Chris Hohn Long Charter Communications: Sohn London Conference ~ market folly

Monday, December 12, 2016

Chris Hohn Long Charter Communications: Sohn London Conference

We're posting notes from the Sohn London investment conference 2016.  Next up is Chris Hohn of Children's Investment Fund (TCI) who pitched a long of Charter Communications (CHTR).


Chris Hohn's Sohn London Conference Presentation

TCI have already been invested in Charter for 3 years, but Hohn sees it as a multi-year investment. Charter is a public leveraged buyout which makes it an interesting special situation. It bought Time Warner Cable, a much bigger company, using a large amount of debt. Charter can compound at about 25% per year.

Cable companies are interesting because they should no longer be labelled as television businesses but as broadband businesses. Broadband businesses are a toll road on the internet.

Four reasons to like the business:

-    Telephone companies are not competitors to broadband providers

-    Digitization and cloud technology will change the capital expenditure profile reducing the intensity while the top line is growing.

-    Donald Trump will deregulate the sector leading to more pricing power and take away the regulatory risks.

-    Cable will also be a disruptor to wireless in the future.

There is a lot of upside still to come for Charter which is underestimated by the investment community. Nearly everyone needs broadband. Charter has the potential to double its customer base over time. Charter is 4x leveraged and TCI wants it to stay that way. In 2012, half the profits were coming from the TV business. Today only 22% come from TV. Hohn thinks that about 90% of the real value of the business is in broadband.

John Malone is the largest shareholder with about 20% of the equity and 25% of the voting rights. TCI own about 5% of the company. Malone is one of the world’s great investors with compounded returns of about 30% per annum. He is shareholder friendly and is committed to share buybacks.

Hohn always tries to find businesses that are protected from competition.  TCI have returned 17% per annum net of fees for the last 13 years using this approach. It is hard to break into the fiber broadband market. Google tried recently but have now essentially given up. The industry has effectively become a duopoly between Charter and Comcast (CMCSA), even then because they do different things they are monopolistic within their sectors. Charter has pricing power. It has been raising its pricing by 5% per year. Charter has 30% margins but these could rise to 50% or even 55%.

Risks: the TV business could decline, unbundling will come, wireless could be a threat.  Cable will be a disruptive player in wireless. Both Comcast and Charter will probably enter the wireless sector. He thinks Verizon may try to buy Charter in the future.

Be sure to check out the rest of the Sohn London conference presentations here.


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