Qurate Has A Big Decision To Make Right Now

In their recent episode of the VALUE: After Hours Podcast, Taylor, Brewster, and Carlisle discussed Qurate Has A Big Decision To Make Right Now. Here’s an excerpt from the episode:

Bill: Well, I’m going to talk Qurate, but it doesn’t have to be Qurate. I just think it’s a really interesting situation right now. Obviously, I own the shares, and some have asked me will I be able to pivot if the business hics up or hiccups. My history with this business is I’ve always been fascinated by the consumer psychology of it. Always. The valuation never fully made sense to me, and then, it never made sense to me, because it got too cheap last year. Here, my free cash flow number is lower than a lot of people that I [unintelligible 00:25:59] what their free cash flow number is. I think there’s dividends that they have to pay out to minority shareholder.

Jake: Is this prospective free cash flow or–?

Bill: Well, who the hell knows?

Jake: Okay. Well, I’m saying the numbers that you’re– These are what you have in your head of what you think they might be able to do.

Bill: Yeah, the business is in a really weird spot. It doesn’t really grow, but it also doesn’t really shrink. I don’t think anybody really trusts it, because everybody’s association, my own included, is that it’s a legacy distribution business. If you wanted to be a bull, I think you could argue, well, look at what 2020 was. It was the best year that that business has seen in a long time, and we’re further along and the cord-cutting narrative than we’ve ever been before. So, presumably, some of the shoppers have figured out another way to shop. On the other hand, I would be lying if I said, “Yeah, I’m super confident in the assets duration in perpetuity.” There’s clearly a legacy benefit that they get from the television.

There’s this really weird dynamic going on where I think– a large part of my bet was Greg Maffei and he’s got a really interesting decision to make right now. Because where the shares are trading, if they want to get aggressive with it, they could probably retire somewhere around 10% of the company if they wanted to do an opportunistic buyback.

But if you go back and you read historical transcripts, he was doing buybacks and the market didn’t really react very well to it. So, I don’t know if he’s a little bit gun shy to do a buyback, and I think if you look at some of the historical shareholder base, they’re not exactly amped up about buybacks because they didn’t work. I think if you look at a retailer like Bed Bath & Beyond, they did a lot of buybacks and an entity that it didn’t work out. So, there’s an argument to be made that maybe cash back is a better decision.

I just think I can argue on one hand that the business is stronger than it’s ever been. I can argue on the other hand that margins have been declining, and best customer spend has been declining over the past three years. So, maybe it’s not as strong as I think it is. It’s one of those, I think this is an interesting point in the company’s history and capital allocation. We’ll see how– The books are always written when people are looking back at the story. If you’re interested in capital allocation, and you’re interested in Liberty, my buddy, Francisco, had a tweet and it showed the three different entities that Maffei was talking about and how his strategy and capital allocation is different in each.

One is Liberty Broadband and that is in large part Charter. So, it’s basically a growth equity. So, he’s just going to keep buying in the shares. Got Liberty, Sirius, doesn’t really have a lot of cash flow. So, they’ve got to wait but one day will be a buyback story. And then, Qurate has a lot more perceived uncertainty and probably uncertainty. So, I just think if you’re interested in capital allocation, and you think he’s moderately good at it, watching those three entities over the next 12 months could be a good learning process in real time.

Tobias: They’ve done some interesting stuff there. Carving out some of those cash flows for the press was kind of brilliant– creating whatever that was, a billion dollars in– [crosstalk]

Bill: Yeah, it was 1.25 at 8%

Tobias: 1.25 from a $100 million in flows out of a billion, right? Like that–

Bill: Yeah.

Tobias: What was the equity on at that point? What was the multiple?

Bill: Well, [crosstalk]

Tobias: It’s like four or five, something like that, right?

Bill: Yeah, when they did it. So, pro forma, it was like two and a half. It was really cheap. It’s not as cheap now.

Tobias: He’s so smart. Both Malone and Maffei, jeez.

Bill: Yeah, well, that’s the thing. If people think that, and they want to learn, and they want to watch, I think this is an interesting situation to watch regardless of what the outcome is. I think it’s hard to argue that the range of outcomes is insanely tight. Although it’s one of those weird situations where you can retire so many shares that you could actually probably de-risk the equity quite a bit by retiring a bunch of shares. I used to think that I would want more preferreds in front of the common. Francisco got me thinking smarter about that.

Tobias: What are going to do with debt rather than–

Bill: Well, they’re going to have a billion dollars of cash on the balance sheet. They probably already do. So, I think it’s like $400ish million shares out at what, 11 bucks. So, call it a four and a half billion-dollar market cap or whatever.

Jake: EV?.

Bill: You could spend– well, the EV is a lot higher because you’ve got all the debt. But you could take $450 million in the cash and take out 10% of the company, and still leave yourself with $500 million in cash. It’s interesting. They’ve got a real decision here.

Jake: When you say that the market didn’t like the buyback before, you mean the price didn’t go up, because of it? Is that–?

Bill: Yeah, and I think that the market was probably right on that. I’m not sure that levered buyback strategy was the right strategy to run at that time.

Jake: If you’re a remaining shareholder, remaining partner in this business, and you think it’s reasonably priced, why would you want the price to go up if buybacks are part of the kind of going forward strategy?

Jake: Well, I don’t think that you do.

Tobias: We’re all on Twitter, sir.

Bill: No, I don’t think– [crosstalk]

Jake: Unless you have a very short-term mindset in which you just want to be punching out.

Bill: Yeah, well, I think what I appreciate about the way that Maffei looks at the world is, I think that there’s a lot of people that would say, “I’m right, the market’s wrong. We’re going to do this no matter what.” I think Maffei historically has said to himself, “The market actually is pretty smart, and I should at least look at what the market’s reaction is as some indication as to whether or not I need to re-jigger my thinking.” I think that’s created some very smart outcomes for them. I tend to agree with you. I think if I was confident in the business right now, I would do a big buyback. But I don’t know what they’re thinking. It’s one of those that I think you could– If it stays here for two years and they take out 20% of their shares, or three years and they take out 30%, that’s one of those things that the outsiders gets written about. But it’s in the moment, it’s kind of uncertain. So, I just think it’s a good learning experience for people to pay attention to. I’m certainly excited about it.

Tobias: Bill’s talking about Qurate, Q-R-T-E-A is the ticker.

Bill: It’s all I ever talk about.

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