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Overview: Tiger Global Management's 1Q14 positions

Part 6
Overview: Tiger Global Management's 1Q14 positions (Part 6 of 8)

Why Tiger Global increases position in Charter Communication

Tiger Global Management and Charter Communication

Tiger Global Management’s latest 13F shows new positions in Avis Budget Group Inc. (CAR), Zillow Inc. (Z), and Trulia Inc. (TRLA). The fund sold stakes in Yahoo! Inc. (YHOO) Amazon Inc. (AMZN). It raised positions in Vipshop Holdings (VIPS) and Charter Communication (CHTR).

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Tiger Global increased its stake in Charter Communication (CHTR) which now accounts for 2.72% of the fund’s 1Q14 portfolio. The position accounted for 0.58% of the portfolio in 4Q13.

Charter Communication is a cable operator providing services in the United States with approximately 6.1 million residential and commercial customers as of March 31, 2014. It offers traditional cable video programming, Internet services, voice services, and advanced video services such as On Demand (or TM), high definition (or HD) television, and digital video recorder (or DVR) service. It also sells local advertising on cable networks and provides fiber connectivity to cellular towers.

Charter participates in cable consolidation

The U.S cable industry is seeing consolidation with Comcast’s (CMCSA) merger with Time Warner Cable (TWC) and AT&T (T)’s proposed acquisition of DirecTV (DTV). Charter, which is owned by media mogul John Malone through his Liberty Media investment vehicle, saw its takeover bid rebuffed by TWC earlier this year.

Shares increased after Charter Communications forged a complex deal in April with CMCSA, which is seeking to win approval for its merger with TWC and keep its market share below 30%. Under the deal, Charter will acquire approximately 1.4 million existing TWC subscribers following the close of the Comcast-TWC merger. In addition, Charter and Comcast will swap ~1.6 million customers. Charter, through a tax free reorganization, will form a new holding company (New Charter) that will own itself 100%. Charter will also acquire ~33% stake in a new publicly-traded cable provider to be spun-off by Comcast serving ~2.5 million customers (SpinCo). With this, Comcast’s managed residential subscribers will be below the required 30% of the total MVPD subscribers in the United States. Comcast shareholders, including the former TWC shareholders, are expected to own approximately 67% of SpinCo, while New Charter is expected to directly own approximately 33% of SpinCo.

The transfer of systems, asset purchase, and SpinCo acquisition will be valued at a 7.125x 2014 EBITDA multiple (as defined by the parties). Charter will make additional payments to Comcast over time as tax benefits from the asset sale are realized. Following this agreement, Charter’s current residential and commercial video customer base will increase from 4.4 million to ~5.7 million, making Charter the second largest cable operator in the United States.

The deal will take place following federal approval for Comcast’s $45 billion acquisition of TWC that was announced in February. The deal ended the strained relationship between Charter and Comcast after Charter lost out to Comcast in a bid to acquire TWC in February. Charter had even persuaded TWC shareholders to reject the Comcast merger.

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Charter first quarter results above estimates—net loss narrows

Charter said that on an actual basis, 1Q14 revenues increased 14.9% year-over-year (or YoY) to $2.2 billion due to growth in Internet, video, and commercial revenues and acquisition of Bresnan Broadband Holdings last year. It posted a basic and diluted net loss per share of $0.35 in 1Q14 that narrowed from $0.68 on a pro forma basis, and $0.42 on an actual basis during the same period last year. Net loss decreased on a pro forma basis primarily due to higher adjusted EBITDA of $767 million, which grew by 7.3% YoY.

Video revenues totaled $1.1 billion in the first quarter—an increase of 6.3% compared to the prior-year period driven by higher expanded basic and digital penetration, annual and promotional rate adjustments, higher advanced services penetration, and revenue allocation from higher bundling. Internet revenues grew 15.4% to $616 million, driven by an increase of 353,000 Internet customers during the last year and by price adjustments. Commercial revenues increased 20% to $234 million driven by higher sales to small business customers. Voice revenues fell 18.5% to $150 million due to value-based pricing and revenue allocation from higher bundling.

During 1Q14, Charter saw YoY and sequential improvement in customer relationship and primary service unit (or PSU) growth. Residential customer relationships grew by 112,000, up from 61,000 in 1Q13, with triple play sell-in improving YoY, to over 50% of total residential video sales. Commercial customer relationships grew by 4,000 in 1Q14, compared to a loss of 1,000 in the prior-year period. Residential PSUs increased by 206,000 versus 140,000 in the same quarter the past year, while commercial PSUs increased 14,000 during the first quarter versus a gain of 7,000 in the same quarter the past year. The management added, “We continued to see improving levels of customer churn, resulting from improved service delivery and higher customer satisfaction.”

Charter Spectrum product suite is a future growth driver

Charter noted that continued competition and the prolonged recovery of economic conditions in the United States, including mixed recovery in the housing market and relatively high unemployment levels, have adversely affected consumer demand for its services, particularly video.

In response to video competitors, Charter has promoted its digital product and initiated a transition from analog to digital transmission of all channels, which will result in substantially more HD channels and higher Internet speeds. Charter Spectrum is being introduced across Charter’s markets in 2014, in conjunction with the company’s all-digital initiative, which is expected to be completed by year end 2014.  The management said, “With our new product suite, Charter Spectrum, we will deliver the most HD channels, video on demand and the fastest Internet service across the vast majority of our markets, all packaged with high quality service at a competitive price point.”

Charter expects increase in capex due to all-digital initiative

Charter expects 2014 capital expenditures to be approximately $2.2 billion, driven by its all-digital transition including the deployment of additional set-top boxes in new and existing customer homes, growth in commercial business, and further spend related to efforts to in source service operations as well as product development.

The total principal amount of debt was approximately $14.2 billion as of March 31, 2014. Free cash flow for 1Q14 was $74 million, compared to $118 million during the same period last year.

Besides cable operators, Charter sees competition from wireless service providers and streaming services like Aereo, Netflix (NFLX), and Hulu.

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