GCI Liberty (GLIBA/K) is back in public markets, the leading telecommunications provider in Alaska was spun off on Tuesday (7/15) from Liberty Broadband (LBRDA/K) ahead of LBRD’s merger with Charter Communications (CHTR).
Alaska is a challenging market, it has a small population with a huge unforgiving geography, partially protecting GCI from competition (although satellite providers like Starlink are a threat and starting to take some share). GCI is primarily a broadband business (70% of revenue) which also includes 3000 miles of undersea cable connecting Alaska to the rest of the country with the remainder mostly in wireless (GCI recently discontinued their video offering). The business was founded 45 years ago by Ron Duncan who is still the CEO today at 72 years old. Unlike other broadband businesses, GCI is skewed towards business revenue with the big exposure to healthcare and education in rural/remote villages, many of these places only have a couple medical professionals or teachers, everyday services are provided in single rooms using video conferencing. However, their business has challenges, much of GCI’s revenue is tied to government programs (Universal Service Fund or “USF” is mid-40% of revenue) under constant scrutiny and the Alaskan economy is tied to cyclical natural resource markets like oil and mining. Population has declined slightly over the last few years, revenue growth at GCI is likely roughly flat to inline with inflation over time.
Below is a back of the envelope valuation of GCI:
GCI Liberty is cheap compared to peers (I pulled peer multiples from CapitalIQ, didn’t verify or normalize), but that’s not really what caught my attention in the spin. Unlike other Liberty entities where John Malone has stepped back from the board or agreed to eliminate his super-voting rights in negotiated mergers, here at GCI, Malone is the Chairman and will be leading capital allocation decisions.
To steal the line of another investor I chat with, this is like the old quote that Warren Buffett has stated he believes he could achieve a 50% annual return if he were managing a smaller sum of money. The spin was taxable to Liberty Broadband shareholders which allowed Malone to achieve setup basis on the GCI assets, resetting the depreciation tax shield (which likely also benefits from the Trump administrations recent “BBB”) the value of which will be based on the first 20 days of trading, but capped at $420MM per the merger agreement with CHTR. That value is not included in the valuation above and significant given the ~$2B enterprise value.
In the investor day presentation, John Malone comments both on the valuation and capital allocation thoughts (attribution to BamSEC):
Shane Kleinstein Liberty Media Corporation – Head of Investor Relations
I think building on that, John, we got a question from a valuation perspective, building on what Ron had said, how do you suggest investors think about appropriate multiples or valuation for this asset partially in light of the recent Cox-Charter transaction, partially in light, while GCI has strategic advantages. It is — the dynamics have changed since it last traded publicly. So curious reviews from a valuation standpoint.
John C. Malone Liberty Broadband Corporation – CEO & Chairman of the Board
Well, I would say, if you’re speaking of valuation in terms of EBITDA multiple, it should trade at a premium EBITDA multiple because it’s EBITDA will be fully sheltered, it has a modest debt leverage situation, so it doesn’t have a lot of downside risk. It has a declining capital intensity, and therefore, its free cash flow characteristics should be superior. Now Charter is currently is trading at or around a 7 multiple EBITDA. I would think that this business should be trading at a premium to that. And if it doesn’t, we’ve got — we’re going to have plenty of free cash flow with which to reduce equity if that opportunity presents itself, I think, the Board will be looking at returns on the free cash flow and how to deploy it.
And given the fact that we have more than enough tax shelter to shelter our own cash flow, we’ll be looking opportunistically for acquisitions or investments that provides unusually high pretax returns, but that can benefit substantially from the shelter that consolidating what GCI could provide. So it’s kind of an ideal core asset, around which to build some interesting incremental assets. So we certainly look forward to that. I’m hoping that it can become the beginning of a new Liberty Media and now that Liberty Media has largely gone to a single line of business focus with its spin-offs and we will have the availability, of course, of the Liberty Media management team who work for — who will work for this enterprise under contract, providing services ranging from financial to tax accounting and public relations chain, including you.
Later on, after commenting on leverage, he goes into possible areas he’d be interested in:
John C. Malone Liberty Broadband Corporation – CEO & Chairman of the Board
Well, from my point of view, Shane, I would say 3 is a pretty nice number going up for accretive acquisitions. Sometimes you’ll take it up in order to — until you get the synergies realized from combination. We would try to stay in the 3 to 3.5 range, I would think. And if we drop below that, we might take it up in some kind of a small recap and shrink the equity. But my guess is that if we look widely enough, we’re going to find lots of accretive, small but accretive acquisitions in the communications sector, looking primarily at special situations, in some cases, distress, but I think that we will find opportunities to grow the business outside of Alaska with accretive small incremental acquisitions in the — in and around the communications industry.
Capex will be a bit muted in the next 12-18 months has GCI finishes its investment cycle as part of the Alaska Plan, but following that, as a minimal cash tax payer, Malone should have a lot of flexibility to make acquisitions and use GLIBA like his “50% return PA”. Read through the spinoff docs as well, there’s a lot of talk about issuing Ventures Group tracking stock in the future which could be a turnoff to many. I haven’t seen much chatter about this spinoff, there seems to be a lot of John Malone fatigue in the last 5-10 years as some of their investments have underperformed (that might be generous phrasing). He’s 84 years old, but he’s an admitted deal junkie:
Shane Kleinstein Liberty Media Corporation – Head of Investor Relations
Well, John, I’ll turn a related but different one to you. A question came through, what’s your expected involvement in GCI and Liberty. What are the areas that you particularly expect to be taking part?
John C. Malone Liberty Broadband Corporation – CEO & Chairman of the Board
Well, I enjoy strategy, I enjoy strategizing with Ron. I love M&A. I love deals, and I love structure and so the opportunity to rebuild what some people regard as complexity and I regard it as high return investing is what I look forward to. And I think the combination of Ron and his knowledge of the business and his team with some of the young guys within Liberty Media’s management structure, who are pretty good at turning over rocks so we’ll have talent available to the organization that is several steps above what an organization that size would normally have available to it in terms of finance, tax structure and clearly IR and public relations. So I think we have a little bit of a supercharger when it comes to capabilities that you wouldn’t normally find in a business of the size of GCI because of the involvement with Liberty, Liberty Media, me and the rolodexes that both Ron and I have been able to develop over this long period, I think, we’re going to find some very interesting opportunities, which will have exceptional financial reward associated with them.
I think it’s an interesting setup, cheap asset on its own, with the call-option on Malone’s deal making capabilities in a smaller, less followed entity.
Disclosure: I own shares of GLIBA/K once again