Patrick Brennan. Portfolio Manager, Brennan Asset Management

Transcription

1 Patrick Brennan Portfolio Manager, Brennan Asset Management

2 CHTR Via LBRDK/GLIBA: Double Discount US Cable Patrick Brennan, CFA Best Ideas 2018 Hosted by MOI Global June

3 BAM Disclosures In BAM s investment decision making process involves a number of different factors, not just those discussed in this document. The views expressed in this material are subject to ongoing evaluation and could change at any time. Past performance is not indicative of future results, which may vary. The value of investments and the income derived from investments can go down as well as up. It shall not be assumed that recommendations made in the future will be profitable or will equal the performance of the securities mentioned here. While BAM seeks to design a portfolio which reflects appropriate risk and return features, portfolio characteristics may deviate from those of the benchmark. Although BAM follows the same investment strategy for each advisory client with similar investment objectives and financial condition, differences in client holdings are dictated by variations in clients investment guidelines and risk tolerances. BAM may continue to hold a certain security in one client account while selling it for another client account when client guidelines or risk tolerances mandate a sale for a particular client. In some cases, consistent with client objectives and risk, BAM may purchase a security for one client while selling it for another. Consistent with specific client objectives and risk tolerance, clients trades may be executed at different times and at different prices. Each of these factors influences the overall performance of the investment strategies followed by the Firm. Nothing herein should be construed as a solicitation or offer, or recommendation to buy or sell any security, or as an offer to provide advisory services in any jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction. The material provided herein is for informational purposes only. Before engaging BAM, prospective clients are strongly urged to perform additional due diligence, to ask additional questions of BAM as they deem appropriate, and to discuss any prospective investment with their legal and tax advisers. Contact information Patrick Brennan, CFA Brennan Asset Management, LLC patrick@brennanvalue.com 2

4 Brennan Asset Management, LLC (BAM) BAM is a registered investment advisor based in Napa, CA. BAM manages money through separate accounts and a private fund. All-cap strategy: total names Top 10 names: 70-80% of portfolio 3-5+ year holding period Eat our own cooking Media/telecom, specialty financials and consumer discretionary focus BAM Strategy Own under-followed or under-owned because of complexity issues Investments include documented areas of inefficiency including: Spinoffs/Thrift Conversions Liberty Media Complex Owner/Operator Businesses Generally looking for 15-20%+ IRRs on base case scenarios over 3-5 year time period 3

5 A Brief History of Time 2015 LILA/K (Liberty LILAK) Greg Maffei joins Liberty, March LVNTA LIBERTY LINTA QVCA LSXMA/K (Liberty Sirius) 1999 LIBERTY LCAPA LMDIA LSTZA BATRA/K (Liberty Braves) FWONA/K (Liberty Media) ASCENT CAPITAL GROUP INC Modern iteration of Liberty begins with May 10, 2006 creation of LCAPA/ LINTA tracking stocks 2014 Octagon shapes represent tracking stock while company logos show asset-backed companies 4

6 Liberty Structure Summary Berkshire rules: 1: Don t lose money 2: Don t forget about rule number 1 Liberty additions: 3: Don t willingly pay taxes when spinoffs, tracking stock and share repurchases are readily usable 4: Don t forget about rule number 3 5

7 Repeatable Inefficiency Trackers/Spinoffs create uneconomic selling Indices often cannot own trackers Normal spinoff selling Exposure limits how many Liberty names do I own?! Liberty companies screen poorly Negative GAAP earnings Too much leverage (private equity capital structure) No dividend in yield starved world Too many minority interests Too much work: How do I explain this to clients/portfolio managers? Crossover industry/market cap inefficiencies I cover telecom not retail (QVC), travel (EXPE/TRIP), hotels (ILG) I am large-cap investor (CHTR/SIRI/LBTYK) and can t own these spins (GLIBA/LBRDK/LILAK) Malone vs. Malone 6

8 Recent Liberty Underperformance S&P % Berkshire Hathaway -1.2% Performance 12/31/17 06/08/18 1 GCI Communications QVC -25.4% -19.1% Discovery Communications 2.6% LILAK 10.5% Liberty Global -16.0% -30% -25% -20% -15% -10% -5% 0% 5% 10% 15% S&P % Berkshire Hathaway 48.7% Performance 12/31/15 06/08/18 2 GCI Communications QVC -21.6% 11.6% Discovery Communications -13.9% LILAK -48.9% Liberty Global -27.4% -60% -40% -20% 0% 20% 40% 60% 1 LILAK starting price as of 07/02/15; LBTYK shares adjusted for LILAK distribution 2 GLIBA returns adjusted for CHUBA/LEXEA spins and assume GLIBA shares purchased with cash in lieu of fractional shares 7

9 Recent Liberty Underperformance Liberty entities are often the perfect screen for what investors DO NOT want to own currently No dividends Complicated Selective operational issues Company specific issues Foreign Exchange (DISCA/LBTYK/LILAK) Cord Cutting (DISCA/LBTYK/LBRDA/GLIBA) Malone vs. Malone (GLIBA/QRTEA and LBTYA/LILAK) Short-term operational weakness (LBTYA/LILAK/QRTEA) 8

10 Cable is a Good Business Around the Globe Better Product/Few Competitors/High Barriers to entry Fiber/HFC faster than copper Difficult, expensive to replicate (Building permits/franchise rights/angry neighbors) ask GOOG Utilityesque with pricing power Predictable cash flow Demand for Data (IDC: 10x ) Unburdened by dividends/investment grade Widows and orphans vs. Cable cowboys Value obscured by reporting and Liberty entities Depreciation vs. maintenance capex Liberty entities add more confusion 9

11 CHTR History 2009: Charter files/reemerges from bankruptcy: 2012: Tom Rutledge becomes CEO 2013: Liberty invests $2.6B in CHTR (~27%) : CHTR makes series of offers for TWC ($114- $133) 2014: TWC/CMCSA agree to merger for ~$ : CHTR agrees to series of swaps/divestitures with CMCSA 2015: CMCSA withdraws offer under regulatory pressure 2015: CHTR/TWC agree to merger for ~$ : CHTR/TWC Merger closes 10

12 Operational/Capital Allocation Dream Team? Tom Rutledge COO Cablevision ; CHTR CEO 2012 Considered pioneer of triple play offering CVC consistently held highest cable metrics Dr. John Malone CEO TCI Cable One of great capital allocators all time Predicts high teen/low 20% IRR on CHTR/TWC/Bright House 11

13 CHTR Concerns Nielsen s Law vs. Fast Enough Broadband pricing power? Video Cord cutting Integration/Credibility vs. Acceleration in trends Margin vs. Cost accounting 5G Threat VZ vs. World Urban vs. Everywhere else Mobile Growth Driver or Expense increase? Cost savings vs. Inertia Valuation EBITDA vs. Leveraged free cash flow Merger possibility dead? 12

14 Broadband Opportunity Nielsen s Law: High-end connection speed grows 50% per year Data usage: great secular growth stories History suggests speed eventually utilized Nielsen's law Moore's law Internet bandwidth Computer power Annualized Growth 10 year CAGR 50% 57.0x 60% 100.0x but visibility on 1G+ applications is poor hence recent M fast enough 13

15 Broadband Opportunity CHTR has larger DSL overlap (>50%) vs. other cable names T will increase fiber rollout to at least 12.5 million homes by 2019 CHTR still increase broadband subs ~0.8mm-1.1mm over next 3-5 years assuming: ~50-55% share in fiber markets 70-85% share in DSL markets 14

16 Broadband Opportunity Visibility on 50%+ internet penetration appears high Greg Maffei has stated that penetration as high as 60% evenutally doable E 2019E 2020E 2021E 2022E High Speed Data Penetration (Resi) 38.5% 41.2% 43.4% 45.0% 47.0% 49.0% 50.0% 51.0% 52.0% Internet Subs (Resi) Additions CHTR offers minimum speeds of 100M in 50%+ of its footprint 200M: 25% 15

17 Cord Cutting issues NFLX and others have gained as MSO s have lost Larger players: Less worse than smaller ones (still negative) No material acceleration in Q1 despite stock selloff lagging indicator? 45.0% 40.0% 35.0% 30.0% 25.0% 20.0% 15.0% 10.0% 5.0% 0.0% -5.0% -10.0% Q1 15 Q2 15 Q3 15 Q4 15 Q1 16 Q2 16 Q3 16 Q4 16 Q1 17 Q2 17 Q3 17 Q4 17 Q1 18 Y-Y Change Largest MSOs Y-Y Change NFLX Source: Bloomberg/Company Filings; MSOs Include Altice, AT&T, Comcast, Cox, Dish, Charter and Verizon 16

18 Cord Cutting Considerations Few dispute cord cutting continues but Tom Rutledge was arguably one Credibility?: A couple of million doesn t impact plan vs. We plan on growing total subscribers CHTR Q1 results (-122,000) impacted by non-pay disconnects likely impacts Q2 numbers as well Integration generally smooth this was hiccup We expect video losses to accelerate but large cable better than small Q actually showed stabilization in trends does this continue? Video is profitable but much less so than broadband Margins getting worse Cable: Leverage despite programming deleverage changes at higher losses Wide discretion in allocating costs CHTR Stream($22)/Choice ($25) Appeal to cord cutters? 17

19 Cord Cutting: Accelerating? Large percentage still considering cutting the cord but fewer than previous years MS th Annual Streaming Video Survey (3,100 Adults 18+) 18

20 Cord Cutting Surveys Churn highest among new vmvpd MS th Annual Streaming Video Survey (3,100 Adults 18+) 19

21 Cord Cutting Margin Impact Increasing video costs per sub has lowered video gross margins EBITDA Margin has occurred despite deleverage from largest expense E Programming Costs $8,105 $8,953 $9,614 $10,596 $11,370 Residential Video Customers Change in Resi Video Customers -0.3% -1.3% -1.7% -2.1% Programming Costs Per Sub (r) $39.13 $43.66 $47.27 $52.91 $57.88 Programming Costs Per Sub (c+ r) $38.39 $42.79 $46.23 $51.59 $56.23 Increase in Cost Per Sub 11% 8% 12% 9% Programming Costs/Total Revenue 22.8% 23.9% 24.0% 25.5% 26.0% Implied Gross Margin Video 49.0% 44.1% 41.3% 36.3% 33.7% Total EBITDA Margin (Pre-Wireless) 35.9% 34.8% 36.1% 36.8% 37.6% 20

22 Unit Economics: Double vs. Single Implication: Cord cutting more negative for CHTR vs. CMCSA CHTR CMCSA Double Play Broadband Only Double Play Broadband Only Video ARPU $90 $0 104 $0 Gross Margin 40% 40% 49% 49% Video Gross Profit $36 $0 $51 $0 Broadband ARPU $54 $65 $53 $101 Gross Margin % 95% 95% 95% 95% Broadband Gross Profit $51 $62 $50 $96 Total Gross Profit $87 $62 $101 $96 Depreciation $9 $3 $9 $3 Pre-Tax Operating Profit $78 $59 $92 $93 Source: Company Data/Bloomberg/MS Research 21

23 Unit Economics: Double vs. Single CHTR Double Play Broadband Only Video ARPU $90 $0 Gross Margin 40% 40% Video Gross Profit $36 $0 Broadband ARPU $54 $65 Gross Margin % 95% 95% Broadband Gross Profit $51 $62 Total Gross Profit $87 $62 But this analysis assumes one ignores promotions (3 year lock) Depreciation $9 $3 Pre-Tax Operating Profit $78 $59 and doesn t account for video margins deteriorating (higher programming costs) $30 TV $7 HD Box $35 Promotional Fee (3 Years) $9 Broadcast Fee $81 Total Video $65 Broadband $146 Total Double Play 22

24 Unit Economics: Double vs. Single CHTR Double Play Broadband Only Video ARPU $55 $0 Gross Margin 34% 34% Video Gross Profit $19 $0 Assuming more permanent video discounting paints different picture Broadband ARPU $54 $65 Gross Margin % 95% 95% Broadband Gross Profit $51 $62 Total Gross Profit $70 $62 Depreciation $9 $3 Pre-Tax Operating Profit $61 $59 Pre-Tax Operating Profit (With 50% Promotional) Pre-Tax Operating Profit (With 100% Promotional) $67 $59 $61 $59 Lower pricing should result in faster customer acquisition and discourage overbuilding 23

25 Margin vs. Cost Accounting Programming $8,105 $8,953 $9,614 $10,596 Regulatory, Connectivity, and Produced Content $2,058 $2,065 $2,093 $2,064 Cost Service Customers $6,935 $7,216 $7,414 $7,239 Marketing $2,117 $2,306 $2,964 $3,036 Mobile Transition Costs $14 $72 $156 $124 Other $3,648 $3,778 $3,318 $3,221 Total Operating Costs $22,877 $24,390 $25,559 $26,280 Margin expansion has occurred despite deleverage on highest expense (programming) The cost to service video customers is far higher but exact allocation unknown Total EBITDA $12,773 $13,004 $14,464 $15,301 Programming/Revenue 22.8% 23.9% 24.0% 25.5% EBITDA Margin 35.9% 34.8% 36.1% 36.8% Higher video losses: Lower cost to service and eventually programming leverage 24

26 Cord Cutting: Video Drives CPE CPE $2,961 $2,650 $2,761 $3,385 Scalable Infrastructure $1,626 $1,702 $2,009 $2,007 Line Extentions $907 $977 $1,005 $1,176 Total Success Based $5,494 $5,329 $5,775 $6,568 Upgrade/Rebuild $469 $594 $610 $572 Support Capital $1,089 $1,046 $1,160 $1,541 Total Capex $7,052 $6,969 $7,545 $8,681 Largest portion of Capex spend is CPE, which is heavily skewed towards video set-top boxes Capex/Revenue 20% 19% 19% 21% CPE 42% 38% 37% 39% Scalable Infrastructure 23% 24% 27% 23% Line Extensions 13% 14% 13% 14% Total Success Based 78% 76% 77% 76% Upgrade/Rebuild 7% 9% 8% 7% Support Capital 15% 15% 15% 18% Total Capex 100% 100% 100% 100% Larger video losses likely means lower capex Expense/Capex reductions suggest lower impact FCF/share 25

27 5G Considerations Lots of research suggests bigger bark than bite Many believe issues with LOS/fiber backhaul/costs Issues with neighborhoods ( blight on my property), city councils ( access to utility pole with cost you ) Issues with handsets complicated/expensive/timing uncertain Most comfort? If 5G transformational, why T buying TWX and VZ try to purchase CHTR? But perhaps VZ knows something or technology changes? Best chance with 5G is in dense urban areas CHTR underrepresented If VZ hits 30mm rollout perhaps <1mm CHTR cable subs at risk by 2022 Unlikely but possible threat vs. lower valuation 26

28 5G Thoughts What are you gaining economically by having wireless drop between node and building when wiring inside building? T May 2018 "For the general residential broadband solution, the economics for us don't seem to work T May 2018 Without rain, without wind, without leaves, without physical structures in-between, it (28 GHz millimeter wave spectrum) works really well CHTR Feb 2018 (do wireless) shareholder really understand the amount of capital required to essentially build a cable network from scratch where wireless drop is inferior to wireline drop? CHTR Feb 2018 What would millimeter wave cost? You would need ~6mm sites to cover US based on typical reach of millimeter wave at cost $250,000 to build a site. You re looking at a cost of $1.5 trillion to build out never going to happen. TMUS/S April 2018 Consumers will find no material difference between the two technologies (5G vs. LTE) Huawei April

29 5G: Line of Sight Issue Many (outside of VZ) believe Line of site issues (trees/weather) will drastically reduce 5G speed 28

30 5G: Line of Sight Issue which was confirmed via a field test by ARRIS/ Cable Labs ARRIS Cable Labs 2017 Can a Fixed Wireless Last 100m Connection Really Compete with a Wired Connection and Will 5G Really Enable this Opportunity? 29

31 5G: Line of Sight Issue GOOG Earth + 35 Resi Neighborhoods at 500ft= Lots of Obstructed Views Tarana s Residential LoS Availability study Reprinted in RCR Wireless News. The analysis used Google Earth s well-calibrated 3D building and foliage data, evaluating LoS availability as a function of base station height and support for fixed-access customer premises equipment (CPE) deployment modes in windows, on eaves, or on rooftops. The study included 8,219 occupied structures in the 35 neighborhoods and 3,736 individual observations of LoS across the 3 CPE installation modes 30

32 FTTH vs. Wireless Drop When is wireless drop better than FTTH? Only in dense areas and assuming everything else works Fiber to Node Drop Cost (include CPE) Comment Tucows $1,250 $300 Marketing/Labor on CPE? Liberty Global % <25 meters 33% 3 year Marketing/Labor Fios $1,200 $800 ~1% return Urban FTTH $1,153 $760 Suburban FTTH $2,050 $760 Rural FTTH $2,499 $2,500 Higher cost for FTTH Assuming ~$800 for the FTTH drop and 200m of required tower/radio distance, wireless better than 5G in <15% of country Penetration Rate 30% 40% 50% Tucows $4,467 $3,425 $2,800 Liberty Global $3,249 $2,518 $2,079 Fios $4,800 $3,800 $3,200 Urban FTTH $4,603 $3,643 $3,066 Suburban FTTH $7,593 $5,885 $4,860 Rural FTTH $10,830 $8,748 $7,498 Capex CPE Opex Equipment Life Total Tower Cost FTTH Cost Homes/Tower to choose 5G over FTTH 5G - 28 GHz $22,500 $650 $4,200 7 $51,900 $ Sources: ARRIS Cable Labs 2017 Can a Fixed Wireless Last 100m Connection Really Compete with a Wired Connection and Will 5G Really Enable this Opportunity?, VantagePoint Evaluating 5G Wireless Technology as a Complement or Substitute for Wireline Broadband, company filings, and internal models 31

33 5G: Best Chance? Largest DMAs CHTR Underrepresented CHTR: ~9% fewer total broadband subscribers than CMCSA but ~50% fewer in 25 largest DMAs and limited overlapping telecom market in top 25 DMA Rank DMA Name Total BB Subs % of Nielsen TV HHs MSO Incumbent MSO Incumbent MSO Share Telco Incumbent Telco Incumbent Telco Share Nielsen TV HHS 1 New York, NY 6,667,919 90% ATUS 2,568,536 39% VZ 2,077,955 31% 7,368,320 2 Los Angeles, CA 4,866,753 89% CHTR 2,756,976 57% T 920,862 19% 5,489,810 3 Chicago, IL 2,882,379 83% CMCSA 1,726,758 60% T 891,972 31% 3,475,220 4 Philadelpia, PA 2,672,665 92% CMCSA 1,400,406 52% VZ 1,003,258 38% 2,917, Boston, MA 2,378,348 99% CMCSA 1,424,563 60% VZ 592,692 25% 2,411,250 8 San Francisco, CA 2,250,220 91% CMCSA 1,523,563 68% T 630,656 28% 2,484,690 6 Washingon, DC 2,127,899 87% CMCSA 750,463 35% VZ 976,562 46% 2,443,640 9 Atlanta, GA 2,120,724 89% CMCSA 895,912 42% T 800,309 38% 2,385,730 5 Dallas, TX 2,078,697 79% CHTR 767,249 37% T 781,384 38% 2,646,370 7 Houston TX 1,767,071 74% CMCSA 821,646 46% T 720,410 41% 2,373, Seattle, WA 1,668,675 94% CMCSA 1,114,736 67% CTL 236,477 14% 1,766, Tampa, FL 1,586,867 85% CHTR 938,845 59% FTR 461,972 29% 1,859, Detroit, MI 1,507,757 82% CMCSA 736,664 49% T 399,911 27% 1,828, Orlando, FL 1,368,828 92% CHTR 928,702 68% T 164,107 12% 1,489, Minneapolis, MN 1,352,611 78% CMCSA 577,086 43% CTL 333,344 25% 1,723, Phoenix, AZ 1,352,430 73% COX 753,372 56% CTL 441,098 33% 1,848, Cleveland, OH 1,346,688 90% CHTR 694,054 52% T 332,739 25% 1,493, Denver, CO 1,340,359 85% CMCSA 815,977 61% CTL 434,604 32% 1,576, Miami, FL 1,284,464 77% CMCSA 741,984 58% T 452,165 35% 1,660, Sacramento, CA 1,157,276 86% CMCSA 630,019 54% T 339,969 29% 1,349, Portland, OR 1,040,874 92% CMCSA 619,305 59% CTL 195,579 19% 1,136, San Diego, CA 1,017,167 96% COX 560,453 55% T 262,286 26% 1,055, Raleigh, NC 1,016,421 90% CHTR 670,090 66% CTL 133,645 13% 1,131, Charlotte, NC 989,432 85% CHTR 613,271 62% T 214,646 22% 1,168, Baltimore, MD 972,753 88% CMCSA 502,047 52% VZ 400,476 41% 1,099,890 48,815,277 87% 25,523,677 52% 14,199,078 29% 56,184,110 Source: SNL Kagan, Nielsen 32

34 CHTR Mobile Offering Expected to launch June 30 this year MVNO on VZ Network Pricing mirrors CMCSA offering CMCSA: Breakeven at MSD penetration of broadband base Costs hit income statement expenses vs. capex Goal: Reduce churn for broadband customers not profit maximizer Telenet (Belgium) as model? Announced Mobile Operating Platform with CMCSA in April 2018 Now: Focused on design/development backend systems but could be start of larger partnership? Enhances offering in enterprise business market Possible Wifi sharing agreement Xfinity/CMCSA? Joint bid for mobile assets? or CMCSA too distracted? 33

35 CHTR Mobile Unlimited Per Gig 2017 EBITDA Margin 3 Year Avg EBITDA Margin AT&T 1 $120 $ % 39.0% $ Verizon 2 $130 $ % 43.5% Tmobile 3, 4 $120 x 27.6% 26.7% Sprint 5, 6 $100 $ % 25.2% CHTR/CMCSA Mobile 7 $90 $ % 40.4% All plans are pre-tax unless otherwise noted and are quoted for 2 lines and assume auto pay; per GB based upon data offering available (i.e., some offer 4GB, others 5G, others 8G) 1 Per GB=$100 for 5G 2 Per GB=$85 for 4G or $105 for 8G 3 Receive $10.99 Netflix subscription per month taking unlimited down to $109 - taxes are included. Including the value of each, the price would be approximately $100 4 Tmobile would not initially sell per gig; when we asked on CMCSA pricing, they offered us two lines for $100 at 2G per line or $25 per G 5 The "unlimited" plan covers 23G of data 6 Per GB=$65 for 4G; If a customer goes beyond 4G, he/she can purchase 1G for $15. Sprint fiscal year ends 03/31 7 CMCSA margins are for its cable business Can CMCSA/CHTR build scale on MVNO? Cost savings are real but inertia is powerful 34

36 2018 Harris Poll: Cable Hatred Extends Beyond Investors Issue for Attracting Mobile Subs RQ measures how companies are perceived in modern culture Good News: CHTR increased 6 slots since 2015 Bad News: They are 86/100 35

37 CHTR: Rolling LBO 2-4% Top-line Growth ~100 bp internet penetration expansion 3-4%+ annual video losses costs per sub HSD-MSD HSD Commercial Growth (14% revenue in 2017) ~7-8% EBITDA Growth Margin expands to CMCSA levels by 2020 (pre-wireless 50 bp drag from wireless 18-20) Leverage on programming (assuming higher video disconnects)2020+ higher topline/less margin if disconnects less 40%+ Free cash flow per share growth $30+ FCF Per share 2020 materially higher as capex drops/wireless drag lessens/leverage programming Capex declines to CMCSA levels 4-4.5x Leverage Limited cash taxes Merger progress Fully digitized footprint yearend (80/40% TWC/BH Q1 18) 1G by year end (45% Q1 18) Packaging complete 2019 (55% Q1 18) 36

38 Cable Comps: Programming Costs E 2019E 2020E TWC (Resi/Com) 22.3% 22.5% 22.9% 24.0% CHTR (Resi/Com) 24.5% 26.3% 27.0% 27.5% 24.0% 25.5% 26.0% 26.3% 25.6% CMCSA 21.2% 21.8% 22.2% 22.4% 23.1% 24.6% CVC 25.6% 27.6% 28.2% 29.1% 34.2% 34.2% Suddenlink 29.0% 28.5% E 2019E 2020E TWC (Resi/Com) $32.75 $35.14 $38.92 $43.07 CHTR (Resi/Com) $38.66 $42.08 $47.24 $50.93 $46.23 $51.59 $56.23 $60.73 $63.77 CMCSA(Resi/Com) $30.59 $33.42 $36.40 $39.18 $43.01 $47.95 CVC $39.95 $44.98 $49.54 $54.83 $76.43 $79.32 Suddenlink $55.02 $58.80 Pro-Forma CHTR/TWC shown in 2016/2017 Programming costs on residential video basis for CVC/Suddenlink versus residential and commercial for others 37

39 Cable Comps: EBITDA Metrics Converge EBITDA/Revenue E 2019E 2020E TWC 36.6% 36.1% 36.1% 34.3% CHTR (Pre-Wireless) 33.6% 35.0% 35.0% 34.9% 36.1% 36.8% 37.6% 38.2% 39.7% CMCSA 41.0% 41.1% 41.0% 40.6% 40.2% 40.3% CVC 32.8% 31.2% 31.7% 30.3% 33.4% 41.3% Suddenlink 44.9% 47.1% EBITDA/Homes Passed E 2019E 2020E TWC $ $ $ $ CHTR (Pre/Wireless) $ $ $ $ $ $ $ $ $ CMCSA $ $ $ $ $ $ CVC $ $ $ $ $ $ Suddenlink $ $ ARPU (Average Customers, Includes Commercial - Total Revenue) 12 Months Ended E 2019E 2020E TWC $ $ $ $ CHTR $ $ $ $ $ $ $ $ $ CMCSA $ $ $ $ $ $ CVC $ $ $ $ $ $ Suddenlink $ $ Pro-Forma CHTR/TWC shown in 2016/

40 Cable Comps: Capex Metrics Converge Capex/Revenue E 2019E 2020E TWC 14.5% 14.5% 18.0% 18.8% CHTR 21.8% 22.4% 24.4% 18.9% 18.9% 20.9% 19.5% 16.0% 15.0% CMCSA 12.4% 12.9% 13.9% 15.0% 15.2% 15.1% CVC (Resi cable only) 15.5% 14.5% 12.9% 11.8% 10.4% 10.9% Suddenlink 13.7% 12.0% Capex/Homes Passed E 2019E 2020E TWC (Resi/Com) $ $ $ $ CHTR $ $ $ $ $ $ $ $ $ CMCSA $93.11 $ $ $ $ $ CVC $ $ $ $ $ $ Suddenlink $ $93.28 Pro-Forma CHTR/TWC shown in 2016/

41 Cable Comps: Penetration Rates Video Penetration E 2019E 2020E TWC (Resi/Com) 41% 38% 36% 36% CHTR (Resi/Com) 35% 34% 34% 35% 35% 34% 33% 32% 30% CMCSA (Resi/Com) 43% 42% 41% 40% 40% 39% CVC 58% 56% 53% 51% 47% 46% Suddenlink 34% 32% 30% Internet Penetration E 2019E 2020E TWC (Resi/Com) 39% 39% 40% 43% CHTR (Resi/Com) 34% 37% 41% 45% 46% 48% 50% 52% 53% CMCSA (Resi/Com) 36% 38% 40% 42% 44% 45% CVC 55% 55% 55% 50% 51% 52% Suddenlink 38% 39% 40% Voice Penetration E 2019E 2020E TWC (Resi/Com) 18% 17% 18% 22% CHTR 19% 20% 22% 23% 23% 23% 22% 22% 22% CMCSA (Resi/Com) 19% 20% 21% 21% 21% 20% CVC 45% 45% 44% 40% 38% 38% TWC (Resi/Com) 18% 17% 18% 22% Pro-Forma CHTR/TWC shown in 2016/2017 Penetration rates are on residential basis for CVC/Suddenlink versus residential and commercial for CMCSA, TWC< legacy CHTR, and pro-forma CHTR CMCSA 2017 residential video, internet and phone penetration rates are 37%, 42% and 18% respectively. 40

42 Proxy vs. Reality Delay in merger closing makes it helpful to compare with one year lag CHTR Forecasts - Pro- Forma 2015E 2016E 2017E 2018E 2019E Revenue $37,507 $39,503 $42,209 $45,690 $49,283 EBITDA $13,328 $14,556 $15,974 $17,811 $19,541 EBITDA Margin 36% 37% 38% 39% 40% Capex ($6,516) ($6,463) ($6,916) ($6,479) ($5,829) Capex/Revenue 17.4% 16.4% 16.4% 14.2% 11.8% CHTR Actual/Our Forecast E 2019E Revenue $37,394 $40,023 $41,581 $43,716 $45,482 EBITDA (Pre-Wireless) $13,004 $14,464 $15,301 $16,434 $17,357 EBITDA Margin 35% 36% 37% 37.6% 38.2% Capex ($6,969) ($7,545) ($8,681) ($8,525) ($7,277) Capex/Revenue 19% 19% 21% 20% 16% CHTR forecast likely underestimated degree of cord cutting but (all else equal) would likely mean lower expenses/capex 41

43 CHTR: Debt Leverage of 4.5x as of 03/31/18 Weighted average interest rate of 5.4% as of 03/31/18 Vs. expected EBITDA growth of ~7-8% If growth rate faster value infinite Weighted average tenor of ~10 years Even assuming incremental annual borrowings of $4-5B over next five years at higher rates, not a large increase in total funding costs Recession resistant business How big a drag should debt cause on leveraged cash flow valuations? 42

44 Tax Discussion $10.9 Billion NOL From CHTR disclosure, company doesn t expect to pay cash taxes until 2021 at earliest We would take over and suspect many underestimating how powerful tax reform is for CHTR FCF Of current $10.5B of depreciation, roughly $3B (and declining) is related to merger and therefore not-deductible $7-8 depreciation + $7-$9 billion capex=$14-$15b shield BEFORE interest deduction ($3.5-$4.5B) on EBITDA stream expected to reach ~$20-$21 billion by 2021 Large portion of CHTR income shielded before lower tax rate and NOLs Possible no taxes beyond 2023 (2021 guidance) Caveat: Do not know the exact tax vs. GAAP depreciation schedule so we show some cash burden in 2022 If CHTR maintains 4-4.5x leverage, FCF per share likely much higher than many expect 43

45 CHTR Multiple? Cable Private Market Multiple Higher Than Public 4 parties approached CHTR about deal in 2017 Investors have historically used EV/EBITDA metrics to value cable companies But Lower interest rates/capex/tax rates/buybacks have increased leveraged free cash flow per share Adjusted Price/FCF EV/EBITDA 2018E 2019E 2020E 2018E 2019E 2020E CMCSA 12.3x 10.9x 9.3x 6.8x 6.3x 5.7x DISH 0.5x 0.9x 0.8x 4.7x 5.0x 5.2x LBTYA 12.6x 13.5x 11.5x 7.7x 7.3x 6.9x CHTR 19.0x 12.2x 8.7x 9.1x 8.7x 8.0x ATUS NA NA NA 7.7x 7.3x 7.0x CABO NA NA NA 9.9x 10.0x 9.7x DISCA 7.5x 5.5x 5.0x 8.4x 6.7x 6.3x Source: Internal models (CHTR), Bloomberg, MS Research 44

46 CHTR Multiple? Discovery Dilemma DISCK currently trades at ~6x 2019E EV/EBITDA and 5-6x 2019E free cash flow per share But DISCA doesn t have broadband AND has substantial exposure to cord cutting/warrants much lower multiple? Yes, so if DISCA ~20% FCF yield CHTR 10%? and DISCK investment grade Possible CHTR multiple anchored to hated media sector Who is incremental buyer of CHTR stock? CHTR 45

47 LRBRDK/GLIBA: CHTR at Discount Increased IRR buying first/second derivative LBRKD/GLIBA DTV (LBRDK) SIRI (LSXMA) TRIP (LTRPA) non-discount Concentrated effort to get NAV Long history narrowing/eliminating discounts (LBRDK/DTV) Reps/Warranties LBRDK s CHTR Shares Likely GLIBA/LBRDK combine Timing likely 2 years but could happen sooner CHTR will buyback lots of shares Basis risk/widening Discount Possible Larger discount GCI vs. Pure Play LBRDK GCI basis risk: GCI + TREE 46

48 LRBRDK: LBRDK Typical Discount: ~7-12% Charter $ $15,984 Cash $78 Cash from options $116 Total Assets $16,178 Margin Loans ($497) NAV $15,681 LBRDA/LBRDK Outstanding NAV Per Share $85.16 LBRDK Current Price $76.50 Current % of NAV 89.8% 47

49 GLIBA: Larger Discount More Variables GCI Communications Alaskan quad-play cable operator: ~$300mm EBITDA, ~125K data subs, ~219,000 wireless subs Allowed asset backed stock GCI Considerations Recession now rebound in 2019/2020? (Oil) Universal Service Fund/Urban High Cost Support: $10- $13mm headwind on ~$300mm EBITDA Cost savings (Billing systems/network improvement/procurement) Capex reductions Does it move needle for CHTR? GM: Asking for premium for CHTR shares settle for NAV What multiple for GCI? Large equipment savings Rate card savings likely less than people think ($51-$52) 48

50 GLIBA: GCI $2,807 TREE 3.22 $ $799 LBRDK $76.50 $3,265 CHTR Exchangeable (QRTEA Reatribution) 2.20 $ $650 CHTR Exchangeable (June 2018) 1.12 $ $331 CHTR (Owned) 2.03 $ $600 Other Assets (evite/giggle) $40 Exchangeable cash $415 03/31/18 Cash $403 Total Cash $818 Asset Value $9,311 CHTR Exchangeable (QRTEA Reatribution) -$ CHTR Exchangeable (June 2018) -$ Acquired GCI Net Debt -$1,478 Other Debt LBRDK Margin Loan -$1,000 Tax Liability $0 Preferred Shares -$183 GLIBA: Larger discount to LBRDK warranted given moving pieces Net Value $6,040 Shares Outstanding NAV $55.03 GLIBA Price $44.77 Price/NAV 81.4% 49

51 GLIBA: (Equal Weight Discount) Implied LBRDK Price Per GLIBA Share $24.20 Number of shares of GLIBA Value of LBRDK $2,656 Per Share Implied Value LBRDK $ Cash LBRDK Share ($0.42) -True Position LBRDK Share $0.00 +Debt LBRDK Share $2.70 Implied CHTR Price Per LBRDK Share $64.51 Number of LBRDK Shares Implied Value of CHTR Stake $11,879 Number of CHTR Shares Held by LBRDK 54.1 Value of CHTR per LBRDK Share $ GLIBA: More work but possibly buying CHTR at implied ~$220 Current LBRDK Price $76.50 Current CHTR Price $ Implied Discount to LBRDK Price 18.6% Implied Discount to CHTR Price 25.7% 50

52 CHTR IRRs: CHTR Purchase EBITDA (post wireless) $15,301 $16,334 $16,957 $18,502 $20,109 $21,637 Assumed Multiple 9.0x 9.0x 9.0x 9.0x 9.0x 9.0x Enterprise Value $137,709 $147,003 $152,614 $166,515 $180,977 $194,733 Implied EV/Customer $5,166 $5,196 $5,547 $5,902 $6,216 Less Net Debt $68,382 $73,382 $76,982 $81,482 $85,982 $90,482 Equity Value $69,327 $73,621 $75,632 $85,033 $94,995 $104,251 Shares Outstanding (avg) Value Per Share $234 $283 $323 $407 $517 $647 Free Cash Flow Per Share $10.81 $15.50 $24.11 $33.77 $46.53 $54.22 Implied Multiple Per Share 21.6x 18.3x 13.4x 12.1x 11.1x 11.9x Implied IRR -8% 6% 14% 17% 19% CHTR Price $295.0 Leverage 4.5x 4.5x 4.4x 4.3x 4.2x We assume CHTR buys back shares at 20% CAGR increase in stock price if pessimism remains, share count will be meaningfully lower 51

53 CHTR IRRs: LBRDK/GLIBA Purchase EBITDA (post wireless) $15,301 $16,334 $16,957 $18,502 $20,109 $21,637 Assumed Multiple 9.0x 9.0x 9.0x 9.0x 9.0x 9.0x Enterprise Value $137,709 $147,003 $152,614 $166,515 $180,977 $194,733 Implied EV/Customer $5,166 $5,196 $5,547 $5,902 $6,216 Less Net Debt $68,382 $73,382 $76,982 $81,482 $85,982 $90,482 Equity Value $69,327 $73,621 $75,632 $85,033 $94,995 $104,251 Shares Outstanding (avg) Value Per Share $234 $283 $323 $407 $517 $647 Assumes midpoint of LBRDK (-10%) and GLIBA (-20%) discounts Free Cash Flow Per Share $10.81 $15.50 $24.11 $33.77 $46.53 $54.22 Implied Multiple Per Share 21.6x 18.3x 13.4x 12.1x 11.1x 11.9x Implied IRR 27% 18% 21% 23% 23% CHTR Price $251 Leverage 4.5x 4.5x 4.4x 4.3x 4.2x 52

54 Rutledge Compensation Summary 2016 Grant gives 700 million reasons to turn down $450+ offer? Option/Shares Strike Value at $600 Value at $290 Description 325,512 $ $101 $ Option 325,512 $ $77 $ Option 325,512 $ $47 $ Option 325,512 $ $34 $ Option 325,512 $ $12 $ Option 1,627,560 $270 $0 Total 2016 Options 60,280 $ $36 $ RSU 60,280 $ $36 $ RSU 60,280 $ $36 $ RSU 180,840 $109 $0 Total RSU 1,808,400 $378 $ Grant Value 668,378 $408 $128 Earlier Grants 265,257 $159 $77 Underlying Shares $946 $205 Total Value 53

55 Cable Comps: EV/Customer Low interest rates have inflated acquisition prices but Enterprise Value/Customer Current CHTR $5,384 CHTR at 9x 2020E $5,547 Brighthouse (CHTR Purchase) $4,100 Getting permits/construction crews/digging streets and dealing with upset residents is very expensive and will not get easier over time. Time Warner Cable (CHTR Purchase) $5,200 Suddenlink (Altice Purchase) $6,067 Cablevision (Altice Purchase) $5,679 Ziggo (LGI Purchase) $5,074 VZ, S, ATUS and 1 mystery party approached CHTR in 2017 If sold, it won t be at 9x EBITDA Verizon FiOS Rollout $4,000 Implied Lightning UK Rollout $2,600 54

56 CHTR Risks: New Technology If not 5G, something else (Bezo s Rockets, etc.) Regulatory Issues Some 5G tension healthy avoid congressional committees New presidential administration less friendly to cable Breakdown in Nielsen s Law Fast enough longer than anticipated Less recession resiliency? No slowdown in programming costs per sub Mark-to-Market Leveraged investment 6x possible? Risk off Underperformance Widening spreads on LBRDK/GLIBA 55

57 Contact Information Patrick Brennan, CFA Brennan Asset Management, LLC 56

58 Cord Cutting Surveys NFLX common among cable subs and larger (and lower churning) amount of new growth MS th Annual Streaming Video Survey (3,100 Adults 18+) 57