Andrew Bary

A long-awaited proposal by Charter Communications to buy Liberty Broadband is giving a lift to shares of Liberty Broadband as investors bet that the two companies can work out a deal.

Liberty Broadband, which is controlled by media mogul John Malone, is the largest holder of Charter, the number-two cable TV provider, with a 26% stake that is worth about $15 billion. Liberty Broadband also owns an Alaskan cable TV business valued at over $2 billion and has about $3.6 billion of net debt.

Liberty Broadband's nonvoting shares, which trade under the ticker LBRDK, are up 25.5% to $76.63 in early trading Tuesday while Charter stock is down 1.6% at $326.48.

Liberty Broadband has long traded at a big discount to the value of its Charter stake and other assets. That discount stood at about 35% on Monday's close, Barron's estimates, before the news of the Charter merger proposal and Liberty counterproposal.

Charter is offering to swap 0.228 Charter share for each Liberty Broadband share, which is worth about $75, in a tax-free exchange that would exclude the Alaskan cable TV venture. Wolfe Research analyst Peter Supino wrote in a client note that the Charter proposal implies a total price of around $82 a share including the value of the Alaskan cable business, less related debt. Charter said it's open to a deal that also includes the Alaskan business.

Liberty Broadband's counterproposal calls a swap of 0.29 Charter share, or about $96 a share, based on Monday's close, for each Liberty Broadband share, including all its assets and debt. Both deals would be tax-free to Liberty Broadband holders.

Charter essentially wants to buy Liberty Broadband at a discount to its estimated net asset value while Liberty Broadband wants the full value -- Barron's estimates that the company's asset value was around $96 a share on Monday.

Wolfe Research's Supino wrote that if a deal is consummated that it would be a "win-win" for both companies. It would be a bigger win for Liberty Broadband since the discount to asset value at which the stock has long traded would be greatly or entirely erased.

Charter is apt to argue that its proposal is fair because it offers a big premium to Liberty Broadband's depressed share price, and provides a benefit to Charter holders, as well. Charter would effectively retire some shares because the company would issue fewer shares to Liberty Broadband than it would get in the deal. Liberty Broadband owns 45.6 million Charter shares, according to Charter's filing this morning outlining its proposal.

Investors appear to be betting that the two companies can meet in the middle and reach a deal. Charter remains the logical buyer of Liberty Broadband.

Liberty Broadband has some special governance rights that would go away after the deal.

Investors have long anticipated that Charter would make an offer at some point for Liberty Broadband but many thought a potential deal could be a few years away.

"Everybody knows the endgame is to combine with Charter," Christopher Marangi, a senior portfolio manager at Gamco Investors told Barron's in July . "There is no tax or other barrier to combining the two companies. The question is when." Unlike other Liberty entities, Liberty Broadband is an independent company and not a tracking stock. That facilitates any deal.

Barron's wrote favorably on Liberty Broadband in that July cover story on Malone, arguing it was a cheap play on Charter that could benefit from a closing of the big discount including a deal.

The big discount befuddled many investors including Marangi, and appeared to reflect investors' doubts about an imminent deal and what Marangi called investor "fatigue" with parts of the Liberty empire that are proxies for other companies.

The potential combination would be a win for Malone, 83, who engineered a recent deal that combined Liberty Sirius XM with Sirius XM Holdings.

Many Malone watchers have expected him to resolve or clean up parts of his empire now that he is in his early 80s. Liberty is a longtime holder of Charter, and Malone is close to Charter management.

The deal would close on July 30, 2027, under both proposals although an earlier date could be negotiated. It's unclear why there's now such a long proposed time -- three years from now -- to the closing date.

Some investors including Marangi think that Malone may move to sell Atlanta Braves Holdings, which owns the baseball team, in the coming year. That could boost the Braves stock, now trading at around $40.

Liberty Broadband is controlled by Malone through ownership of supervoting class B shares that each carry 10 votes -- a structure common with other Liberty entities. Malone owns about nine million shares of Liberty Broadband, a roughly 6% economic stake, but with a voting power of close to 50%.

Both proposals require the approval of a majority of shareholders unaffiliated with Malone. It's notable that Malone wouldn't get a premium for his supervoting class B stock in either proposal -- which is the same as what occurred in the Liberty Sirius deal.

These are shareholder-friendly moves to all Liberty Broadband holders and contrast with the situation at Paramount Global where holders of the voting stock, notably the Redstone family, negotiated a premium for their stock.

Write to Andrew Bary at andrew.bary@barrons.com

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September 24, 2024 11:29 ET (15:29 GMT)

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