Denali Investors 2015 Letter – A Rare Down YearVW Staff
Kevin Byun’s Denali Investors letter to investors for the fourth quarter ended December 31, 2015. A rare down year for the famous John Malone style hedge fund – see the full letter below.
Denali Investors – General Comments
During the fourth quarter, our portfolio did not perform in a challenging environment. Our performance is attributable to a combination of unfavorable outcomes and a number of our positions simply not working during this window. The market experienced significant volatility which impacted both our names and the market more broadly.
We have had previous success in taking advantage of opportunities created by volatile markets. The special situations pipeline for 2016 remains robust. Our portfolio contains numerous specific and understandable catalysts with attractive risk/return profiles.
Select Portfolio Positions
Liberty Ventures (LVNTA/LVNTB) – It was announced on November 12, 2015 at the Liberty investor Day that LVNTA will be separating into three entities, with timing of completion expected the first half 2016.
The separations will create pure play Expedia and CommerceHub entities and highlight the value of the LEXEA and CHUBA assets within LVNTA. LVNTA has always traded with a significant discount to NAV. This was especially true in the early days when LVNTA was first spun off from LINTA on August 10, 2012 and emerged as a very misunderstood entity at a 50% – 60% discount to its NAV at the time. Due to perceived complexity, LVNTA has maintained an elevated, although more reasonable, discount to its NAV even today. The perceived complexity of LVNTA’s assets help explain the significant discount to NAV and the spinoffs should help narrow the discount.
LVNTA is one of two tracking stocks that represent Liberty Interactive. The other Liberty Interactive tracking stock is QVCA. QVCA is the new symbol for what was attributed to LINTA after the reattribution transaction between LINTA and LVNTA that took place on October 20, 2014. This time, instead of additional tracking stocks, the spinoffs of CHUBA and LEXEA are expected to be hard/full spinoffs.
1. CommerceHub (CHUBA) Spinoff
CHUBA enables eCommerce merchants to drop ship across range of vendors and bills itself as a scalable, high-growth (~25%), high-margin (50% OIBDA) B-2-B platform. The CHUBA Revenue model includes set-up, recurring subscription and per order fees, which the company refers to as SaaS Plus. CHUBA is attempting to create a virtuous cycle of vendors and retailers that provides a moat. Another way to frame the value proposition is that CHUBA exists to help retailers/suppliers beat Amazon (or try to at least). To its credit, CHUBA has shown a history of consistent EBITDA profitability and positive operating cash flow. Frank Poore will continue as CEO of CHUBA. CHUBA/B and be a tax free distribution to holders of LVNTA/B.
SAAS comparables trade at higher multiples that are commensurate with growth rates. As shown, CHUBA offers high growth rates that could be valued as such by the market. CHUBA is expected to be unlevered at time of spin-off (plan to put in place undrawn credit facility).
2. Liberty Expedia Holdings (LEXEA) Spinoff
LEXEA will include the Bodybuilding.com business and the entire ownership interest in Expedia (EXPE), which is 23.6m shares, 18.2% economic stake, and 55% voting stake, along with other assets. LEXEA expects to raise $350m new debt which will fund a $300m distribution attributable to LVNTA and with $50m cash on the LEXEA balance sheet. Liberty Interactive CFO, Chris Shean, will serve as CEO of LEXEA. LEXEA/B will be a tax free distribution to holders of LVNTA/B.
The voting control of the EXPE shares are currently with Barry Diller, for which there is plenty of history. The structure of LEXEA is similar to that of LTRPA (Liberty TripAdvisor). In order to ultimately consolidate LEXEA and EXPE, a combination could be effectuated by a downstream merger of LVNTA and EXPE. Precedents include the LEI and DTV as well as RVI and DSW transactions.
The LEXEA operating business will be Bodybuilding.com. Revenue is approximately $500m for 2015 and has an OIBDA margin of ~7 to 8%. Bodybuilding has $44m in debt. The LEXEA net debt of $300m is ~$2 per share. The bulk of the value is from the EXPE stake itself. The voting stake does have value however the market will not likely give credit so we do not assign any value currently.
3. New Liberty Ventures (LVNTA)
LVNTA is expected to have $3.2b in cash, including a $300m distribution from LEXEA. However, the largest asset at new LVNTA is expected to be the LBRDK stake, contingent upon completion of the CHTR + TWC + BHN transactions expected in mid 2016. LVNTA has agreed to purchase $2.4b of LBRDK shares to help fund the CHTR + TWC + BHN deal (LBRDA has the right to reduce commitment by up to 25% through debt financing. Shares to be purchased at fixed price of $56.23). However, LVNTA does not need to purchase LBRDK if the CHTR deal breaks (hence LVNTA investors assume no deal risk). However, assuming a $2.4b LBRDK investment is made, there would remain ~$900m cash remaining at New LVNTA.
Other remaining LVNTA assets will include 29% IILG (Interval Leisure), 36% FTD (FTD Inc), 22% TREE (Lending Tree) stakes. The IILG stake consists of 16.6m shares at ~$12 per share, or $200m. The Reverse Morris Trust transaction with Starwood (HOT) will alter the percentage ownership of the pro forma IILG upon completion. The FTD stake consists of 10.2m shares at ~$24 per share, or $245m. The TREE stake consists of 2.8m shares at ~$70 per share, or $190m. This totals to ~$640m.
LVNTA has ~$2.2b in exchangeable debt which is partially offset by ~$1b in TWC and ~$400m in TWX/TIME basket that underlies the 0.75% exchangeable. LBRDA’s ~$1b TWC stake will roll into CHTR shares. The Green investments are valued at cost at ~$350m. In total, the LVNTA NAV is approximately $3.3b, or $23 per share.
New LVNTA will remain structured as a tracking stock. As stated, one of the goals is to seek to reduce the complexity discount of LVNTA. However, New LVNTA may or may not have a reduced discount to NAV as it will remain the most complex entity despite the spinoffs of LEXEA and CHUBA.
Also, if you assume the CHTR + TWC + BHN transactions and LBRDK investment are completed as envisioned, LVNTA is effectively a CHTR investment*. This is an interesting structure to have 42.7m LBRDK shares captive within LVNTA. It would be logical to distribute the LBRDK shares and we believe that to be the next step to occur. One way to effectuate the distribution of LBRDK from LVNTA would be to use a similar structure to the Liberty Entertainment (LMDIA) split off and merger with DTV (DirectTV) completed November 19, 2009. LMDIA was first split into LEI (New Liberty Entertainment) and LSTZA (Liberty Starz) and then LEI was merged into a New DTV. At the time, LEI was attributed other assets but also substantial debt which was assumed by DTV. Transferring debt onto this modern version would reload the cash balance at LVNTA. As a result, the resulting Stub LVNTA would consist of the remaining assets and emerge much better capitalized.
Denali Investors LLC
DENALI INVESTORS = VALUE + SPECIAL SITUATIONS + HEDGES
H. Kevin Byun founded Denali Investors in 2007. The firm employs an opportunistic special situations and value-oriented framework. Denali seeks to identify catalyst driven situations that will unlock value and produce market agnostic returns. Mr. Byun has a triple major from Rice University and an MBA from Columbia Business School.
Value + Special Situations (Catalysts): Denali seeks to identify value-oriented and special situation investment opportunities at substantial discounts with definable catalysts or by being the catalyst through proactive methods. Our special situations focus and experience has generated outstanding market agnostic returns.
Fundamental Research + Analysis: Denali’s research and analysis have consistently produced a high rate of success. Our investment process uses a combination of thematic and rigorous fundamental research on individual companies and catalyst driven situations.
Portfolio Construction + Risk Management: Denali invests in only its highest conviction ideas. Concentration into 5 – 15 very attractive, non-market correlated investments is an advantage. Our opportunistic style of investing allows the firm to select investments with highly favorable risk-reward profiles. We structure the portfolio to have favorable asymmetric characteristics that we believe will provide substantial upside yet preserve capital in a downturn.
Flexible & Opportunistic Mandate: Denali has a flexible mandate that allows the firm to look at opportunities across the spectrum. Unlike other funds that are designed to fit into a limited ‘style box,’ we are opportunistic generalists focused on special situations. Our flexible approach has resulted in numerous outstanding investments.
Net Cash = Fortress: Cash is a valuable strategic asset. Our cash has typically averaged 20% to 35%. Cash remains the default in the absence of greater opportunities.