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DirecTV Headed in Right Direction

By right direction, I mean the company's stock price. Not the company itself.

Indeed, I think DirecTV Group (DTV/NYSE) being controlled by Rupert Murdoch is a great thing (in contrast to my less-than-effusive endorsement yesterday over the speculation that he could buy the Financial Times). Murdoch might have a record of dumbing down newspapers, but his people know how to run satellite companies.

And maybe the market is starting to see that.

I notice that DirecTV is trading north of my $15.50 entry price of last July 21. It could always drift back down, of course, leaving my stake underwater again. (I added to my stake three times, in August, October, and November.) But recall that there were two factors hampering the company's prospects with Wall Street.

First is the fact that the company basically subsidizes subscribers for their first year. This gave the impression that the company had little free cash flow. But DirecTV announced 2005 results last month that beat analyst expectations and at the same time announced a $3 billion stock repurchase plan to be spread out over two years.

The second factor hampering DirecTV's stock performance has been the "overhang" of shares held in the General Motors pension plan. GM holds roughly 215 million DirecTV shares. But yesterday DirecTV announced plans to buy 100 million of those shares from GM for $15.50 each in a deal scheduled to close on Friday.

That's a positive and more than half of the $3 billion in projected stock repurchases.

To be sure, there are still perception problems to overcome. Management needs to prove that "churn" won't be a problem. And there's still another 115 shares being held by GM. And, needless to say, nothing goes straight up.

DirecTV has been in the portfolio for less than a year and this is a long-term investing portfolio. So we're still in early innings with this pick.

Let's stay tuned.

BreakingViews Eyeballs 3i

I posted last week about portfolio holding 3i Group PLC (III/LN) reportedly rejecting a buyout offer from a European rival. The editors at BreakingViews looked at this over the weekend in The Sunday Telegraph (scroll down):

Private equity groups are used to instilling terror in company boardrooms. Now it seems the tables have been turned. Last week 3i was reported to have rejected an approach at £10 a share - worth £6bn - from a rival private equity group. It's easy to see why private equity might be interested. In the past few years chief executive Philip Yea has transformed a business that had run into trouble in the dotcom bubble.

The editors correctly state that Yea has “tidied” the portfolio and expanded into Europe. It should be added that 3i has a competitive advantage because the firm focuses on small-to-medium sized deals, while most of the competition seeks larger transactions. The BreakingViews article also points out that Yea has formed a talented team to manage the portfolio:

But there are difficulties in bidding. First, any buyer would need to bring on board the existing management team, since their expertise is vital to realising the value in the portfolio. Second, 3i is structured as an investment trust, which means it might lose some tax benefits if it changed its status.

Yet despite these two factors, the mystery bidder did not make a low ball offer:

Traditionally, 3i has been valued like an investment trust, trading close to its net asset value - albeit at a 10 to 15 per cent premium to prospective net assets rather than a discount to reflect the higher returns usually achieved in private equity. A bid at £10 a share would be a 35 per cent premium.

But Yea turned the offer down. Why? Because he believes 3i now offers stable returns and deserves to be valued like a bank -- where the net asset premium is a function of the cost of equity and investment returns.

BreakingViews cautions:

Yet even using this technique, you don't get to £10 a share. 3i's cost of equity is about 10 per cent and it delivered returns of just over 12 per cent last year. That implies it should be valued at a 20 per cent premium to net assets - or 890p a share. Yea clearly thinks he can push returns towards his 20 per cent target. If he achieves it, the shares will be worth substantially more. But if he doesn't, investors will be kicking him for not letting them take the cash.

Remember, all this talk of 3i being approached is a news report. And reports can be totally accurate, partially accurate, or downright false. I don't believe this one is false. Yet for all we know Yea and 3i management could be in negotiations right now. Or even fielding other offers. In any event, Yea's leadership has been a HUGE plus for 3i as a company, and he puts the interests of shareholders first. So his judgment on whether or not a buyout offer is best for 3i shareholders should be trusted.

P.S. 3i Group was first mentioned here on May 17, 2005 at $12.73 (adjusted for a 16-for-17 reverse stock split). The shares closed at $16.85 yesterday. That's a gain of more than 32%, and does not include dividends. When reading the original rationale for owning the stock, you'll notice that payouts were an important reason for buying into the company. Regular readers of this site know that 3i has been repurchasing its stock as well.

P.P.S. Note that 3i trades on the London Stock Exchange. I reside in the US so I track my results with the company in US dollars. Because of currency fluctuations, my results may be better or worse than those in British pounds. Ditto for readers in Canada or any other country outside the UK.

Not So Pretty in Pink

I first started reading the Financial Times in 1991. A few times a year I had to fly to Kansas City for a client meeting and would pass through Atlanta when changing flights. I'd pick up the pink-colored FT at the Atlanta airport and read it on the plane and in my hotel room.

I was excited to see it because I had heard of the FT a few years before. I'd read that it was the best-written newspaper in the English language. And I found it was. Hands down.

In those days, the paper wasn't on newsstands in Richmond. And I never saw it in other airports I passed through with the exception of New York. Then Barnes & Noble came to town in the next year or so, followed by Borders, and they always stocked the FT. I continued enjoying it throughout the 90s and thought it was superior to even The Wall Street Journal. I still enjoy the FT and feel its weekend section, "Weekend FT," is better than the Journal's weekend edition.

But over the years, my eagerness to read the paper has dropped off. I think a paper should report the news as objectively as possible, yet I still want a paper with a point of view (even if that view is not shared by yours truly). Instead of having a uniquely British point of view, the FT seems to be written from the viewpoint of EU bureaucrats in Brussels. I may be wrong there, but so be it.

I wonder how relevant the publication is to business people in middle England and the former colonies.

Anyway, something isn't right. The paper hasn't been making as much as it should -- and it has even occasionally suffered loses in recent years. And now, as The Independent reported yesterday, Pearson is being pressured to sell the FT.

I don't know what new ownership would mean. And I don't know that Rupert Murdoch buying the paper would be a good thing. By that I mean it probably would be good financially. Yet Murdoch has a reputation for "dumbing down" papers -- my understanding is that he has definitely dumbed down The Times of London. I'd hate to see a tabloid-like virus, however slight, infect the pages of the FT.

But maybe newspapers have to do that stuff to survive now. Either way, things aren't looking too pretty for the "Pink 'un" these days.

P.S. If Murdoch ever launches a FOX Business Channel, the FT could be an excellent provider of content. Much as the same way CNBC uses Dow Jones.

Liberty Media, IAC/InterActiveCorp

This week's excellent Barron's cover story on Barry Diller and IAC/InterActiveCorp included a good amount of stuff of interest to us shareholders of Liberty Media (L/NSYE).

As you get into the article, Barron's gives two potential catalysts that could justify being bullish on IAC. The first is Ask.com, described in the piece as the "scrappy" second-tier search engine.

Then Barron's got around to Liberty Media:

Another potential catalyst is the 21% IAC stake held by John Malone's Liberty Media. Liberty owns super-voting stock, giving it a 53% voting interest in IAC. As part of that arrangement, Malone granted Diller an irrevocable proxy to vote Liberty's shares, while Malone got the right to nominate up to two non-Liberty executives to IAC's board. Diller says Liberty recently proposed a director candidate, whose identity will be disclosed soon.

As it happens, Liberty this month disclosed a plan to divide its assets into two bunches, each with its own tracking stock. One group of assets, dubbed Liberty Capital, will include Malone's cable TV programming assets, like the premium movie channels Starz and Encore, along with a 16% stake in Murdoch's News Corp and a grab-bag of other assets.

The other tracker, to be called Liberty Interactive, includes QVC, the IAC stake, and Provide Commerce, a recently acquired online vendor of flowers, produce and other goods. A spokesman for Liberty says the tracking stocks should be issued to current Liberty Media holders sometime in April. What will that mean for IAC? "For our investors, if anything, it's a potentially positive catalyst," Diller says.

Some investors think the division of Liberty into two tracking stocks could be a prelude to a bigger transaction. Last week, Liberty filed with regulators for permission to increase its stakes in both IAC and Expedia. The Deal, an M&A trade journal, recently speculated that Liberty might sell its stake in News Corp. along with its subscription cable movie channels and use the proceeds to buy the rest of IAC. It wouldn't be surprising to see the issuance of the tracker lead to changes in Liberty's capital structure that could directly affect IAC/InterActive. For one thing, the synergies of joining QVC and HSN seem obvious.

This all is something to keep our eye on. And remember Liberty shareholders, patience is a virtue.

Marc Faber Audio Interview

This weekend, Jim Puplava's "Financial Sense Online" features an interview with Marc Faber. The link lets you listen to Faber's current interview with FSO as well as several earlier interviews dating back to 2003.

Anglo-Saxon Capitalism Advances

The rumored buyout offer of 3i Group PLC (III/LN) is just part of a much larger picture. I've posted before of Anglo-Saxon Capitalism slowly taking root around the world. Not just in "emerging markets" but especially Continental Europe.

In fact, the wave of cross-border takeover activity in Europe has become furious, as today's BreakingViews column in The Wall Street Journal Europe points out:

Almost every week another mega transaction is announced: E.On of Germany bids for Endesa, Spain's largest utility; Italy's Enel says it might carve up Suez, one of France's biggest utilities; Mittal Steel goes hostile for Arcelor, the quasi-French steel giant. And so on.

Well, at one level, this can be viewed as a pickup of the mergers cycle -- fueled by cheap debt, strong corporate cash flows and rising business confidence. But we are also witnessing a structural shift. The long-predicted restructuring of European industry on transnational lines is finally happening.

While there have been cross-border takeovers on the Continent before, none were of the "hostile" variety. Governments even had what they deemed "strategic" sectors. The column mentions the French government declaring yogurt one such sector -- that's right, yogurt -- and last year warned off PepsiCo about bidding for French dairy "champion" Danone. Thank goodness, for shareholders and consumers alike, that idiocy seems to be ending:

The first breach came last year when Dutch bank ABN Amro Holding bid for Antonveneta, an Italian bank, against the wishes of Antonio Fazio, then Italy's central bank governor. Mr. Fazio couldn't find legitimate means to block the Dutch. So he resorted to questionable tactics that backfired spectacularly. He was hounded out of office just before Christmas.

The next shock came earlier this year with Mittal's hostile bid for Arcelor, technically a Luxembourg steel group but viewed in Paris as home grown. No law required the bidder to get either government's permission. But previously it was thought that awful consequences would befall anyone who didn't get the official OK. Yet Mittal, a Dutch company run out of London by a very rich Indian, made its offer without even informing the French.

Events have progressed to the point that every industry is up for grabs, including banks, utilities and even airports. Only companies in the defense industry seem off limits.

Yes, backlashes still occur. Yet they get weaker and weaker over time. Most likely because economic reality sets in:

More important, Europe's nation states are finding that they are already inextricably intertwined. How can Spain get huffy about E.On buying Endesa when Spanish companies are acting like latter-day conquistadors throughout Europe? How can France stop a bid for Arcelor when Arcelor itself has just made a hostile takeover of Canada's Dofasco?

It's not just a matter of hypocrisy. Many European companies benefit from going abroad. They don't want nationalistic responses by their governments in the corporate arena to deny them those opportunities. The most telling example is how Paris toned down its opposition to Mittal when it realized the Indian government viewed this as racist, potentially making it harder for President Jacques Chirac to win business for French companies when he visited Delhi several days ago.

As an investor in what I think are undervalued companies, I want MORE possibilities for value realization. Not less. One of the prime ways of seeing value unlocked is takeover activity. So naturally I want MORE takeover activity going on. Not just inside a country or continent. But globally.

The 3i Group report stated that the buyout offer was from a European rival. Former portfolio holding Imagistics International (an American company) was purchased last year by Oce, a Dutch firm.

The more this stuff happens, the greater our chances for profit.

And the BreakingViews column ends on a realistic, though ultimately happy, note:

Not that the friends of free markets should be complacent. The struggle between liberalism and protectionism will never be conclusively won. But, in Europe, the tide is flowing in favor of open frontiers. We may be about to witness the "domino" phase of this takeover boom. To date, the trans-European merger pioneers have been daredevils willing to risk the wrath of governments. Soon their timid rivals will follow.

The Prince and the $6 Billion IPO

Bloomberg in the UK reports that Saudi Prince Alwleed bin Talal is looking to raise $6 billion by offering at least 30% of his Kingdom Holding Company:

Through Kingdom Holding, Alwaleed holds a 4.3 percent stake in Citigroup Inc., the world's most profitable bank, as well as shares in more than a dozen businesses including Time Warner Inc. and News Corp. The prince's record as an investor and a Saudi market whose benchmark index surged 134 percent in the past year may stoke demand for the IPO.

"The appetite to be partners with Alwaleed is there,'' said Alfredo Rotemberg, who helps manage $200 million in international investments at OppenheimerFunds Inc. in Beechwood, Ohio. "He's been a good buyer of companies.''

A $6 billion IPO would be equivalent to all the public offerings in Arab countries last year, according to ABQ Zawya Ltd., a business-information service in Dubai, United Arab Emirates. It would dwarf MasterCard Inc.'s planned $2.45 billion sale, currently the biggest IPO set for this year. The Saudi Arabian stock market, the largest emerging equity market, has jumped as record oil revenue fueled investment.

I guess Prince Alwaleed can be viewed as something of a value investor. At least that's the impression I've gotten in press stories over the years. The Bloomberg reports continues:

Alwaleed, a nephew of Saudi King Abdullah, made billions of dollars by buying shares in underperforming, brand-name companies. In 1991, he invested $590 million in Citigroup predecessor Citicorp, which needed cash as it struggled with Latin American loan losses and a collapse in U.S. real-estate prices. Alwaleed, who at the time already owned $207 million of the stock, now holds about $10 billion of Citigroup shares.

I claim no thorough knowledge of the Prince. He seems to go for large cap companies, though that could just be what gets the media attention. Or the size of his fortune makes small cap investing unpractical. Or both.

CBS Reports

As we all know, CBS (CBS/NYSE) reported earnings results as a separate company yesterday for the first time since being spun off from Viacom. This morning's Wall Street Journal has a good piece on the subject by Brooks Barnes.

I notice that WSJ.com now has some different numbers for CBS. I should note that, for what it's worth, WSJ.com gets its numbers from Reuters. It says the company is selling for 0.97 times book value and 0.82 times sales. The market cap is listed as more than $19.45 billion with 772.71 million shares outstanding. The dividend yield is 2.54%.

Does any of this change my view of CBS? No. It's still one of the cheapest large media companies around in a sector that's undervalued in general. Some investment analysts say it deserves to be this cheap, but I like owning undervalued and boring assets. For a few years, anyway. ;-)

In a nutshell, I view CBS as undervalued -- period -- with a top-notch management team committed to shareholders thrown in for free. They've already boosted the dividend by 14% and announced plans to sell the first of what could be several "non core" assets later this year.

I'm staying tuned . . . probably for 3 to 5 years.

3i Group Reportedly Rejects Takeover Bid by European Rival

I've said before -- most recently last week -- that if we're right about a company being undervalued it could find itself "in play." The next example of this just might turn out to be 3i Group PLC (III/LN), according to a report in The Times of London. The new caused 3i shares to jump 5.7% in London yesterday.

Scroll down the article and read:

3i Group took on 55.5p to 970.5p, on talk that the investment house last month rejected a £6 billion offer from a European rival. That would be equivalent to about £11 a share. (3i would not comment, as is its policy on such matters.)

Interest in 3i from a private equity peer would be no surprise, given the stock market values the stock at little over net asset value. Equally, it would be no surprise if 3i's new management team of Philip Yea and Simon Ball -- chief executive and finance director respectively -- were keen to reap the benefit of the group's increasingly mature portfolio of investments.

About two-thirds of 3i's current investments are expected to reach maturity within the next three years. This month's stake sales of information group Williams Lea and drugmaker Betapharm will likely be followed next year by flotations of Renta, Vonage and Magix.

This building momentum comes at a time of buoyant equity markets and limited reinvestment opportunities. Many investors therefore see the stock as carrying lower risk than usual. They also foresee a larger proportion of the cash generated by the realisations coming back to them.

Merrill Lynch, viewing 3i as a specialist lender rather than a conventional venture capitalist, has a target price of £10.50 on the stock.

3i Group was first recommended on this blog on May 17. You can read the original rationale for owning the shares here.

P.S. One thing I've noticed scanning the Dow Jones Newswires the past year is that 3i has been steadily buying back its stock. Always a good sign.

Another Value Fund Closing

The Third Avenue Small-Cap Value Fund will close its doors to new investors at the close of business on February 28. The fund, managed by Curtis Jensen, has $2.3 billion in assets. Fully 39% of the portfolio is in cash.

Let's see. All three Longleaf funds are closed to new investors. Ditto both of the Tweedy Browne funds. Do these -- and other -- fund closings of top-notch value managers mean little is out there worth buying?

Maybe. Yet maybe not.

With the Third Avenue Value Fund managed by Marty Whitman remaining open, this is looks to be a "small-cap" thing. That is, larger portfolios have a harder time getting in and out of positions when investing in small companies. And Third Avenue Management apparently doesn't foresee enough to do in the near future with a portfolio over one-third in cash.

Further evidence is that the Longleaf Small-Cap Fund has been closed to new investors for years. In fact, Mason Hawkins and Staley Cates said a few months ago that it will almost certainly NEVER reopen. And the Tweedy Browne funds -- American Value and Global Value -- invest in both large and small cap names. (I happen to like not establishing market cap limits.)

My feeling is these closings speak more to assets under management becoming a bit unwieldy for the managers involved, as opposed to a lack of things to do for those of us with assets not totalling in the billions. Though I don't think there's a surplus of bargains out there.

Anyway, I wish I had the "problem" of finding enough to do with a multi-billion dollar portfolio.