC - Senior VP & General Counsel   [38]
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 In real simple terms, the judgment that we won, about a year and a half ago, is on appeal. Appeal hasn't been perfected. That means the briefs haven't been filed yet. But we expect that they'll be filed next year.

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 John Tinker,  Maxim Group - Analyst   [39]
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 Thanks.

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Operator   [40]
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 Operator. We'll take our final question from Kannan Venkateshwar with Barclays.

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 Kannan Venkateshwar,  Barclays Capital - Analyst   [41]
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 Thank you. Just one question from my side. If you're looking at cable investments, is there a scenario under which you would do those investments on your balance sheet, rather than Charter's balance sheet?

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [42]
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 This is Greg again. I think it's hard to imagine that we would do a US cable investment that's not through Charter. I mean, we talked about our beliefs and the value of scale and federation. We talked about our beliefs in the strength of the management team at Charter, and the fact that they have assets like an NOL that can benefit from the consolidation play. You never want to say never, but it's just -- that's a hard scenario to imagine.

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 Kannan Venkateshwar,  Barclays Capital - Analyst   [43]
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 Right. Thank you.

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 Greg Maffei,  Liberty Media Corporation - President and CEO   [44]
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 With that, I think we're done for the afternoon. Thank you very much everyone for your interest in Liberty Media, and look forward to speaking with you next quarter, if not sooner.

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Operator   [45]
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 Thank you. That does conclude our conference. You may now disconnect




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