Hidden ProfitsJ O H N D E L V E C C H I O ’ S

U N C O V E R I N G T H E S T O C K S T H A T P AY Y O U F I R S T

Beating Buffett: Ten Times Your Money from the Billionaire Leaving Warren in the Dust

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MOST people don’t know who John Malone is or that he’s a giant among CEO giants. He’s a perfect example of the “hidden in plain sight” ethos that guides Hidden Fortunes.

If you’re serious about investing smartly, and maximizing shareholder yield, you should know about him and his accomplishments. He’s turned in astounding compound returns for investors in his companies ever since he was tapped as CEO for a then-small Denver-based cable TV company called TCI. Today he presides over a multitude of media companies.

A working-class scholarship boy among trust funders at an elite prep school, Malone found himself caught in a self-described “tug of war.” To carve out a place for himself, he excelled in sports, but his successes on the field had more to do with “raw drive,” as he puts it, than natural talent.

That same drive led him to Engineering and Economics degrees at Yale, and a Master’s and Ph.D. in Operations Research from Johns Hopkins. Malone used everything he’d learned to transform the sleepy cable operator into the nation’s largest cable company. He was coolly rational. He never overpaid for any of his acquisitions.

When he crossed paths with giant AT&T regularly in the 1980s and ’90s, he would show up alone at the negotiating tables. Just him facing a crowd of AT&T’s C-level execs, presidents, lawyers, and minions. Though a math whiz, he wouldn’t do a deal that he couldn’t calculate on a napkin. It either offered the return he was after or it didn’t.

He was a skinflint, too. While other cable operators upgraded their systems without regard for what they’d earn from customers through the improvements, Malone — more technologically trained than any of them — was always the last to invest. He waited 10 years to use set-top boxes and pay-per-view programming. And TCI lost no major ground by waiting. But did he make money for TCI shareholders!

If you’d invested just $1,000 in TCI when he took over, you’d have made $900,000 — a 900-times gain — by 1998, when Malone moved his focus to Liberty Media. This first table breaks down how your investment with Malone would have compared to other options:

Beating Buffett: Ten Times Your Money from the Billionaire Leaving Warren in the Dust

By John Del Vecchio, Forensic Accountant and Editor of Hidden Fortunes

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Talk about a world-class record. And there’s more to come, which I’ll get to in a minute. First, what makes Malone so valuable to us?

King of Cable on Quality, Value, and ConvenienceIn the 1990s, AT&T bought TCI, and Malone transitioned out to devote himself fully to his Liberty Media

holdings. He spent years building an empire of media companies. Along the way, he passed Ted Turner to become the largest private landowner in the U.S., and he’s used his great wealth to support colleges, universities, and college scholarships for high school students.

He eschews the flash and publicity of other billionaires, even taking family vacations in an RV! This is why few know him, and in many cases, not even the investors enriched by his companies know he’s the puppeteer.

So how did he do it?

Malone is a “capital allocator.” While other trusted executives run day-to-day operations under the direction of Greg Maffei, whom he hired and who has taken over more and more of Malone’s former roles, Malone decides where the excess cash from the cash-gushing businesses goes. He thinks like an investor, which he is as, the largest owner of all his companies. His primary goal is to turn investments into huge gains.

As I mentioned earlier, he wants deals that are so clear he can do the math on a napkin. He once wrote a $500,000 check at the table with Black Entertainment Television’s (BET) Robert Johnson, because the deal on offer was that clear to him. That investment turned into more than $700 million — 1,400-times — when media giant Vivendi bought BET.

More than that, he always owns tons of stock in the businesses he controls. So he’s looking for the same things we are… and knows how to treat shareholders!

Here are some of the many, many businesses Malone and Liberty have controlled, owned or owned major stock stakes in:

$1,000 at the Beginning of Malone’s TCI Tenure

TCI

Other cable comp. Malone beat others 5-fold

S&P 500 Malone beat market 40-fold!

$900,000

$180,000

$22,000

By 1988 Performance

• Court TV• Atlanta Braves, which owns extremely

valuable Atlanta real estate• Starz• Expedia• TripAdvisor• Charter Communications (a large stock

purchase put Malone on the board)• Live Nation, the largest ticket booker

and venue owner/operator in the U.S.• Formula One Group• DirecTV

• Discovery Channel• SiriusXM Satellite Radio• MacNeil/Lehrer Productions, which

includes PBS NewsHour• Diverse European cable operations

(creating Liberty Global)• News Corp. (Rupert Murdoch’s media

empire)• InterActive Corp. (Barry Diller’s media

machine)• Sprint Nextel

• Evite.com

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That’s an impressive list. So what makes Malone so good?

The Four-Part SecretThe Malone secret has four parts:

1. Buy cheaply or not at all.

2. Hardly ever reduce low-cost debt.

3. Keep capital expenditures low.

4. Buy your own stock when it’s a better deal than you can get by investing elsewhere.

Of course, the right price is subjective. Some say he paid too much when Charter Communications bought Time Warner Cable. But, he saw what they didn’t (reminds me of myself... as a forensic accountant I’m always seeing what others don’t!). He’s a mathematical whiz but, most importantly, his Ph.D. reflects his mindset: operations research.

He’s what we used to call an “efficiency expert,” someone who looks at business operations to find all the places that could be made better. It’s what Greg Maffei does today as CEO of Liberty Media, but Malone was the one who learned exactly how to cut the costs and boost cash flow at TCI.

He could look at a target and quickly see where all the costs could be cut and cash flow increased, so he knew immediately when his buy price was a steal or not. What to others looked like an expensive purchase, to Malone looked like Christmas in June. Malone has another secret that works to an investor’s advantage. He really hates paying taxes.

In his time at TCI, his entire tax team met once a month (that’s a lot). In his entire history at TCI, the company didn’t have to pay any significant taxes, even though cash flow ballooned 20-times!

In addition, it’s been said that TCI only disposed of an asset if there was a tax angle to it! All the tax money saved goes to shareholders through buybacks.

Not only is Malone hidden in plain sight, but he has a proven track record that includes paying his subscribers first. He’s the brains behind two of our positions in Hidden Fortunes, so let’s take a look…

A Triple Lying at the Bottom of the Deep Blue SeaDuring the dot-com boom, the telecom industry predicted massive internet demand — way more than

existing telephone cables and technology could handle. Companies built fiber-optic highways both underground and undersea. They went from 256 megabits per second, then gigabits per second, to terabits per second — all of which make 1956’s 36 “channels” look like a grain of sand on a beach.

Unfortunately, companies like Global Crossing, WorldCom, and Level 3 Communications anticipated faster growth in demand, overbuilt, and were stuck with miles of unused — “dark” — fiber-optic cable. Dreamers imagined something like Netflix — the ability to stream anything anytime, worldwide — but the reality was hundreds of thousands of DVDs at the post office. Bankruptcies followed.

Those companies were simply too early. In the 15 years since they built more capacity than needed, video demand has risen and then exploded. Streaming services of all kinds require more and faster transmission worldwide, beyond even what the cheerleaders thought in the early 2000s. The dark fiber has gone light, with the so-called triple play of getting telephone, internet, and TV delivered to homes.

1927’s radio technologies and 1956’s cable innovations could not hold a candle to the undersea world of fiber-optic highways we have today:

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With fiber-optic submarine cables crisscrossing the ocean floor, the developed world is highly wired and wireless: We get what we want and talk to whom we want, whenever we want. Populated areas enjoy blazing speeds and a buffet of choices, and even services for rural residents are catching up. Television — whether cable, satellite, or via internet services such as Netflix or Amazon — and video are driving demand for more capacity and swifter transmission. But growth is slowing in developed economies.

Still, there are parts of the world, especially in Africa, Asia, and Latin America (including the Caribbean) with far lower penetration and quality of service. Caribbean and Latin American penetration is 30% to 50% of U.S. levels. Low levels of penetration mean hindered investment, which can be a drag on economies. Since internet access is at the center of today’s technological world, are there sweet spots for potential investors? Let’s take a look.

The first rule of business is to give the people what they want. So you have to go where the demand is — where penetration rates are low, but where there is also relative political and social stability and at least reasonably growing incomes. Here’s a map of average internet speed worldwide:

Our Wired WorldTransoceanic Data Cables

SOURCE: Submarinecablemap.com, www.dentresearch.com

A Market Waiting to Be TappedGlobal Internet Speeds by Country, Mbps

SOURCE: https://www.fastmetrics.com/internet-connection-speed-by-country-php, www.dentresearch.com

Faster Slower

If you’re a telecom and cable operator looking at this map, Africa, the Middle East (outside of the oil rich nations), India, and Southeast Asia offer great opportunity but uncertain rewards due to politics, social instability, and insufficient per capita wealth. But the Americas are a different matter. Outside of North America, both speed (in the map above) and penetration are low in South and Central America and the Caribbean.

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Where Does Malone Fit In?Malone took his expertise from the U.S. to Europe, creating Liberty Global, with top management that has

merged disparate companies in Western and Eastern Europe. Stay with me, because what follows is a complex tale of smart maneuvering in the telecom sector.

Liberty Global began investing in telecoms in Puerto Rico, where its owns 60% of Liberty Cablevision of Puerto Rico (LCPR), and has been in Chile for 20 years through its 100% ownership of VTR. But Chile and Puerto Rico aren’t the future: Chile is a mature market and Puerto Rican growth — though good — is limited by economic problems.

In 2015, Liberty Global created two tracking stocks for its European and Latin American operations, one called Liberty Global and the other Liberty LiLAC, for “Liberty Latin America and Caribbean.” LiLAC tracks the Liberty Global business as the largest cable operator in Chile and Puerto Rico, where it also offers broadband internet and landline telephone.

Tracking stocks are familiar Malone moves.

Malone is not the only master investor who employs tracking stocks, but he is the foremost practitioner and has employed them to make investors wealthier for over 15 years. A tracking stock is not true equity ownership in a business. It says: “This stock will track — or be considered as — these specific businesses owned by the parent.” Therefore, the only way to buy Liberty Global equity is to invest in either or both of the Liberty Global (LBTYA) or LiLAC (LILAK) tracking stocks.

Why do this? Isn’t it sketchy? Not at all. It’s a way for everyone — the company, the market, buyers and sellers of other companies — to get a sense of what the business tracked by the stock would be worth if officially spun off as an independent entity. Therefore often, as is likely with LiLAC later this year, the tracking stock is a stop on the way to a true spinoff.

Out of the Bottleneck and into the ProfitsWhat LiLAC is trying to do in its current and future markets is solve a huge problem in Latin America and

the Caribbean: how to get the fastest speeds with the greatest capacity to the user at a low enough cost to build the system so that it’s profitable. And the major bottleneck is that fixed delivery (DSL via copper lines, coaxial cable, and fiber-optic cable) is the fastest method, but expensive to build enough to reach everyone. So wireless networks are the “last mile” solution, with highest speeds today known typically as “LTE” — fast, but not fiber.

Getting fiber to the home — the way to bring the fast speeds that “last mile” — is expensive. But LiLAC has a special advantage in that its network of cable TV lines — coaxial cable — are “hybrid fiber coaxial,” which bring blazing fast data from fiber-optic lines to the home, business or government. Therefore, LiLAC has the lowest cost option already in-place to offer the best service.

The CWC acquisition was key to this strategy, because it came with 48,000 kilometers of undersea fiber-optic cables connecting 42 countries in the region — far beyond Panama and the 16 Caribbean nations in which it offers consumer services. This matches fiber-optic connections with LiLAC’s hybrid fiber coaxial to offer options few competitors can match, and definitely not on LiLAC’s scale. Connecting the CWC fiber network to LiLAC’s hybrid coaxial system eliminates the bottleneck and puts LiLAC way ahead of current competitors — and scares off new ones.

LiLAC’s plan is to offer a seamless network where a customer can move from cord to mobile with speeds fed by its fiber network. But OTT may still be a risk over time — as it is a risk for nearly all cable companies across the world.

Malone & Co. note that 80% of Latin American viewing is still “free-to-air,” but they’re doing everything they

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can to ensure their offerings are compelling enough to compete against cord cutters. And an acquisition of, say, Grupo Televisa would move them more into original content, too, which is a way of taking on OTT.

All of this is to say that LiLAC is simply run by the best in the business, and with unparalleled experience in Latin America and the Caribbean. Its management is nimble, and goes where the opportunities are. They brought together fragmented businesses from Mexico to Tierra del Fuego to offer better services and bring investor profits. If there’s a threat, this is the team I want to be on to meet it — and beat it.

Action to Take: Buy Liberty LiLAC (Nasdaq: LILAK) up to $28.

The One Formula to Invest in Pro SportsIf the story behind LiLAC gave you a bit of headache, I don’t blame you. The telecom space is about as

convoluted as it gets. But the other Hidden Fortunes recommendation is a little more straightforward (and a heck of a lot of fun to write about).

Sports are ubiquitous. Some might even say they’re invasive, as college recruiting now extends to grade-school age kids, and nearly every adolescent you and I know is playing sports year-round, sometimes two and even three at a time.

Sports are also huge business.

On top of the millions of spectators who flock to stadiums, billions of fans worldwide tune in via traditional broadcast or cable TV and, increasingly, on handheld devices like tablets and smartphones to witness feats of athletic glory. Billionaire team owners, benefitting, more often than not, from publicly financed facilities, enjoy the revenue generated by ticket sales.

Believe it or not, we can enjoy the upside, too.

Content providers pony up massive sums to acquire traditional and internet broadcast rights for NFL, NBA, Major League Baseball, and NHL games. That’s a familiar scenario for U.S.-based investors.

And, oh my, those eyeballs are worth a lot. Companies pay megabucks to carry the games, to show their logos at live events, to sell branded gear (or “merch”), and to secure endorsements from superstars.

Soccer is a clear No. 1 in terms of total fans. So it’s easy to see why eight top marketers paid $75 million each — $600 million total — to sponsor the most recent World Cup in Brazil for just seven days. At the same time, advertisers paid around $75 million to buy about 20 30-second spots in the Super Bowl, the biggest single-day sporting event in the world. Sports leagues, in short, turn eyeballs into cash.

For perspective, the NFL’s $13.9 billion in revenue is roughly equal to the GDP of Jamaica and exceeds the annual revenues of well-known U.S. companies Office Depot and Monsanto. But even that understates the magnitude of the numbers. Sports leagues turn a dollar of revenue into more profits than nations and blue-chip companies, and their margins leave these comparisons in the rearview mirror.

This is because they have very low fixed costs — no research and development, expensive buildings, or inventory. The teams carry the costs. The leagues are where the real money lies. ESPN and TNT recently inked a broadcast deal with the NBA worth over $23 billion over nine years. The NFL’s most recent deal topped $27 billion. The price tag for college football is over $5 billion.

Unfortunately, we can’t buy stock in these powerful, growing businesses. Professional sports leagues aren’t traded on stock exchanges.

NASCAR for the WorldWere you to ask John Q. American his favorite sport, he’ll likely answer “football” and then “baseball.” No. 3

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and rising is “auto racing.” The stock-car circuit — or NASCAR — isn’t a global top 10 sport. But it, too, is big business. The top teams in the sport are worth an average of $137 million, and the top drivers earn upwards of $20 million annually, including prize money and endorsements.

That’s not to say that “auto racing” isn’t popular outside the U.S. It is. But rather than the left-turn-based, closed-wheel action of NASCAR, fans in Europe, Asia, and South American are entranced by the open-wheel twists and turns of Formula One.

Like soccer, Formula One has a well-established worldwide audience that beats out world soccer’s biggest competition, the UEFA Champions League, the English Premier League, the U.S. Open, and the PGA tour. Only the worldwide powerhouse NFL beats it for viewers.

Yes, Formula One is huge. But it’s actually under-monetized — it could make a lot more money because it seriously lags it competitors when it comes to revenue per viewer.

At $1.80 per viewer, Formula One limps across the finish line with a mere 16%, 27%, and 30% of the three others big sports leagues. If Formula One were to close these gaps even a bit, shares would be worth a lot more than today’s price of around $38.

Again, Where Does Malone Come In?I’m glad you asked. Let’s back up for a moment. There is Formula One racing but also Formula One the

company, which owns the commercial rights to all the races. Until this year, this company was privately owned and run by Bernard “Bernie” Ecclestone, an autocrat who dictated terms for all stakeholders with a “take it or leave it” attitude.

But in 2016, Ecclestone put Formula One up for sale. It just so happens that the successful bidder was Liberty Media, controlled by (spoiler alert) John Malone. Liberty Media paid $8 billion for Formula One in 2017.

Like all Malone stocks, Formula One comes in three flavors — A, B, and C shares, or FWONA, FWONB, and FWONK, respectively. FWONK (Nasdaq) is the most liquid, so that’s the one we’re targeting. Malone is as seasoned a media executive as they come. His savvy is one reason why we’re bullish on Formula One. Take, for example, Charter Communications. Its largest stakeholder is Malone-controlled Liberty Media. Since Liberty first acquired a stake in Charter company, the stock has gone up as much as 262% and recently turned down an offer of over $100 billion from Verizon — because it was too low. This is the guy you want behind the wheel of a company sitting in pole position for big profits.

Action to Take: Buy Formula One (Nasdaq: FWONK) up to $42.50.

Follow the Leader… For NowAs I said earlier, Malone is a perfect example of the type of research I do. He might not be as well-known as

Warren Buffett, but he’s consistently brought serious profits to his shareholders with dozens of companies. The numbers bear this out.

But Malone isn’t perfect. No one is. I continue to stay vigilant on the data as it comes in. As soon as Formula One (Nasdaq: FWONK) and/or LiLAC (Nasdaq: LILAK) show signs of bad numbers, we’ll duck out. The work of a forensic investor never ends.

Good investing,

John

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Publisher..............................Shannon Sands Editor...................................John Del Vecchio

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