Liberty Broadband, the tracking stock created by cable legend John Malone’s Liberty Media to mirror its investment in Charter Communications, will begin selling back some of that interest to the cable company, part of an earlier agreement to cap its holdings to 26%, and could use some of the gains for share repurchases, to pay down its own debt or for acquisitions, according to one analyst.
Liberty Broadband was created in 2014, about one year after Liberty Media acquired a 27% interest in Charter for about $95 per share. Charter stock is now trading above $600 per share.
Liberty Broadband’s holdings in Charter have fluctuated as it has bought stock and the cable operator has repurchased its shares over the years. Last year Liberty Broadband said it had a 24.4% stake in Charter. As of Nov. 20, Liberty Broadband said it owned about 51.1 million Charter shares.
According to a Securities and Exchange Commission filing on Feb. 24, Liberty Broadband and Charter agreed back in 2015 that the former’s interest would not exceed 26%. However, as a result of Charter’s own share repurchase programs, that interest is rising, and Liberty Broadband has agreed to sell Charter shares back to the company on a monthly basis to keep that interest at a constant 26%. Analysts expect Charter to buy back about $10 billion of its own stock in 2021, after repurchasing about $12.1 billion in stock in 2020. But that 2021 estimate could rise as the company did not participate in the federal C-Band wireless auctions, which would free up more capital for buybacks.
According to the SEC filing, under the agreement, Liberty will sell to Charter, generally on a monthly basis, a number of shares of Charter’s Class A Common stock representing an amount sufficient for LBB’s ownership of Charter to be reduced such that it does not exceed the ownership cap then applicable to LBB under the Stockholders Agreement as Charter reduces outstanding shares through repurchases from time to time.
In a research note, Evercore ISI Group analyst James Ratcliffe estimated that Liberty Broadband could sell as much as $2.7 billion worth of stock this year back to Charter as part of that agreement. After taxes, the tracker could stand to gain as much as $2.3 billion from the sales.
Ratcliffe wrote in the note to clients that the most likely scenario is that Liberty Broadband will use the proceeds to repurchase its own shares. Second on the list could be M&A, and lastly, it could be used to pay down debt.
In his note, Ratcliffe wrote that if Liberty Broadband went the M&A route, he would "expect any transactions to be in the cable space. We view this as more likely than paying down debt, but less likely than buybacks."
Liberty Broadband is no stranger to cable deals. In 2017, sister company Liberty Interactive purchased GCI in a deal that valued the Alaskan telecom company at about $1.1 billion and forming GCI Liberty. After a series of complicated deals, GCI Liberty merged with Liberty Broadband in August. Liberty Broadband also owns 100% of WiFi mobile positioning and location company Skyhook, which was purchased by Liberty Broadband subsidiary TruePosition in 2014. In 2016, TruePosition and Skyhook merged under the Skyhook name.
Liberty Broadband has been a favorite of some analysts who see the shares as a way to own Charter stock more cheaply. Liberty Broadband was priced at $144.25 each in early trading on Feb. 25, while Charter was priced at $616.95 per share.
While the most recent stock repurchase shouldn’t come as a surprise, Ratcliffe wondered why the parties just didn’t raise the cap on the amount of Charter stock Liberty Broadband can own.
“We wonder, however, what drove the decision to set up a periodic sale structure, rather than raising the ownership cap,” Ratcliffe wrote. “In particular, was this decision driven from the Charter side (a desire to limit Liberty’s ownership, for governance or tax reasons), or from the Liberty side (a desire to begin to monetize the Charter investment without selling to the public market)? Clearly, this will be a question when Liberty reports earnings tomorrow.”
Liberty Broadband is scheduled to hold a conference call with analysts to discuss Q4 results on Feb. 26 at 11:15 a.m.
