Events: FV Update
May 12, 2015
- NASDAQ: CHTR
- Recent PPS: $178.78 (5/11/15 close)
- Shares Out: 116.01 million
- Market Cap: $20,740
- Total Debt: $14,177
- Enterprise: $34,917
In the April 24 Deal Break Analysis, I made a critical modeling error – I grossly miscalculated the equity component of a CHTR TWC bid, which resulted in a 311MM share issuance at 9X EBITDA versus 127MM in the updated analysis. No excuses – just pure, unadulterated lack of attention to detail.
Standalone. On a standalone basis, CHTR is worth approximately $184, assuming 7.1% top-line growth, a 38% terminal EBITDAM, a 12% Maintenance Capex margin and a 15X terminal PE.
CHTR + BHN. I have bumped up the estimated BHN purchase price to 8 times 2014 EBITDA, as well as the PF leverage target to 4.5X from 4X originally. Growth, margin and PE assumptions remain the same as in the Standalone Valuation. CHTR + BHN is worth $223.
CHTR + BHN + TWC. I estimate TWC is taken out for 9 times 2014 EBITDA, at $181.63 per share with a $100 per share cash component. The following assumptions are made: 6% growth, 40% terminal EBITDAM, 10% Maintenance Capex margin, 4X target leverage, and a 17.5X terminal PE. Let’s call this “New CHTR”. New CHTR is worth $338.
New CHTR will have PF leverage of a heady 6 times 2014 EBITDA; but with tax assets, asset swaps and synergies, management will likely whittle leverage down by perhaps half a turn. New CHTR rapidly deleverages to target by 2018.
At recent closing prices of $178.78 and $154.78, CHTR and TWC trade for 53% and 61% of pro forma FVPS.
Understandably, one might ask how the market is possibly undervaluing such a widely-followed situation. I would argue that on a short- to medium-term basis the market is dead on – at $178.78, New CHTR trades for 8.64 times 2015E EBITDA, smack in line with industry comps of 7X to 9X.
The auction-pricing nature of the market is a brilliant mechanism for immediately reflecting new information. Boom – a deal is announced and the market rapidly adjusts pricing. That is Eugene Fama’s definition of market efficiency. Where Fama is wrong is in how accurately the market reflects the new information. As successful investors have proven time and again over decades, the market is consistently wildly inaccurate with how it reflects new information. Yes the market was “efficient” at the lows of March 2009 in that it reflected the global depressionary conditions in place; it simply was outrageously inaccurate in how it reflected those conditions.
Long-winded way of saying that the market is spot-on with its current “reflection” of New CHTR – based on the fact that the PF entity appears to trade in line with industry comps – but wildly inaccurate due to overlooked margin and multiple expansion opportunities that lie ahead.