Profile: Jarden Corp.

From Horizon Kinetics:

Jarden Corp. (“Jarden” or “JAH”) is a holding company whose brands include the household names Coleman, Oster, Marmot, First Alert, Mr. Coffee, Bicycle and also Bee playing cards, and Crock-Pot, among others. Many of these brands have been prominent for generations; 14 have been in continuous use for over a century. Jarden has made investments in the brands but is able to benefit from the fact that they are long-standing, easily recognized brand names— efforts to increase visibility for an existing, trusted brand are frequently less costly than those to establish a new one. Furthermore, while some portfolio components (K2 skis and snowboards, for example) may be sensitive to economic conditions, many are not. For instance, many people consider their morning coffee to be a key part of their morning routine—if a household’s coffeemaker breaks, it will most likely be replaced even in a weak economy. As a measure of the value the company places on its brands, it acquires almost exclusively products that occupy the #1 market share in their category. It is very difficult to competitively displace this type of consumer brand. Jarden’s brands represent #1 market positions in 23 categories, including fishing, coffee makers, blenders, smoke alarms, and playing cards.

In addition to adding new product lines to the portfolio and making the necessary investments to maintain or expand the market share of their brands and the long-term profitability of the company, Jarden management’s assertive advocacy for shareholder (as opposed to executive officer) returns predates their own tenure. The current management team, headed by Martin Franklin (Executive Chairman) and Ian Ashken (Vice Chairman and Chief Financial Officer) has been in place since June 2001. Immediately preceding that date, as outside private equity investors, they had proposed, in a letter to the Board of Directors, to take the company private. Their letter of criticism and proposed action so impressed the Board that they invited Mr. Franklin and Mr. Ashken to join rather than acquire the company, and to manage it. Which they did. Aside from divesting poorer products, they undertook a series of leveraged acquisitions of the class of consumer products companies that now characterize the portfolio, deploying the cash flows generated by mature brands to pay down the debt. The company has also actively repurchased shares. These actions have contributed to the annualized book value per share increase of 30% witnessed since 2001. 

Horizon Kinetics Commentary: Long Product Life Cycles

Profile: ESPN (sub of Disney)

A bit of history

From the Schumpeter column in the Economist (The Real Disney, March 2013):

“When the story began, it was not obvious that it would have a happy ending. In 1979, when cable TV was in its infancy, ESPN’s founders had the idea to launch a 24-hour cable network that would focus on university sports in Connecticut, where they lived. No one thought a network could survive showing only sports, but it took off. In the beginning it was bootstrapping and rowdy. In “Those Guys Have All The Fun”, a history of ESPN, James Andrew Miller and Tom Shales write about how staff bet on the games they covered, and a couple of secretaries were involved in a prostitution ring organised by a mailroom employee.

ESPN has cycled through nearly as many owners as Cruella de Vil had Dalmatians. It started life with the backing of Getty Oil, which listed ESPN in its “other” category of investments, along with almond groves. Later it was majority-bought by ABC/Capital Cities, which Disney acquired in 1995 for $19.5 billion. Disney really wanted the broadcast network ABC, not ESPN.

The two firms’ cultures are as different as Lady and the Tramp. Disney has been around for 90 years, has 166,000 employees and is headquartered in California. ESPN is still based in Connecticut and is lean, with 7,000 workers globally. As one might expect of a clan of sports-lovers, ESPN is hyper-competitive. It has a “can-do mentality”, says Bob Iger, the boss of Disney. Being in suburbia has helped it shun the trappings and groupthink of Hollywood.

Disney smartly gives its subsidiaries autonomy. The boss of ESPN, John Skipper (a former Disney executive), and Mr Iger (a former ABC sports producer) both love sports and speak often, but are 2,900 miles apart. Disney’s biggest contribution to ESPN has probably been its fat wallet, which paid for new sports rights and technology. ESPN was one of the first firms to offer live video on its website, and it has launched an application so cable subscribers can stream ESPN on mobile devices.”

Competitive advantage

Pricing Power (The Real Disney, March 2013):

“ESPN’s muscular profits depend on three things. First, fans watch sports live: no one wants to see Monday Night Football on Wednesday. Because viewers cannot fast-forward through the adverts, advertisers pay more for slots on ESPN.

Second, ESPN offers spectacles you cannot see elsewhere. Rights to broadcast games are often exclusive. ESPN shows more sports, including baseball, car-racing and poker, than any other network. SportsCenter features some of America’s sparkiest sports commentators, whose banter is as irreverent as an English football chant, minus the swearing. (Keith Olbermann, an over-the-top political pundit, used to be one of them.)

Third, ESPN pioneered “affiliate fees”, which cable operators pay for the right to carry each network. In 2013 ESPN will probably earn $6.6 billion from them, more than three times what it makes from ads, according to SNL Kagan, a research firm. Because it has so many exclusive sports rights, ESPN has been able to haggle its fee up to $5 per subscriber, per month: far higher than any other network’s. These fees are more predictable than ad sales, which is why investors are such fans of cable networks.”

The main threats

More competition for sports rights (Fighting for possession, the Economist, May 2013):

“The cost of sports rights has been rising and so, as a result, have ESPN’s operating expenses. For the six months to March, ESPN’s operating costs were up 9% to more than $5 billion; pricier sports rights were an important reason why. Some deals have become so expensive that ESPN has chosen to walk off the field. BT recently outbid ESPN to acquire rights to English Premier League football. Without them, ESPN would not have enough viewers. It decided to sell its British and Irish channels to BT.”

The unbundling of cable (Interview with John Malone of Liberty Media on CNBC)

“Malone said that as more alternatives become available and broadband connectivity grows, over-the-top systems, which bypass cable operators for control and distribution, may begin to offer sports content and challenge the established system.

If sports networks decoupled from cable distribution and offered consumers standalone services at market prices,”you have an unsustainable model” for cable companies, he said. Despite long-term sports deals signed by cable networks, Malone said, in the next five years, bundling may begin to be relaxed because sports programming in every home becomes “not mandatory.”

Sports programming is considered by many in the entertainment industry to be the holy grail of cable, a highly guarded space that is thought to be a major justification for U.S. households in keeping their cable subscription. For this reason, sports networks are able to generate high subscription fees from cable operators, and networks are often able to sign more lucrative content deals by “bundling” less popular networks to must-have sports channels. 

“As the cable guys and the satellite guys start to lose customers to the over-the-top guys, some of those economics will be reflected back on the sports guys. They’ll start losing advertising revenue. They’ll lose affiliate revenue. And they have to face reality that maybe you need to segregate your market like everybody else,” he said in the “Squawk on the Street” interview taped Wednesday and broadcast Friday.”



Profile: Nintendo

What caught my interest?

A rough thesis on Nintendo by Moore_Capital54 on  the Corner of Berkshire and Fairfax forum:

Over the last 2 months we have built a significant position in Nintendo.

I thought I would share this idea with the board as it is the type of contrarian value investment that I love and reminds me of others which have produced fantastic results for us over the years.

What we have here is a company that is currently valued at a market cap of $19.5B USD. However, Nintendo holds over $13B in cash and liquid securities. When subtracting the cash we get an EV of only $6.5B.

Our thesis is that the earnings power of the business on a normalized basis, works out to roughly $2-3B a year.

We can go on and on about what Nintendo has done wrong, and how they desperately need a hot product. History teaches us that at least once every decade, Nintendo is able to launch such a product and when it does it produces significant FCF. FY 2011 Nintendo produced $800mm of FCF, and this was considered a terrible year.

Another catalyst is the dividend reinstatement which was suspended on September 29th, but historically ran around 1-2B a year. A reinstatement would mean the current valuation would produce between 5-10% dividend yields.

I expect NTDOY to double over the next 24 months quite easily, with very little downside risk.


Why is Mr. Market pessimistic?

Nintendo has been one of the worst performing stocks in the Japanese equity markets this year.  They are coming off their worst year in 30 years.  They actually lost money for a full year.  This is either a rare opportunity to buy the Big N at trough valuations, or this is the end of the company as we know it.  Investor sentiment indicates that most people believe Nintendo is doomed just like Sega, Nokia, or even Research in Motion.

Franchise Value

A link to the past: why Nintendo won’t make games for smartphones (June, 2013)

Nintendo has a huge range of exclusive franchises that are more or less guaranteed to sell like gangbusters, and it’s that exclusivity that makes them so valuable. The company turned a profit even through the unsuccessful GameCube years, buoyed by fans of its Mario, Zelda, and Pokemon games, and maintains healthy cash reserves. By comparison, Microsoft isthought to have lost close to $4 billion helping the original Xbox reach a similar install base to that of the GameCube.

Make no mistake — the Wii U has been a massive misstep on Nintendo’s part, and the chances of it coming close to its predecessor’s success are worse than narrow. But even with a subdued E3 showing, the company displayed enough to ensure that the system won’t be a total bust. Nintendo’s developers can knock out titles like Mario Kart 8 andSuper Mario 3D World in their sleep, and the Wii U will get a sales bump each time.

Other resources

Profile: Level 3 Communications

Level 3 Communications in one sentence:

Level 3 Communications, Inc., together with its subsidiaries, operates as a facilities-based provider of a range of integrated communications services primarily in North America, Latin America, and Europe.

The Internet Content Value Chain:

On Durable Competitive Advantage

Lower unit cost faster than you lower unit prices. That has been for 10 years our mantra, through scope, scale, innovation, lower unit costs, faster than unit prices grow, then you create a Netflix, or an environment for a Netflix, or an HBO GO, or an, or an for gaming, which is a huge phenomenon that rarely gets talked about in proportion to its size.

All of these things are network delivered, cloud-based services. And we feel more strongly than ever that if you could innovate, increase your scope, increase your scale, drop unit costs, it is a price elastic commodity and it is going to respond to lowering prices. We do think it is a mistake for those who I kind of refer to as the [scarce bit] people. There is only so much spectrum, there is only so much bandwidth, we want to raise prices.

I think that is a flawed strategy. The key is to innovate, drop unit costs faster than you drop unit prices, but drop unit prices.


…so, we have spent three years in an effort to analyze the US addressable market. We have a database. It took us a long time to put it together. We have 3.8 million buildings in it. That is about 13 billion to 14 billion of recurring revenue a month in those buildings.

You know who is in there, you know the number of employees, the type of business by SIC code. You can make a pretty rationale estimate of the spend and it is about 13 billion, 14 billion per month in the US alone. If you say, and we can do this in the database show me the buildings based on an algorithm that has revenue, net ex, Opex, show me the buildings that have been greater than a 70% IRR. That is opportunity. You don’t have to do anything more. We don’t have to enter a brand-new business.

We don’t have to hire a bunch of folks to get into cloud services. We don’t have to invent anything. We have to get better and better at deploying capital in metros. We have three continents to do it on. So to answer your question, we are focusing a great deal of effort with some of our best executives to analyze, manage and deploy capital in the metro on all three continents.

And I would like to think that we could use a greater fraction of free cash in that effort because the returns are so high.

James Crowe @ Morgan Stanley Technology, Media & Telecom Conference  (Febuary, 2013)

Level 3 Communications History

Form 8K (feb. 200)

Maximizing NPV Requires Many Complex Trade-Offs Between Tens Of Thousands Of Variables

Dropping Prices – Lowers revenue per unit – But increases number of units sold Increasing transmissions speed (OC-12, OC-48) – Increases capacity – But decreases equipment spacing and number of colors of light Increasing numbers of colors (wave lengths) – increases capacity – But decreases equipment and transmission speed
Shortening network element life – Leverages price performance improvements – But increases absolute capital requirements


o NPV is maximized when price decreases approach technology improvement rates 
o Pull less fiber, more often, to leverage technical improvements – Requires multiple conduits 
o Deploy new generations of opto-electronics technology very quickly 
o Average asset lives are short 
o Small improvements compound over time

– J. Crowe

LVLT Sources Scanned from Paper Copies – Investor Information Exchange

What is the internet backbone?

The Internet backbone refers to the principal data routes between large, strategically interconnected networks and core routers in the Internet. These data routes are hosted by commercial, government, academic and other high-capacity network centers, the Internet exchange points and network access points, that interchange Internet traffic between the countries, continents and across the oceans of the world. Internet service providers (often Tier 1 networks) participating in the Internet backbone exchange traffic by privately negotiated interconnection agreements, primarily governed by the principle of settlement-free peering.

– Wikipedia entry on Internet Backbone

Industry drivers

Rapid growth in demand

But the most important development of the past year may well be the fundamental changes that are reshaping the communications industry – changes driven by the explosion of demand for online video, gaming, and the streaming of movies and live events. What we are witnessing is nothing short of an information and content revolution, and our industry is being transformed by customer demand for more and more bandwidth and for online delivery of a wide variety of content.

The explosion of demand for rich content has created unprecedented demand for bandwidth, and
we believe that there is no company in our industry better positioned to benefit than Level 3. We
designed and built our company to fully harness the benefits of Internet technology, beginning with the
construction of the first international communications network to be completely optimized for Internet
Protocol (IP), an accomplishment for which our company was honored as a Computerworld
Smithsonian Laureate and inducted into the Smithsonian Institution. And today, we combine the reach,
reliability and scalability of our IP backbone network with our state of the art content delivery network
(CDN) and our Vyvx Services for Broadcast.

We believe that we are now beginning to see the clear implications of our investment in IP
backbone capacity and in our CDN. Our unique assets, our significant operating leverage and the
commitment of our employees are becoming apparent in our financial results.

2010 annual report

Industry consolidation

At the same time, a world of lightning-fast innovation and precipitous price drops is a world in which the winner takes all. The technology leader has the lowest costs and, therefore, the lowest prices. That brings more traffic, which cuts costs, which reduces prices, which brings more traffic, and so on. “We watched it with Intel and microprocessors,” Crowe says. “We watched it with Dell and computers. Sooner or later, somebody is going to end up with 70, 80, 90 percent of the Internet backbone. How that happens is always tough to describe, but it’ll happen. You can show mathematically that one company will get supernormal market share. It’s a network effect on steroids.”

And Level 3?

He looks at the floor with an aw-shucks smile. “That’s what Level 3 is built to do.”

– “Surviving the Fiber-Optic Fire Sale” by Frank Rose, Wired magazine (2004).


Longleaf Partners (Southeastern Asset Management) is the largest equity holder (they hold debt as well). Following are comments from their quarterly letters regarding Level 3 in chronological order:

2Q 2002
After the close of the quarter, the Partners Fund, together with Berkshire Hathaway, Legg Mason, and Longleaf Partners Small-Cap Fund, completed a private placement in Level 3 convertible notes. Although typically we neither own corporate bonds nor do private placements, this was a compelling opportunity that the Fund’s Öexible policies allowed us to pursue and that we did not want to forego. The ten-year notes position Longleaf ahead of the common equity, pay a 9% cash coupon, and are convertible at any time to common equity at $3.41 per shareÌa price that is under the stock’s current level, and is far below the company’s growing intrinsic value.

Level 3 owns the best Ñber telecommunications network in the industry. Importantly, most of its competitors struggle with huge debt levels and further signiÑcant capital expenditure requirements. Many are now in bankruptcy. Customers are universally worried about their service providers’ reliability,
Ñnancial integrity, and ability to provision future needs. Level 3’s superior network infrastructure, its servicing capabilities, and its capital resources position the company to become the clear industry winner. As we said in the press release announcing the placement, “”We invested in Level 3 to take advantage of consolidation opportunities in the telecommunications arena. We believe these opportunities are substantial. Level 3 is uniquely and competitively positioned, and its management team, led by Jim Crowe, is most able.”

3Q 2002
Our investees’ competitive advantages improve the probability that the growth in corporate values will be a meaningful part of our future investment returns. Specifically, our newly acquired and unique assets are:

– the lowest-cost provider of broadband wholesaling (even after competitors’ debts get washed away in bankruptcy) through Level 3

1Q 2003
Level 3: Purchased Genuity at a price that was immediately value accretive, adding high margin revenues over a uniquely low fixed cost communications system. Stock rose 5%.

2Q 2003
All of the stocks in the portfolio rose during the quarter. The largest contributor to performance was Level 3 Communications. In June we converted our bonds into equity, receiving additional shares to compensate for the interest payments we were giving up. The company strengthened its financial position when we agreed to convert and take the net present value of those future interest payments. This stronger balance sheet further improves the quality of the equity which we now own. Because our investment in Level 3 has been extremely successful in the twelve months since we did the private placement, the company is the Fund’s largest holding.

3Q 2003
Although Level 3 has been the largest contributor to the Fund’s year-to-date return, the stock declined 19% during the quarter. Our appraised value of the company was unchanged and our corporate partners remain some of the most capable we have seen. Level 3’s revenues fell primarily because of management’s effort to eliminate the unprofitable portion of Genuity’s business (Level 3 acquired Genuity earlier this year.) Our appraisal assumed this run-off, and our expectation for the company’s cash flow growth is unimpaired. Level 3 has also announced a plan to replace its bank debt with bonds to provide a more flexible financial structure to aid in purchasing additional customer revenues to run over Level 3’s fixed cost structure

4Q 2003
Level 3, which is the Fund’s largest position, made important strides. In June we exchanged our 9% convertible notes for equity. The company successfully integrated the Genuity business it purchased and restructured debt for a more flexible financial structure. The management team plans to pursue further organic revenue growth as well as larger scale through acquisitions that make financial sense. Level 3 was the third largest contributor to the Partners Fund’s return, and the stock remains undervalued when compared to our appraisal.

1Q 2004
Level 3 Communications hurt the Fund’s results. Lower operating cash flow expectations for 2004 precipitated a 29% price drop. The managed modem business will decline because AOL is decreasing its Level 3 business following revisions in AOL’s dial-up growth expectations. In addition, pricing competition in the Internet Protocol segment has remained terrible for longer than anticipated. Although demand for IP traÇc is growing, revenues are flat. On the other hand, transport revenues are rising at a healthy rate. Our appraisal of Level 3 remains well above its price because we believe that beyond 2004 the company will make up in broadband what it loses in dial-up service, will benefit as pricing becomes more rational, and will continue to see massive  increases in demand with the growth of newer applications such as voice-over-IP and  wireless communications.

2Q 2004
Level 3 detracted from the Partners Fund’s return both for the first half and in the last three months. Early in the year the company reduced expectations in its managed modem business because of the decline in AOL’s dial-up traÇc. Price competition continued to neutralize the rapidly growing Internet Protocol (IP) volume. In response to Level 3’s announcements in the first quarter, we reduced our appraisal to reflect lower cash flow in 2004, but our long-term assessment of the company and its prospects remained sanguine. We believe that expanding capacity utilization from both broadband customers and new services such as voice-over-IP will create firmer pricing in the next few years, and that Level 3 is strongly positioned to be a low cost beneficiary.

3Q 2004
Level 3 has been the largest detractor from Fund performance, falling 26% in the quarter and over 54% this year. It’s our view no news other than the ongoing short raid precipitated the recent decline. The company’s strong growth in demand for its fiber backbone capacity continues to be offset by stiff price competition. Based on our appraisals the stock is the most undervalued in the portfolio.

4Q 2004
After being one of the largest positive contributors to 2003 performance, Level 3 detracted from 2004 results. Level 3 fell 40% for the year despite a 30% fourth quarter rally. We believe the company is the lowest cost and highest service level provider of fiber optic backbone services, but faced two specific challenges in 2004. The managed modem business that serves dial-up customers suffered from a re-sizing of ports by AOL. While broadband usage increased demand for fiber backbone capacity at rates approaching 100%, price competition driven by overcapacity left revenues flat. These two dynamics hurt our appraisal of the business by pushing cash flow growth further into the future, but the stock price fell much more dramatically. We remain large owners of Level 3 because we believe that top line growth is a question of when, not if. Strong broadband demand should continue since only about a fourth of U.S. homes currently have this type of connection. Additional services such as voice over IP and video on demand will further increase capacity utilization. As this combined growth absorbs capacity, prices should stabilize because competitors with older networks cannot justify capital outlays at today’s prices. We believe that Level 3 has the longest staying power while waiting for pricing to turn because:
– Their cost structure is the lowest in the industry.
– The structure of the company’s leverage is formidable with no bank debt, and its first notes not due until 2008. The company recently bought back much of its obligation for 2008 after a successful placement of 2011 notes.
– The company has been adding customers, and incremental revenues have contribution margins of 60%. The potential to buy another, weaker competitor as they did with Genuity offers additional revenue opportunity.
– The management team led by Walter Scott and Jim Crowe has a strong operating and capital allocation history, they have practiced conservative accounting, and they are substantial owners.

1Q 2005
Level 3’s performance hurt the Fund’s return during the quarter, falling 39%. The company announced a higher cash burn rate for 2005 than many expected, as well as higher capital expenditures related to growth in new business. Given this growing demand coupled with Level 3’s low cost position among its competitors and the long overdue consolidation occurring among  telecommunications service providers, we believe that Level 3’s stock remains undervalued and that its prospects over the next three to five years are compelling. We acted on this belief by participating with six other firms in the private placement of a convertible bond that is due in 2011 and yields 10%. The offering raised $880 million, which will allow Level 3 to maintain over $1 billion in cash reserves throughout the year and to have flexibility to act on opportunities that may arise. The quarter-end portfolio of the Partners Fund does not reflect this purchase, which closed April 4th and reduced cash reserves by 2.5%.

3Q 2005
The two primary stocks that have hurt Fund performance for the year, Level 3 and Disney, are actually in better shape today than at the outset of 2005.

Hints of firmer prices in Level 3’s IP and Transport businesses have begun to show in the most recent quarter’s financials. In addition, Jim Crowe and the company’s competitors have begun to see better pricing. We have not adjusted our appraisal yet, but are encouraged by the positive signs.

1Q 2006
Most of the stocks in the Fund rose during the quarter with the largest contributor being Level 3. As the company reported higher operating cash flow for 2005 and increased guidance for 2006, the stock price responded. The financial results reflected our long-held belief that growing demand and industry consolidation eventually would stabilize pricing. Also, the company made a very important acquisition of Wiltel, and announced a smaller but favorable acquisition of Progress Telecom. The stock rose over 80% in the quarter and the convertible bonds purchased last year were up 50%.

2Q 2006
Rallies in many holdings that began the year at the lowest P/Vs have driven much of the strong performance in 2006. Although Level 3’s stock fell 14% in the second quarter, both the equity and the convertible bonds have made significant gains this year. The combination of top line growth, increased operating cash flow and several solid acquisitions has generated value appreciation. In spite of the stock’s large rally, the price remains at less than 60% of our appraisal.

3Q 2006
The Fund’s strongest performers for the year continued to do well in the third quarter. The combined bond and equity position in Level 3 has made the biggest impact on returns in 2006; the stock was up over 20% in the quarter. Operating cash flow has grown as pricing declines have slowed. The company’s acquisitions have enabled Level 3 to broaden its offerings from wholesale fiber backbone access to direct customer connectivity in many metro areas. Our appraisal has grown, and we believe that given the business’ operating leverage, the pace of value growth will be substantial. As the low-cost producer, Level 3 is also well positioned to make value-additive acquisitions in an industry that needs further consolidation.

4Q 2006
Level 3 almost doubled over the last twelve months. Internet usage has grown with ever-increasing video, voice and data demand. Not only has higher capacity utilization slowed price declines, but the acquisitions that Level 3 has made, including Wiltel, Telcove and most recently, Broadwing, have helped consolidate the industry’s overcapacity while expanding Level 3’s direct reach to customers in metro areas. The stock remains well below our appraisal of corporate value, and that appraisal continues to grow at a fast rate.

1Q 2007
Level 3 was the largest contributor to the quarter’s results. The company’s competitive strength continued to grow as did its stock price. During the quarter we converted the 2011 notes into equity, receiving the full face value of all remaining interest payments as well as a premium for early conversion. Adept balance sheet management by the company has played an important role in the success of this investment.

3Q 2007
After a substantial rally early in 2007, Level 3 declined 20% in the third quarter, making it the largest detractor for both the last three months and the year. The integration of the Broadwing acquisition has been more cumbersome than anticipated, creating longer provisioning times for orders. 2007 revenues have been delayed, but next year’s sales should reflect the built backlog and growing demand. The longer term outlook for the company remains strong.

4Q 2007
Level 3 had the largest impact. The company announced that orders were taking longer to provision resulting in revenue growth in the single digits versus the previously estimated mid-teens. We lowered our appraisal to reflect the delayed cash flows and to assume no improvement in the longer provisioning time. The combined third and fourth quarter stock declines made Level 3 the biggest detractor of 2007. The stock trades at a material discount to our conservative assessment of intrinsic value even though the prospects for Level 3’s future are much more certain than in recent years.

1Q 2008
The telecom
industry as a whole, and cellular operators in particular, fell. Level 3’s value grew in the quarter in spite of the stock’s 30% decline. The market overlooked the company’s progress in reducing its backlog of new customers and improving provisioning times. This positive news was overshadowed by the announcement of COO Kevin O’Hara’s departure. We are confident that Jim Crowe, the CEO, is the right person to lead the company and grow its value, and we are glad that CFO Sunit Patel, who previously planned to step down, has decided to remain in his role.

4Q 2008
Level 3 (“LVLT”) is the low cost provider among the primary internet backbone transport companies as well as a major competitor in direct internet service to businesses within most major metro areas. Unit demand is growing rapidly, especially with increasing movement of voice, data, and video over the internet. We have assumed lower growth in business services over the next year due to the economy. Concerns over slower growth and the company’s debt hammered the stock price, which fell 74% in the quarter. The company bought over half of its debt maturing in the next two years at significant discounts. Level 3 successfully raised $400 million for this purpose, and the Partners Fund was among the investors offered the opportunity to buy 2013 notes with a 15% coupon, convertible at $1.80 per share. LVLT is cash flow positive with depreciation and amortization outstripping capital expenditures. Jim Crowe and Sunit Patel have continued to ably manage the company’s capital structure while growing the business.

2Q 2009
Level 3 bought in more of its near-term maturities. The combination of solidifying its ability to meet obligations over the next several years and the general thawing of credit markets has improved investors’ view of the company. The stock rose over 60% in the quarter and has more than doubled this year.

3Q 2009
In the quarter Level 3 reported disappointing revenues primarily caused by internet backbone customer deferred spending. As the economy improves and capacity utilization rises, cable operators and other wholesale customers will have to spend to manage growing demand. Level 3 announced a new board member, Rahul Merchant, who has a wealth of experience in the telecommunications and technology industries including being on the Sun board. Although the stock fell 8% in the quarter, it has almost doubled in 2009.

2Q 2010
Level 3 declined 33% in the quarter and is one of the largest detractors for 2010. The company reported disappointing results. Changes made in the business over the last year have not yet shown significantly positive revenue results. We believe the company’s additional sales staff and growing productivity will translate into increased contracts and revenues. Additional sales will deliver substantial operating profit improvement because of the company’s high contribution margin.

3Q 2010
Level 3 has irreplaceable fiber assets, and demand for bandwidth is growing rapidly with the increasing movement of data and video across multiple platforms. The company’s pace for adding new direct customers has been disappointing. The contribution margin from increasing top line growth is substantial. Translating obvious demand into strong organic revenue growth in the near term will determine success.We are unhappy with Level 3’s operating results and stock price. You can assume that we are neither oblivious nor idle.

4Q 2010
Level 3 fell 36% for the year but had a 5% gain in the fourth quarter following news of becoming a primary carrier for Netflix. Because of the 60+% contribution margin from additional revenues, the growing demand for internet video should add meaningful free cash flow over time. The company has been slower to deliver growth than projected, particularly in the metro business. The short-term cost of hiring and training new sales people has impacted costs but not yet revenues. The transition time from orders to revenues in wireless backhaul has expanded because newer products demand more set-up time, and carriers are taking longer to connect. At this point success depends on revenue growth. Major debt maturities are three years away. Given that the cost to build the network was over $25 billion and that today’s enterprise value (debt + equity) is less than $8 billion, the company’s assets are severely discounted with several possible rewarding eventualities. As we said earlier in the year, we are neither oblivious nor idle regarding Level 3’s results and stock performance.

1Q 2011
Level(3) rose 50% in the quarter as EBITDA and margins came in higher than expected, and the company indicated that it expects higher top line growth. Subsequent to quarter-end, the company announced it will buy Global Crossing. The transaction will strengthen Level(3)’s balance sheet, further consolidate fiber capacity, and reduce Global Crossing’s operating costs. Although our appraisal reflects current results, if the combination goes as planned, Level(3)’s value could grow dramatically.

2Q 2011
The continuation of strong operating results at several core holdings as well as positive reaction to Level(3)’s announced acquisition of Global Crossing helped performance. Level(3)’s 66% second quarter return took the stock’s first half gain to 148%. Combining these two fiber network businesses provides numerous benefits. Level(3)’s debt cost will dramatically decline as its debt/EBITDA ratio falls from over 6 times to 4 times. Global Crossing’s gross margins will rise meaningfully as the company moves much of its U.S. long haul business to Level(3)’s network. Further industry consolidation bodes well for long-term pricing. We also gain astute partners in the board room as Global Crossing’s majority owner, Singapore fund Temasek, will have three board seats and own roughly 25% of the company.

3Q 2011
Level(3), which is up 52% year-to-date, has recently completed its acquisition of Global Crossing. The combined telecommunications fiber company will have lower operating and debt costs as well as larger revenue opportunities. The recent 39% stock decline did not reflect any change to the company’s prospects or the underlying value of its fiber assets. In fact, results released in the quarter included record gross and operating cash flow margins, helping the value of the company grow.

Other Sources:

LVLT on Corner of Berkshire and Fairfax forum

“What is wrong with Level 3?” – on Seeking Alpha

Andrew Odlyzko: Recent Papers

A presentation on smartphone and tablet user trends by Mary Meeker of KPCB

Data on the CDN market:

CDN Data: pricing, volume, contracts  (video), (pdf) – Dan Rayburn

Profile: Exor SpA


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Exor SPA – Hold Co stub trade” at

“As with Fiat, Exor has quite a complex 3 class share structure (ordinary, preferred and savings) of which ordinary shares were around 65% of the total (the company is buying back shares, mostly the preferred, at the moment so this may be slightly inaccurate). The last asking price was EUR 15.98 so the ordinary shares are worth around EUR 2.5bn and the share of the listed securities above minus the net debt position was roughly EUR 2.7bn. In other words, the current valuation is attributing a negative value of some EUR 200m to the non-listed businesses in which Exor has a stake (these are carried on the balance sheet at a very rough calculation of 1bn).

In addition, I belive the company may have a further 740m of assets. These appear as current assets on the balance sheet but I could not find any substantial description of what they were beyond a vague description of bonds and listed equities. Due to my slightly sketchy understanding of the accounting rules, I wasn’t certain if these were the listed securities discussed above. Everything I have seen suggests that they are not as the stakes in Fiat etc. are all carried in non-current assets (as far as I can tell) however, I decided to be conservative due to my lack of definite knowledge. The company is also trying to sell Alpitour which was carried at 83m but has now disappeared due to it being an asset held for sale (again my understanding here may be faulty).”

Exor SpA (EXOR.MI) – Priced for failure, run for success; initiating as Conviction Buy” by Gpldman Sachs Global Investment Research (July 2010)

“Under Agnelli heir Mr Elkann, together with executives and Fiat CEO Mr Marchionne, there have been several recent positive steps taken to unlock shareholder value.”

“We see potential for holding companies to outperform if market confidence improves. Our European holding company universe has an average LTV ratio of 16%, which means NAVs would appreciate 24% if GAVs were to appreciate 20% (assuming static net debt), as detailed in our scenario analysis below.”

On Italian corporate income tax laws:

“Italy has a relatively favourable holding company regime. Since January 1, 2008, only 5% of capital gains on stakes owned for at least 12 months are taxed at the Italian corporate income tax rate (IRES), currently 27.5%, making the effective tax rate 1.375%. If the asset is held for less than 12 months, than the full IRES applies, plus a regional tax rate (IRAP), currently at 5%. Only 5% of dividends are taxed at IRES irrespective of the holding period, making the effective tax rate 1.375%. Under the EU Parent-Subsidiary Directive, there will be no withholding tax on cross-border distributions of dividends if the parent holds at least 10%. Of note, Exor has almost €400 mn in tax losses carried forward that may be utilised to minimise tax on future profits.”

On capital structure and allocation:

“The Exor holding system currently has a small net cash position. Current liquidity (excluding stakes in liquid listed assets, which together have a value of over €5 bn) is €1.4 bn. Exor is actively looking to invest excess capital (c.€1.6 bn). The company wants to retain a minimum of €200 mn in cash and keep its LTV ratio below 20%. The current excess capital is unlikely to be invested in one new larger asset, but more likely in around three separate investments, according to management.”

Fiat and Chrysler merger

A Merger Once Scoffed At Bears Fruit in Detroit” – NY Times (Jan. 2012)

“This merger is the closest thing to a truly symbiotic relationship that the industry has ever seen,” said Jim Hall, managing director of the automotive consulting firm 2953 Analytics.

Ever since Fiat took control of Chrysler, Mr. Marchionne has said he planned to leverage the strengths of both companies and operate them as co-equals.

But that goal was questioned by industry analysts who saw how Daimler-Benz dominated Chrysler during their nine-year merger.

“Daimler could never figure out what to do with Chrysler because they had no interest in integrating it into their business,” Mr. Hall said. “But Fiat actually believes it needs Chrysler for mass purchasing of parts.”

In Mr. Marchionne, Fiat and Chrysler have a strong leader who divides his time equally between the two companies. He has also promoted executives from both sides and assigned responsibilities that cut across geographic and corporate lines.

“This management team spends their time traveling and making decisions in the operating regions,” Mr. Marchionne said. “But this thing runs as one house.”

The final step in the integration process will be to increase Fiat’s ownership of Chrysler from 58 percent to 100 percent. That will require either a public stock offering to cash out the remaining stake held by the United Automobile Workers’ health care trust, or a direct purchase of the trust’s stake by Fiat.

“We need to find a way to bring these two businesses together completely,” he said.

Fiat’s Marchionne: auto industry needs consolidation” – Just-auto (Jan. 2012)

“You need to be a mass marketer or be strong in premium to make money, everything in between is perilous. Particularly in Europe it is patently evident that apart from overcapacity issues, the real problems have to do with economies of scale.

“Make no mistake, without our alliance with Chrysler two years ago there was a danger that Fiat would have been marginalised. In Europe Fiat alone is not economically viable and the price competition in the region is hurting any attempt to make money.

“With Chrysler we have the opportunity to share development costs and we can run a number of key vehicles off the same basic architecture for both brands.

Europe Auto Must Cut Capacity by 10%-20% Says Fiat CEO” – on (Jan. 2012)

In response to slack consumer demand that will likely continue through 2014, Fiat chief Sergio Marchionne said on Jan. 12 that the European auto industry needs to cut its capacity by 10% to 20%.

“If volumes stay where they are, I think if you took out 10% to 15% of the capacity, maybe 20% of the capacity in Europe,” it would result in a sustainable level of production, Marchionne said. Asked what his forecast is for European vehicle demand, Marchionne said he expects it to “stay flat through 2014.”

Fiat’s Italian plants are currently operating at less than 60% capacity, a situation Marchionne said is untenable and is mirrored by other European automakers.

The Italian automaker reached a “historic” agreement with its labor unions last month which allowed Fiat to bring production of the Panda back to Italy from Poland. “If the commitment is made by the trade unions, and if we are given an opportunity to effectively develop manufacturing infrastructure to the point where it can be competitive against international competitors, then I think we will continue to do that,” Marchionne said.

“All this capacity, chasing that volume is going to create fundamental destructive forces in the marketplace. “There are some levels of sales now that I would not touch. I would refuse to engage. You’re not even recovering variable cost.”

Profile: First Marblehead

A very good write-up on FMD on

First Marblehead (FMD) is a very misunderstood company that currently trades at $1.45 or about 70% of cash liquidation value. It comes with a large embedded call option as the returning founder Dan Meyers rebuilds the business. I call it a smoldering cash pile with an unknown quantity of (free!) dynamite underneath. The reason it is so cheap and misunderstood is because of tarnished recent history with investors and unusually strict recent GAAP accounting rules. The private student loan market and their previous business model of securitization were put on ice in 2007 with the financial crisis and have only recently begun to thaw. Their GAAP financials also completely obscure the fact that they trade below cash liquidation value as excessively strict trust-consolidation rules (think Citi’s SPV abuse…) confuse what shareholders own and do not own. The stock has also dropped quite rapidly in the last month on high volume with no news. This is possibly due to a forced liquidation but who knows, I like to buy when Mr. Market is headed for the door in a hurry.

Update 12/18:
They sold the remaining trusts a few weeks ago which will finally get rid of the nonsense GAAP accounting and show this as a net-net once they file the year end accounts in 2-3 months, will probably be noticed more then. I sent a letter to the board recommending they take advantage of the “gift” from the market when the stock traded below $1.00. Will be curious if they did anything about that, won’t know until the next Q.”

First Marblehead Investors Presentation (November 10, 2011)

2011 Annual Report (September 2011)

Private Student Loans Report – CFPB (july 2012)

From “King of Bankruptcy – Wilbur Ross” on Outlook India:

Is there anything besides government interference that worries you a lot? Because in distress we look at the downside more than the upside…

Distress is downside. But as for the US, the biggest thing that I worry about for the longer term is our educational system. As we become more and more of a high technology society, our population needs more and better education. It is not getting it. More than 37% of our working age population doesn’t have anything more than a high school degree. Georgetown University just issued a study saying that by 2018, 44% of jobs in this country will require more than a high school degree.

GreenWood Investors – 2013Q1 Presentation

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  • PSL perfect for a yield-starved world: high risk-adjusted returns, low charge-offs  
  • Securitization market is further supportive (FMD used to generate dollars per share of earnings from securitizations   
  • Wholly-owned bank can buy other interest$ bearing assets to pull forward loan generation  
  • Delinquencies early but incredibly low: 0.4%

On the Sallie Mae split-up

Sallie Mae Will Split Old Loans From New – NY Times (May 2013)

The overhaul by Sallie Mae is playing out as college students, facing persistent unemployment and a sluggish economy, are defaulting on their loan payments at a rate of 13.4 percent, a level not seen for more than a decade, according to the latest statistics from the Department of Education. As student loan debt grows — it has outpaced total credit card debt, reaching more than $1 trillion — more loans are going to the riskiest borrowers, according to a January report by TransUnion Corporation, which provides credit information to lenders.

What Sallie Mae’s Split Says About Student Loans – Forbes (May 2013)

The $118 billion in FFELP loans is where Sallie Mae currently derives the bulk of its money. FFELP loans, which are backed by the government (more on that later), accounted for 76% of the company’s $1.3 billion in revenue derived from servicing loans. Put simply, FFELP loans are a big business for Sallie Mae.

But that’s changing because back in 2010 U.S. government decided to put an end to the FFEL program through the Health Care and Education Reconciliation Act of 2010. Instead of guaranteeing the loans Sallie Mae made to students the government decided to make the loans to students directly through its own Direct Loan program.

That means a once booming area of revenue for Sallie Mae is going to start shrinking. In 2012, servicing revenue decreased by $24 million primarily due to the end of FFELP in 2010. The company says its FFELP portfolio will amortize over 20 years.

But while that area is shrinking another area of business is growing for Sallie Mae. It’s private loan origination business which is where students and their parents go to borrow money when financial aid and federal loans aren’t enough to cover the cost of college.

Right now, Sallie Mae Bank, which originates those private loans has about $9.9 billion in assets and that’s expected to grow to hit $10 billion this year. Student loan origination went from $2.3 billion in 2010 to an estimated $4 billion at the end of this year. Its market share of the private student loan period will rise to over 50% from 32% in the same period.


In fact, Sallie Mae says the government’s new federal loan program [DSLP], which replaced FFELP, pose a “significant threat” to its own private loans. “If loan limits under the DSLP increase, DSLP loans could be more widely available to students and their families and DSLP loans could increase, resulting in further decreases in the size of the Private Education Loan market and demand for our Private Education Loan products,” the company notes.

The Tuition is Too Damn High’ – Wonkblog (Aug. 2013)

“The Bennett hypothesis states that this happens basically whenever the government subsidizes higher ed. Every $1 increase in subsidies is matched by a $1 increase in price. The money is pocketed by the university, not the students. The economist Albert Hirschman once categorized this type of conservative argument as the “argument from perversity,” that a proposed policy change will actually have the opposite effect of its intended one. But in this case at least, there’s a ring of plausibility to it.

So what do the data say? Thankfully, there’s a rich literature that’s emerged in Bennett’s wake, trying to nail that down. Unfortunately for policymakers, that literature is very mixed. And it suggests that what may be most important is the form the aid takes, rather than that it exists at all.

There’s a 2001 study by the National Center for Education Statistics, which found no Bennett effects for any type of school (though that study has some methodological troubles). Then again, two very recent studies by UC San Diego’s Nicholas Turner (now at the Treasury Department) and Columbia’s Lesley Turner (now at Maryland)found that aid triggers spikes in tuition; the latter found that schools capture 16 percent of Pell Grant’s value, ultimately.”

Profile: Liberty Media Corp / Liberty Interactive

Wikipedia entry:

Liberty Media began in 1991 as a spin-off of TCI, an American cable-television group. Peter Barton, hired by TCI’s Malone, served as president until retiring in April 1997 to start an investment firm and spend time with his family.

The company took over TCI assets considered to have little value, but Barton completed “a deal every ten days for six years” and made the company a big success. Liberty was merged back into TCI in the mid-1990s.

On March 13, 1998, Liberty Media Group and TCI Group announced the merger of Encore and STARZ! into a single company – Encore Media Group, owned by Liberty. Encore was taking advantage of the growth of digital cable, while TCI, which had previously owned twenty percent of Encore, was more interested in traditional cable.

Original Liberty Spin-off from TCI:

An interview with John Malone on (2001)

MALONE: Yeah, if you remember Tryg, part of our original deal with AT&T was that Liberty would be an autonomously managed subsidiary of AT&T and as time went on, it became clear that Liberty’s direction was going to run into conflict from a regulatory point of view with AT&T’s direction and so it seemed to be the prudent thing to split the sheets and since the AT&T shareholders really had no financial interest in Liberty and Liberty shareholders had no financial interest in AT&T, it was pretty much a… once we ran into those problems that started to really mount, it made sense for both sides that they spin Liberty off to the Liberty tracking stock shareholders, which is what ultimately happened. So, Liberty is now autonomous. It is what it’s always been, it’s a collection of businesses and a portfolio of investment assets that we’re trying to grow and optimize. In particular, we’re very interested in the international cable television business. For one thing, it didn’t put us in conflict with AT&T to get into it and it seems that some of those markets are proving very interesting in terms of this triple play, this full technological implementation.

MYHREN: Video, voice, and data.

MALONE: Video, voice, and data. And particularly right now, the equity markets and the debt markets seem to be running away from these businesses, and so these businesses are seeing their ability to raise capital dry up and their stocks trade at record lows and so it’s a pretty good opportunity for Liberty to expand internationally. If we do close the transactions that we have announced, we will be at over 25 million subscribers outside the U.S., with lots of opportunity to grow. So we will have essentially become bigger outside than we ever were inside in terms of subscriber count, anyway.

History of dealmaking

From “The Writing Is on the Wall for HSN and John Malone” on

“Consider, for instance, the saga of Liberty’s stake in HSN (ticker: HSNI), parent of the TV shopping channel once called the Home Shopping Network. HSN was one of four companies last year spun out from IAC/InterActive (IACI), the Internet and retailing conglomerate run by Barry Diller. Malone ended up with about a 30% stake in HSN; he placed the holding in Liberty Media Interactive (LINTA), a tracking stock that among other things includes HSN rival QVC.

I raise all this because HSN shares have been on a tear of late, soaring from less than $1.50 a share at their nadir in December to more than $10 last week. During just the past week, the stock is up more than 25%. And for that you must give at least partial credit to Malone.

Malone had opposed Diller’s spinoff plan, taking particular issue with Diller’s decision not to use IAC’s two-tiered voting structure with the shares issued for the four spinoff companies, reducing Malone’s voting position in IAC’s spinouts. (Malone had more than 61% control of IAC, although under an ancient deal he had granted Diller a proxy to vote the shares.) As part of a settlement between the two moguls, Malone agreed not to boost his stake in HSN or the other spinouts by more than 5% — or cut his holdings by more than 10% — for a two-year period ending May 2010.

For the first year after the deal, Liberty did nothing. But last week, Liberty lifted its stake in HSN to 32.8%, buying 1,872,210 HSN shares at an average price of $4.63. Apparently determined not to reveal Malone’s interest in the stock too soon, Liberty bought the shares in what it described in its Securities and Exchange Commission filing as “a post-paid forward transaction,” which basically means a brokerage firm piled up the shares on Liberty’s behalf into a block Malone could buy and then disclose in one fell swoop. The move allowed Liberty to buy the extra shares at less than half the current price.

It has always seemed logical for Liberty to buy HSN and merge it with QVC; Maffei said as much on an earnings conference call in February. Under the IAC deal with Malone, Liberty can’t make an offer for another year. But the writing is on the wall: HSN seems destined to be owned by John Malone. And over the past few weeks, the stock’s rally suggests investors have figured it out.”


Liberty Media Corp.” – Boyar Intrinsic Value Research

Just One Stock: A Retail Powerhouse in the Cash Flow Bargain Bin by Yale Bock of Y H & C Investments
Liberty Interactive (LINTA) on (May 17, 2011)
History of successful dealmaking
DIRECTV (2007)
Liberty Capital rose almost 13% in the first three months of 2007. The company’s exchange of News Corp shares for DIRECTV shares provided another example of John Malone’s prowess at growing shareholder value through both capital allocation and minimization of tax liabilities. DIRECTV represents the large majority of our appraisal of Liberty Capital. Early in the quarter DIRECTV shares were much more discounted via Liberty Capital than through direct ownership, and consequently, we sold some shares of DIRECTV, replacing them with Liberty Capital. All-in, DIRECTV is the Fund’s second largest commitment. Liberty Interactive also had a strong quarter, gaining 10%. QVC, which comprises most of the value within Liberty Interactive, grew its business as we expected, and its U.S. margins were particularly strong.
–  1Q 2007 Longleaf Partners Letter to Shareholders
I think Edward Lampert makes an interesting point on the future of retail, that very much relates to the business model of LINTA;

EL: I think retail — I think it’s going to be great and it has been great for the American consumer. The question is it good for business? I think a lot of businesses will have profitless prosperity and we got to adopt and I think the companies like amazon, E-bay, they’ve made — they turned this into a big opportunity and we got to be able to compete with them not just Walmart and Target, et cetera.

Q: Does that mean you’ll go more towards this idea to have these stores become distribution centers and do more online?

EL: We’re really focused more working customer back and I think that’s where information and I think who owns the relationship with customers generally viewers, you know, that create as platform. And, you know, I remember when — I started in 1984. I don’t think CNBC existed then. Now this is an incredibly important source of news and information. So, I think, I think that, that a lot of companies like whether it’s Disney, IBM, et cetera that were recreated, something inherent in those companies that you can build on. And I’ve made investments in companies whether it’s an Autozone or Autonation or a sears where there’s something to build on. The question is how well do we execute.

DB: Going back to your retail point what’s changed dramatically by the Internet is distribution methods. What hasn’t changed is the valve brands. in fact, there’s a bigger differential now because if you crew, let’s say, and you can only buy J. Crew merchandise from J. Crew — we don’t have an ownership interest there – but the point is you’re in one -position. Penney and selling other people’s brands you’re in a different position because that person who controls the brand may choose to distribute in many different ways including over the Internet. Or Federated or Macy’s. Guys are buying brands. If you don’t have a brand and dependent on somebody else’s brand you’re — I see the same thing in media too. Content of a brand and distribution.

Eddie Lampert and David Bonderman on CNBC