Yet Another Value Podcast - Shopping for value: Bill Brewster on $QRTEA

Episode Date: September 15, 2020

Bill Brewster discusses his investment into QRTEA. QRTEA is part of the John Malone / Liberty family and owns HSN and QVC. Currently, QRTEA is undergoing some financial engineering which has some people recalling the classic John Malone special situations discussed in You Can Be a Stock Market Genius (https://amzn.to/32ApFqv). Bill talks about why the market might be overlooking QRTEA and why he's excited by the financial engineering.You can find Bill on twitter @BillBrewsterSCG (https://twitter.com/billbrewsterscg?lang=en). You can also find his write up on QRTEA at https://sullimarcapital.group/2020/09/02/qurate-retail-group/ . I also did a write up on the QRTEA special sit which you can find at: https://yetanothervalueblog.com/2020/09/is-qrtea-a-textbook-malone-special-sit-or-a-classic-value-trap.html .

All right. Hello and welcome to the yet another value podcast. I'm your host, Andrew Walker. And with me today, I'm excited to have my friend Bill Brewster on. Bill, how are you doing? Doing well, man. Thanks for having me. Yep. Hey, let me start the way I do every podcast. And that's kind of by pitching you. You know, I've been swapping thoughts with you on Twitter for, I'd say, like the past 18 months, two years. And what I can say is I've really enjoyed swapping thoughts with you. You know, you're a really sharp investor. And I think one of the cool things is when you have something that is valuey that you know people are going to really dunk on you for investing in, you know, like the stock we're going to talk about today, Q rate, where a lot of people are melting ice skew, you're willing to just

say, hey, I know people are going to hate on this, but I'm here. I'm willing to take a big swing at it. And I think I'm going to be right. So, you know, I always can respect someone who does that. And, you know, it's just been a lot of fun talking to you. So thanks for coming on the pod and thanks for all the correspondence. I appreciate it, man. I appreciate it. Man. I enjoy talking to you too. I just hope that this swing is at least, not a strikeout, right? Fowl ball at the worst case, but we'll see. Hopefully a single or a double, but that's right. Hey, that intro out the way, let's, before we start talking, let's talk a little bit about your background. You know, how'd you, how'd you come to get into investing? So I was at a bank, Bimo Harris Bank. I underwrote commercial loans and I had sort of, like,

like the family situation that I had an uncle that died and it, let's see, for lack of a better term, it made the importance of understanding what I'm doing investing much more important than understanding underwriting loans at a bank. And I had spoken to my wife about it over, you know, the years that sort of I thought that this might be an issue. But then when my uncle passed away, it really changed the math behind everything. And by then I had gotten my CFA designation. And she sort of said, like, I know that this is what you're passionate about. Why don't you give it a run?

And it's been about four years. I think I've probably been, like, quasi-competent for two of them. And, you know, we'll see if I'm just competent enough to touch hot stoves here. You know, it's funny. Like, as I, every year as an investor, I'll go back and look at something I looked at, or wrote or took notes on a year or two before, and I'll be like, I mean, what was that guy thinking? Like, that guy was, like, who was this man? Like, why did this man think he should be investing? And, you know, it's all about learning and stuff. So I'm glad to her, I'm not the only one there.

Yeah, no, I think. And the other thing is, like, things that I guess I thought that I knew, I didn't even have a clue. And now I wonder, you know, now that I think I know things, am I just the same guy sitting here not knowing anything? I mean, I think it's a constant evolution and trying to figure out where you're wrong. Yeah, the other thing I will say on this is not to get too reminiscent, but a lot of times, particularly with Warren Buffett quotes, you know, I hate the people or the Twitter accounts who all they do is post Warren Buffett quotes and like somehow they get 100,000 followers. I'm like, this dude is just like pulling it.

But, you know, every now and then I'll be thinking about something or learning something and I'll stumble on a Warren Buffett quote. you know, I started reading Warren Buffett and, like, when I was 17 or something, right? And I'll stumble on a note, quote, I'm like, oh, my God. Like, you know, at the time I knew this was smart, but like the resonance will really strike me at some point. So, yeah. Yeah, man, I listened to his, whoever Euclidean capital or whatever, whoever did all the

podcasts, I listened to him over and over again. And I, I hear completely different things when I listen to him now than when I used to. I just, I'm like, oh, this guy wasn't, he was saying what he was saying. I just actually didn't understand the words coming out of his mouth. And I was convinced I did, which is scary. But it's neither here nor there. So just a little bit more. Why don't we talk a little bit more about your investing style before we hop into curate?

So, you know, we were talking before. I know you had been into airlines and you kind of sold those heading into the crisis, maybe a little bit during the crisis as well. I know right now Wells Fargo, Curate, which you're going to talk about are at big positions. I think we've swapped thoughts on cable quite a bit. So just kind of like what type of investment? or you consider yourself, what do you, you kind of wake up in the morning look at for the most part? I try to stick to things that I think I understand. I tend to gravitate, I think,

to infrastructure, like at the core. I think that I, you know, I love to read whatever about these SaaS companies and whatnot. The problem is I just fundamentally don't understand what they look like in 10 years and how they're going to compete against each other. And I, I get a much better sense, like, Berkshire is a big position. Maybe it's a little bit of a cushion if I'm, like, as honest as possible with myself. But the other side of that is, like, I really, really understand the utility business over there. I understand BNSF. I understand how they're funding it.

And I don't think, like, I have problems with some of the assets like many people do, right? But I also understand why a lot of these assets are going to be there for a very, very long time. I feel similarly about cable. I keep trying to figure out the way that 5G disrupts cable, and I keep coming back to the idea of like selling the wireless company's goods so that they can say that they're deploying 5G could be a good business, but like actually implementing and going through all the permitting and just all the pain in the butt that's going to go with 5G,

combined with the fact that I can't get any report that, that gives me confidence that if it was a downpour, I could actually get my internet. And the idea of living in my home and having like a direct TV experience with my internet is a non-starter. So until that stuff is solved, like I think I understand cable pretty well. I would say like I'm just looking at my portfolio. Transdime is a seven and a half percent position right now for me. um you know charter's 10 um like wells is six is iac and match together are six

disney's five so like i don't know those are it's it's sort of a it's a a wide array of sort of what i think i understand but iac and match are sort of probably the exception to what's normally in the in the portfolio but uh i think i understand match long term and i know i like the guys at iac so that's sort of I bought it in March and I just sort of knew it was cheap and it's one of those I'll probably hashtag never sell no look I mean match one of the things I kick myself on is one of the first things I posted on the blog was I met my wife on a match competitor right and before I met my wife I was very familiar with the match products if that makes sense and you know one of the post person posted on the blog was when match was at like 18 I was like look I get they haven't

solve monetization, but like everyone I know uses Tinder and like this, the mode on this product, you know, the flywheel effect is absolutely mammoth. And they're, they're going to figure this out. And at the time, I actually thought the answer was advertising, not like kind of gameplay monetization. But, you know, that business is one, it is very hard to disrupt one of these dating apps once they get started. And that management team is so focused. Like, name me, outside of Bumble, name me another company that's been able to do a successful flywheel on dating product. I mean, they're just. just really, really good.

I like whenever you hear that Facebook's entering something and it doesn't take off and they have that amount of attention, I think that's a pretty good indication that there's something special there. Yeah. Cool. So background out the way, why don't we dive on into QR. Let's do it. Let's get right into the fun stuff.

Yeah, so the ticker here is QR-T-E-A. You know what? I'll just, that's the ticker. the company. I'll let you dive into who they are, what they do, and why you're attracted to them. So look, fundamentally, I think a lot of people that listen to you understand the blown Liberty Complex. I have watched the company. I guess I've been going to Liberty Days now for like three years. And the first year that I went, I thought, oh, wow, that's sort of an interesting business. And I noticed just that most of the room wasn't that interested in it. The two people that

were interested were women. Most of the guys when Mike George started to talk were like checking stock prices on their phone. And I just sort of thought this is an interesting dynamic. And I walked out of the room and I thought like it's weird to me that people sort of went blank during that just given, you know, what Malone, who Malone is and whatnot. And you know, for people that don't know, it's QVC and then they bought HSN. They also bought Zool-LULULU. Lily as I guess it was a I guess a how would you say a backwards integration they were aqua hiring talent I guess is what you would say um and basically where I would say we are in the sort of story arc of the business is zoo lily really flopped uh as an acquisition they took a

write down last year of I think just north of a billion dollars um they had gotten outside of their core confidence and tried to sell a bunch of products to people. They have since tried to refocus that part of the business. I think that's sort of to be determined whether or not it can work. And then the HSN integration has been a complete mess. And they're still guiding to hitting the synergy targets. But when they acquired HHSN, it was hemorrhaging customers. This is a business that's like characterized by very sticky customer relations.

And I think from my sort of understanding, HSN was a lot more promotional and sort of driving sales and getting excitement going in the moment. QVC tends to have a little bit more relationship-based approach. And I think that the combination of trying to swallow a large organization, having a different sales strategy has really caused some problems with the integration. And you combine that with pretty poor performance in 2019 and a whole lot of leverage. And I think we find ourselves here with the stock price. Yep. So look, I think that's a nice jumping off point for the most common question now, right? Like the most common question, I think the easiest question for anyone who's going to look at Q rate and say, I'm thinking about investing is, hey, this company, it's got a decent bit of leverage. I'm sure we'll talk about the kind of financial engineering that's going on in a second. It's got a decent bit of leverage. It's a home shopping network over

cable, right? Like, that's what it is. There's tons of cord cutting. Instagram shopping's popping up, Amazon direct shopping. Amazon actually launched a QVC competitor that they folded a couple years ago. I think they're going to relaunch one at some point. But like the future is online and QRate is for the most part over cable. This is melting ice cube. How can you invest in a leverage melting ice cube? Why do you think the market is kind of off on that? So I guess that fundamentally what I think QVC is prepared to do is sell items on a screen, like at its core. Yep. And I think that the cable bundle has provided it with an efficient customer acquisition

vehicle. On a go-forward basis, that may look different. And probably will, right? I think the idea that the cable bundle in 10 years looks like the cable bundle of, you know, yesteryear is Z. Right. We'll see if Zazlov gets his way and we get the skinny bundle, though. That's a different discussion. The CEO of Discovery Communications, which Discovery Food Networks.

It's another in the John Malone portfolio of companies. Yeah, and it's one of these superfan type businesses, at least that's how they market it. One of the things that I do think is a nuanced distinction but important. is QVC doesn't generate income from taking from the bundle, right? It requires an active participation in a channel. So some of these bundle channels that I worry a little bit about, I have no idea whether or not people are actually watching Discovery or whether or not it's just on at a dentist's office.

And I don't know once you can measure the return on spend, a little bit better and get a sense of whose eyeballs are actually on a screen, I'm unclear how discovery morphs. I have a higher degree of confidence saying that the user base that is interacting with curates channels is actually like engaged. Now, it may be on in the background, but their fundamental revenue generation is from someone doing something active like ordering a product. So I think that's important. I don't know. whether or not they're going to be able to pivot this business into the customer acquisition sort of like cost per click version of the internet and sort of screen-based distribution

in that sort of realm, right? I think that that's certainly something that like George would say he's investing in performance marketing and this and that. It's to be determined, I think is the best that you can say about that. That said, I don't think the bundle is going away over the next five to seven years. And I think that their customer base is probably more likely to use the bundle than not. So I'm not sure that the ice cube is going to melt as quickly as other people think. But I don't disagree that on a go forward basis, the business probably needs to look a little bit different. Yeah, yeah.

And I'm going to come back to this, but we started mentioning the ice cube's going to going to melt a little slower than the market thing. So why don't we just talk a little bit about A, the valuation and B, I think what attracted to you, what had me kind of re-look at this. I've openly admitted I come to this a little biased. This was a cue rate, you know, I saw the same investor days you did over the past couple of years. And I was like, hmm, this is interesting. And then the trends got way worse than I ever thought. But why don't we talk valuation and the financial engineering component that I think really opened your eyes and caused you to kind of revisit and invest in the situation.

Yeah, so I think that maybe a decent way to frame what I see today is, like, I looked at QV, I was looking back through old write-ups. I looked at it in April of 19, and then I looked at it later in the year, and both times I passed. And the reason that I cited in my write-up for passing was like, at the valuation, I needed to have too long of a view on duration, right, of the asset. And I know that it was like cheap, but in these buyback stories, the thing that I don't like is you still are fighting. Like if they're spending $500 million a year and a buyback against an $8.5 billion market cap, you've got to, I mean, you know, that's got to go on for a long time to really make a dent.

So I didn't, for the reasons that we're discussing about how does this business pivot, I sort of, I sort of, you know, that's of didn't know what the business would look like 10 years down the road. And I never really thought that I could handicap that. And what I think that they may have pulled off or I just got suckered into is it looks to me like they have shrunken the duration of the equity to somewhere between four and six years. And that is sort of an easier call for me to think I can make. And And on top of that, I think that they've signaled that they're not just going to be stubborn and buy-in shares into a falling price and that they're willing to listen to the market and maybe pivot their capital return strategy to get as much as possible back to shareholders,

which if it is an ice cube, I think, mitigates your downside. So why don't we talk about the – so you mentioned they're shrinking the equity eration, right? Just I have a for a second and two. What specifically are they doing to shrink this equity duration? Sure. So the stock, I'm going to go by stock price. I'm sorry about people that want me to cite market cap. I realize that I probably should be, but we'll back into the market cap roughly.

So they returned $1.50 in cash. So the share price was roughly $10.50. I think it was like a $4.6 billion market cap, but don't hold me to that. So they returned $1.50 a share in cash, and then they distributed a preferred equity instrument that was $3 a share. So basically they took approximately 45% of the market cap off the company by rejiggering $3 of the capital structure and then distributing $150 in cash out to the shareholders. So what was a $4.6 billion company is today at $2.6 billion, though, admittedly more levered to the common equity. Yep. So this is some classic financial engineering, right? And I think when I think financial engineering, you know, Q rate, as we mentioned, it's in the John Malone. It's not technically part of Liberty anymore, but they do the Liberty investor days. You know, this is part of Liberty. Greg Maffa is here. When you say financial engineering plus John Malone, you know, I think most investors think, oh, you can. can be a stock market genius. John Malone turned $50 million into literally a billion

through a complicated rights offering financial engineering thing. So is that kind of what attracted you to this situation? Yeah. I mean, yes, it was. I don't think that that sort of click-were thought process is going to work out as well. But I guess what I fundamentally see here is a business that I think can continue to generate pretty strong free cash flow to common, even if it's $500 to $700 million a year, which is what I put in my write-up. I think it could still be a little north of that, but let's say it's that. I see a business that is trading at anywhere between three and five times free cash flow to common. Now, they do have to pay down debt, right?

So it's not like just you can take all this out and, you know, it's not, free. And it's more tenuous because it's levered. I spent a lot of the time in my research trying to get comfortable with why, you know, the old Buffettism, let's say the market closes for four years. Why are you comfortable owning this equity despite the leverage? And I kept coming back to the fact that the customers are so engaged. And I'm worried about a couple things. One, they they recast a slide that they showed in the 2019 Investor Day that showed 99% customer retention. And they recast that in June, and they're showing 97% customer retention among like their super user base. Now, the way that the math works on it, they have also recast their conversion from new to best customers.

Just taking a step back for people that don't know, the way this business fundamentally works in my mind. is you need to find 33,000 people that are rabid fans every year. And then you need to figure out a way to convert of your total lead funnel, 90,000 people to rabid fans by year three. So figure it's somewhat linear. They go 33,000, 60,000, 90,000, something like that.

That cohort math is like extremely important, right? I think if those retention numbers start to fall apart or the lead conversion doesn't continue as it has in the past, then I am completely wrong and out of this. That would be what I'm really watching. But what I have noticed is a lot of sort of like the, some of this I might be really naive, right? But some of these margin pressures that came in last year,

and I think some of the problems that they had and some of the categories were merchandising related, and in my opinion, probably a function of trying to focus a little bit too much on HSN, the integration, and maybe losing a little bit of what mattered to the customer. And what I have seen is that the engagement numbers that drive the sales have really not fallen off. And that's why I'm sort of comfortable swimming against the tide.

If the engagement numbers were falling off to, then this would be a non-starter for me. I agree with, and you know, when I was looking at this and making mistakes on it, one of the things that really attracts me was exactly what you're saying, right? The engagement numbers for this thing are off the chart. They've got this cohort of rabbit fans. But let me push back on you a little bit here. So I were, you know the Jennifer Lawrence movie, Joy, which was based on the woman who became, you know, multi, multi-millionaire through QVC products, if I remember.

correctly. I know of it. I do not. I haven't watched it, but I also know Lori Grenier, so I have general sense. Either one. You know, I'll be honest, I haven't watched it either. I only Wikipedia at it. But, you know, my, my thing is, uh, I think people watch, you know, a la Martha Stewart or Oprah or something. They watch for, they get attracted to the personality. Like, I don't think anybody's watching because it's QVC, though I do think people really like QVC. I think people are watching because I love this host on QVC. I love Joy. I love Martha Stewart. And my worry is that going forward, you know, like QVC was the distribution platform.

And it was the best distribution platform for 30 years, 20 years. Going forward, I worry that QVC says, hey, I can get you instant access to 60 million cable customers of whom 4 million watch us and 2 million are super rabid fans, right? Going forward, does Joy just say, oh, well, I can just get that over TikTok in two seconds. Like, I'm really talented. I've already got a million people following me on Instagram. I'll just set up my own Instagram store, cut out the middleman, keep all the profits for myself.

And that's really easy. And Q-Rate kind of has a death of talent. So they're almost in a double issue where the best talent decides to work for themselves, which means their viewership becomes lower, which means the second best talent decides to work for themselves, and they get into this kind of death spiral. Does that make sense? Do you feel comfortable with that risk?

Yeah. I mean, I think that that is a something to watch for sure. I guess that what I, how I think about it in my head is, um, attention is just like extremely disaggregated right now, right? And I think that the objective reaggregator of attention. I mean, this is like just Ben Thompson stuff right here, right? But it's like basically Facebook and Google. Why can somebody else not enter the market? And I think that, where I come out on it is I don't think that like merchandising product and setting up distribution like and video is as simple as it may seem and I think that there are some influencers for sure that are going to be able to do it whether or not those influencers are the people that can take all of the attention sort of remains to be determined whether or not curate can buy some of that influence remains to be determined to me. And I guess that one of the things that I keep coming back to is we're serving like a 50 to 55 year old woman here. I think that the risk that we're talking about

is probably like a 10 to 15 year risk. But if it takes that long to materialize, I think that there is a chance that the equity gets its money back by then. And one other thing, I guess, as you were saying that it kind of clicked with me, I think you and I have talked about Fox before as well, right? And Fox News, one of the big worries I think a lot of people had was Bill O'Reilly leaves and Bill O'Reilly is kind of the headline hosts. And, you know, very similarly, you think people watch Fox for the hosts and the personalities, but I think what you've seen is they watch Fox News for Fox News, right?

And O'Reilly leaves, Hannity takes over, Tucker Carlson takes over. the platform is so powerful that these hosts I mean they're still big once they leave but with Fox News like they're not as big as when they were on Fox News and obviously you know I mean the president be your biggest watcher is helpful but with QVC maybe there is something to hey you can leave and you can do great on your own but QVC everything's going to be professionally done and prepared for you and there's absolutely value in that you know like this podcast would probably look a lot better if we had professional people doing it in stuff no way no way when you got too hands yeah yeah I do think there's something that

And hey, by the way, like you popped on, you're talented, you pop on and boom, instantly, four million people and we can start monetizing them for day one. So I do think there is something to that. So one woman that I spoke to, and this is n equals one, right? This is not like a representative of 30. But I have screened like some of the message boards. And I did, when I talked to this woman, she said, I go to QVC because, like, I go to Amazon for things that I need tomorrow. but if I want to put face cream on my face,

I want to trust what the product is and who's selling it to me. And I trust the people at QVC. And I said, what do you think about their prices? And she said, well, they have unique sizes. And when they run their deals, no one can beat them. And I just think that maybe there is some of that that's underappreciated by the market because it's focused on both legacy media distribution. and also sort of what's going on in retail.

And I see a business that could have a shot at actually pivoting to the future. I don't know how they do it with these brands. These brands feel sort of stale to me as a younger consumer. But again, I think that they've got sticky enough core to get far enough to the point where the common is okay. subject to Greg Maffay doing what I think he'll do, which is return a lot of capital to shareholders. So just one more thing of that pricing thing. It kind of reminds me of, and we've mentioned Herbalife on previous podcasts a couple

of times, but for ILP would say, oh, herbal life is protein powder and they charge 30% more for it. Why would you buy herbal life when you could? And what they didn't get was, hey, a trusted person is coming to you and you're kind of buying them to get the story and stuff. With QVC, it's a trusted host, is coming to you and saying, hey, this face cream is what works for me, I use it, and building that personal connection. So maybe you could save a dollar on Amazon, but you kind of buy it from QVC because you've got

that connection. Am I thinking about that correctly? I mean, that's the bet that I made. Yeah, I was watching it, you know, this is what it does, right? I end up watching it. And I'm listening to a caller. And it was interesting. She ended the call. She said, like, I feel like you guys are my friends. Yeah. And that, like, that matters. And in surveys, people identify the QVC host as family. That's like not just some passive relationship. That's like a true bond that people have with this product. And that's sort of why I was comfortable ultimately making the bet.

Yeah, yeah. Perfect. So let's go back to capital allocation. So, you know, I'm going to link to both of our write-ups. I thought your write-up was great. My write-up obviously came with a little baggage to the company. But my worry here is the financial engineering here. you're like, I think about investor, event-driven investors rule number one is when John Malone does

something pay attention, right? But I think a lot of people are remembering like John Malone putting money into companies. And when I looked at Q rate, one of the things I said was, hey, you know, over the past five years, these guys were insatiable about buying shares when the shares were at $20 per share. Now shares are at $10 per share. And for some reason, they're taking money out of the company, right? Because paying a dividend and paying this preferred stock. dividend is actually taking money out of the company and putting it into their pocket. And when I look at that, I say, like, to me, that doesn't scream bullishness on the company that screams, I want to get money out of here.

So how do you think about that? So I guess that the best answer that I have is, like, when, at the 2019 Liberty Day, what was it? Was it a Lionsgate, right, that Malone sold? Yeah. like when when he talked about selling that um i i think that he would sell something if he really wanted out um i don't know that he would be in it for the dividend my sense just from listening to maffa over the past you know 18 months or whatever on this entity is um he was tired of buying

shares into a falling share price and i would not be shocked if malcolm and him got together and they were like what is a more creative way to shrink the equity because that's what malone like always talks about right he doesn't really talk about like reducing share count but he's always like shrink the equity and in my mind this is sort of a creative way to do it i don't think they care at all about the preferreds i don't think that they can issue preferreds and sell them to the market tomorrow but i think that this is a way to do an lbo uh and sort of like compress the equity duration without having to, like they're not going to trigger any more debt covenants, right? Because all this subordinate to the debt. So they don't have to worry

about like restricted payments if the leverage goes above three and a half times or whatever they would have to worry about if they were issuing more debt. And I think that maybe this is their shot at not just spending a bunch of money into a share price that gets no respect. And I do think that there's some merit to that. I also think that there's some merit to what you're saying. I don't think that, you know, looking at, looking at them taking capital out of the business is arguably not great. On the other hand, they're not leaving a bunch of capital in it to do another HSN or Zoo Lilly acquisition. So to me, it's, I just, I think, like, I don't want to romanticize these guys and I don't want to say like oh if they can do no wrong but um I think that

uh and I'm sorry Greg if you listen to this but I do think that like some people think he's really arrogant and I've I've watched how how he handled some of the the issues in March and how he treated flunk and LSXMA and I sort of understand that they got themselves into that mess to begin with, but I thought that that was a pretty fair structure for both sides. And I think that maybe this is them saying, like, maybe this isn't the asset we thought it is. And if it's not, we're going to give shareholders the chance to get out a little bit of capital today. And if it is, we're going to buy in shares on the common and we're going to de-lever and people could do really well from here. Yeah. Yeah. I guess so I think all that makes sense. And you know, I do agree with you on the

Fonk and LSXMA, like, I think they, they had a bad hand, and I think they dealt as fairly as they could with it. I, you know, I just don't know how they would have done anything differently there, given everything that was going on back when happened. I guess the only difference I would say here is, like, you know, Malone with Lionsgate, he only owned like 3% of the equity after the Star's deal, and he didn't control it. Whereas like, with Q, with Q rate, if you looked at this and said, you know, I think this is a zero tomorrow. He can't, what's he going to do? Like, the moment he files a form for that says he sold on the open market, the shares

are going to tank, the only, the only way he's out for him are, you know, direct TV, selling it to AT&T or something, or for him, I actually always thought that he would kind of obio this himself and buy it out and then just enjoy the cash flows as a private company. But that's the only difference there, I would say. Yeah, I mean, dude, I think they could flip it. to Amazon. You know, a lot of people have suggested over the years, like Amazon or even Facebook, both of them could benefit because there are real skills, right?

Like selling is a real skill and their production value and everything is a real skill. Amazon, Facebook would make sense. You know, the other thing, and I was going to say this for later, but one thing I was a little disappointed by the money coming out is like Q-Rate doesn't have the best track record of acquisitions at this point, you know, both HSN and I'd say pretty bad, to be honest. But I am always a little disappointed. Like it's a Malone vehicle, and I could see strategic optionality to them acquiring something, like a stitch fix. I think stitch fix is too big for them at this point.

But you can see a lot of synergies between stitch fix and QVC or something. What do you think about acquisitions here? I mean, if they were to do some foreign channel that's established and it sort of just like tucked into what they currently do, I would be okay with that. I think they've bitten off a lot. And I'd like to just see them execute the HSN transaction. And I'd like to see that. I mean, they think another 200 million of synergies is coming from this thing.

I'd like to see them go out and really make a push at potentially acquiring customers through whatever Mike George refers to his performance marketing. It seems like customer acquisition costs in any other language, right? Like I'd like to see them try to pivot this business to the internet. and see if they can make it work. And, you know, I have some sympathy to their argument that, like, everybody wants us to do it tomorrow, but our customer isn't there. So I do think they have some merit in what they say, but it would be nice to see them

lean into that a little bit more. And they've said they will, so time will tell. Yeah. No, I agree. It takes time to do these things. But I'm with you. Like, Mike George, I think everything I've heard about him is the employees. love him. He's a really good manager. You know, obviously it's not super reflected in the share

price or maybe the past couple years of performance. But I'm with you. I'd love to see like, if he's this good, launch the app that's going to monetize 20 year olds or something, you know, turn this from, take that cash flow from the core business and give some of the back to shareholders, but also turn this into a growth story with kind of the next great QVC for the 21st century. Yeah, and I think, look, this is part of what I think is, I mean, it's, it's sort of a blessing and a curse with liberty. You know that you're going to get people that try to optimize cash flow in assets. But I also think that they're susceptible to be outflanked by what they perceive as dumb competition. That's actually just sort of playing a different game.

And I do worry that they're running it a little bit too much for profit today and not enough to try to, like, pivot the asset to what it could be. And while I think that that may mitigate my downside, I think that it sort of could really reduce the upside skew on this, too. No, I think you're 100% correct. Let's talk about position sizing, because this thing is going to be, I think we can use rough numbers and say after this dividend, it's going to be about four times levered,

and you're buying it at five times through the equity, right? So 80% leverage, 20% equity. obviously that creates a lot of upside because if this thing's worth six instead of five X you've just doubled your money right which I think there's reason to believe this could be worth like when I was underwriting a couple years ago it was kind of at 7x and I kind of thought this is an 8 to 9x business which that's a lot of upside when you've got 4 to 5x leverage now it's even more but how do you think about the position sizing here well today was a fun day as it traded down you know I was I was more bullish on the transaction

action. I would say like as far as what's my baseline for the entity, right? I think that that's a good place to start on this. I think that the distribution of outcomes for the terminal value of this business is pretty wide. Yeah. And I think that the downside of that distribution is mitigated, one by like the debt markets, a insatiable appetite for more debt. I think that they could refy the 2023 notes tomorrow if they wanted but it's prohibitively expensive to do so um so with that in mind uh i think that they're going to have some things to play with and some like i think they're going to have to de lever a little bit and then i think that they're also going to have the choice to return some capital to shareholders on banking on probably more capital returns than uh others

might be like might consider prudent but I think it's what they'll probably do especially if the share price stays down here. So I will tell you I was bigger than I would like going into the event. I will probably have this settle somewhere around a 7% position because I don't think if I'm if my analysis is right on the customer and I'm half correct on Maffet. and the strategy here, I don't know that the downside is as big as perceived. Now, that said, I may sell pro rata into some of these buybacks

because I don't know that I want to own more and more and more of an entity that could go to zero. So I think part of the thing that's tough about this investment is like Charter was buy and let it run. And like I'm sort of Tom Gaynor one said, like you find the right horse, just ride it. Charter is much easier in that way. This, I think, is going to require some active management.

And I think at somewhere between 5% and 10%, like I said, I think I'm settling on 7. If I'm right, I think that I could do some, I could meaningfully add to my performance. And in a scenario where things go really wrong, I mean, I guess if tomorrow it's a zero and I'm completely wrong, then 7% really hurts, but I think I could probably recover from like a 3% drawdown and not, you know, sort of take my licks, but I'm not trying to make some hero call on this. No, and you know, it's something I've been actually, Elliot Turner on like the second podcast said something and it's kind of resonated with me. Like I'm like you, I'm really attracted to these infrastructure type things, right? Like, hey, here's a cable company. Like they've got 5,000

subs. I think each sub should be worth $5,000, but it trades for $4,000. And I'm I like that hard, like, I own a customer. I own the fiber. But like he said, hey, if you're going to buy something, like go, go try and find something that can be a 3x if you're right, right. Like, don't be up 20% if you're right. Be up 3x if you're right. Like, curate the thing, you know, I like about and I like what you're pitching is,

hey, I've got a thesis. I'm convicted. I think there's a lot of data that backs you up. But it's also, if you're right, this isn't, it trades for six and it's going to seven. This is it trades for six. The cash flows last two years longer than the market thinks. And it's going to 15 or something. thing. Yeah. Or, I mean, like, my real, like, dream, you know, like, my blue sky scenario is the shares

stay down here. It keeps generating cash. They buy in the shares. And then they flip it to someone like Amazon. And then all of a sudden, like, that's like a real, real home run. I'm not underwriting that. I think that that's a silly thing to underwrite and bank on. But I do think that um there's just a lot of attention on the downside and i think that within the common and within the lack of covenants in the debt package that three and a half times leverage ratio is something that you got to watch and um you know because that gets into the restricted payments and what they're allowed to do but uh i just think that there's less downside i mean i don't just think I mean, I worked enough to have the opinion.

I think I can warrant it, but I truly believe the market is sort of a little bit too hung up on some of the headline numbers without digging a little deeper. But I mean, I could be wrong. What are you doing with the preferred stock you got? Are you holding on to that? No, I already sold it. How's it trading the market?

I didn't even look at it. It was at like 103 or 101. I think I sold it at like different slugs at 10250 to 101. 75 or something like that. And far as 100? Yeah, that's right. No. I mean, look, here's the thing, man.

I don't understand if my entire thesis rests on what Maffa can do with the common and how lax the debt markets are to then take a note, like a part of the capital structure that has limited upside but is lower in the liquidation preference than the debt, I don't understand the risk reward on the preferred. like I understand the risk award on the common. I'm 100% with you. And just for our listeners, as part of this, QVC was at

$10, you got about $1.50 in cash and a $3, if I'm remembering correct, preferred, the preferred pays an 8% dividend and they have to pay it back in 2031. No, you know, I think you're right. Like, hey, you know, this thing's

levered four times. The preferred is sliced 3.75 to 4. If you're right and this works out, the common is a double and the preferred just paid 8% over. If you're wrong, the preferred in the common are both zeros. Seems like it. I mean, I don't know what you would liquidate to get the preferred, like there's no two ways out on the preferred in my mind, right? Like you, the business either works or it doesn't. So if it's working, the common's the place to be in my opinion. I can't, honestly, you know, I used to work out a distress firm. I can't think of a time where there was a common that

took zero and preferred had any meaningful recovery, you know, and especially something this levered. And by the way, all the incentives are, because all the incentives become, forget about the preferred, turn the dividends off, lever this thing up, try, start shooting some Hail Mary's because if it works, the common pays off. And if it doesn't, it's zero anyway. Yeah. That's, I mean, that's how I see it, too. And I just don't think, uh, I don't think, like, everybody came out of pocket. I don't think Mike George came out of pocket in March because he wanted the preferred. I think these guys want the upside.

The other thing, and I don't know how much you've thought about this, that I think it's interesting. You mentioned earlier, like a traditional cable channel, ESPN or something, you know, your cable distributor is going to pay them $5 per sub for the right to carry their channel, right? The interesting thing about QVC is QVC actually goes to the cable channel and says, hey, here's, this is too much, but here's a dollar for every sub that you put us in front of because you put us in front of a million subs.

we're going to be able to monetize 50,000 of them for much more, right? Yeah, that's right. I've kind of thought about is as you go to Roku or as a lot of customers start, as these super fans start downloading the QVC app directly, right? Like actually their customer acquisition costs, you know, I guess to get people to down to that, they have to do Facebook. But actually, a lot of this operating cost comes down because they no longer have to pay the cable company.

So that, I never fully put a bow on that, but that's something I've been thinking about. It could. I don't know how to, I have thought about the issue. I don't have a good answer for you because on the one hand, there are, there's arguably, like the Roku downloads, I think it's 2.4 million downloads driving 480 million minutes viewed or something like that. I mean, that's 200 minutes, or wait, 200 hours, right, or something, what am I, or 480 million hours viewed.

So it's 200 hours a download or something like that. I mean, the idea that everyone is watching that at the same cadence is almost, like, that's not possible, right? So there are some super fans that are finding them through alternative channels. The YouTube videos are terrible. And like I did like an average of the HSN hosts like followers on Facebook. That's atrocious. So, like, I don't know the puts and takes of you have some superfans or whatever that are on the app and now you don't have to pay the cable channel as much versus they have to buy clicks on Facebook. The other thing that I think is sort of interesting to contemplate, but I don't have a good answer, is their conversion ratio right now requires like one and a half percent conversions from new to best customers.

Yep. What if Facebook and Google can deliver them a tighter funnel, but all of a sudden, their conversion could go to 5 to 10 percent or something like that? You need a lot. This business is so nichey that you don't need that many shots on goal if you can convert. But I don't have a sense of where those numbers can lead. I just know I'm going to watch them. Yeah. The other thing I've thought is interesting for the future is, you know, as you said,

curate fans watch because they're super fans. But right now, like, they really only can do, you know, you watch QVC one and two, and they've got two channels. But it is interesting to think, like, let's say you're a super fan and what you're really in is to their home decor products, right? Like, they could build a custom channel around you that shows 24-7 home decor products and doesn't show any of the clothing or anything. And that would get you more engaged, probably get you more purchasing.

It could, like, kind of build out that mode. I haven't fully thought about that. I do think like the customization of the internet does, you know, anything with superfans, I think the internet lets you serve those super fans better and like history shows it lets you monetize them a lot better. And I haven't seen a lot of that yet here, but I do think that could come. Well, I mean, this is where I think you and I see the potential of the, like, I think it's interesting that now we're reading about like, oh, boutiques are using video to drive sales. and lo and behold, selling over the screen is something that people really like these days.

I don't see that leaving, and I don't see how the destruction of the retail sort of like landscape as it currently exists is a net negative to QVC. What I am unclear on is everything that you just said, I agree, is a huge opportunity for them. I don't know if these guys are the guys that can capture it. And I'm not trying to say that, like, disrespectfully. I just think that's the question. And it comes back to the thing I said originally, where, like, I worry the next joy or Martha Stewart or everything is not from QVC. I worry that they start their own channel,

or there's just 5,000 of them that are fragmenting all the attention. And, like, QVC isn't capturing that anymore, as you said, because they're not the right person to grab it. Yeah, and I, you know, I guess that what I suspect they would say is they are going to have a team. merchants on the ground trying to find compelling stories that they can come out and pitch to their super fans. And I think that that's like real. I mean, I don't, I don't think that, like, department stores have always had to compete with boutiques. And when you drive down the road,

there's a lot of reasons that people choose different stores for different things. It would be really nice to see QVC get a little bit less comfortable with just being the place that 55 to 65-year-old women go and to try to like really lean into what I think is a pretty compelling strategic advantage I just don't know if like I think that they're investing some through the income statement here I know that that's sort of silly to say in this entity but I do think that if they really wanted to milk it for cash there's I don't know 200 million or something like that but that's off the top my head I that's you know don't quote me but um do they have it in them to do a 500 million dollar investment or a couple 500 million dollar investment or a couple 500 million

dollar investments do show like, hey, we're really going to try to prove this thing? I don't know that they do. And like I said, that I think mitigates the downside, but takes some upside out, too. I'm with you. Like, if you look at Liberty's history, it's not that they're not willing to invest. If it's cable or into hard assets, I think they're willing to invest. But, you know, off the top of my head, investing into like soft, intangible things, I can't think of a recent example of them, you know, I mean, they bought serious and they've obviously done a lot, but I can't think of anything where they've really been like, we're going to take the cash flow down to zero for two years because we think we can really start a flywheel. And I just don't know if Q rate would be the right place to do it either way. Yeah, it's, I mean, it's almost not even in their DNA, right?

So, I mean, I know I just keep saying it, but this is how I think about it. I'm like, man, it sucks because I would really like to have one of these like compounder type internet. that this is shopping of the future, but I do think it introduces, especially with this leverage, like the possibility of a very bad outcome. And actually, if I saw it, if I saw them do that, it would probably make sense to back off the position size a little bit because I think the upside could grow so much, but so could your downside. So I don't know. I have mixed feelings about it. Something that has, you know, and I hate talking anything negatively about these guys, because I really like them, but something that I've always sort of been bothered by

is their perception of Spotify not being a competitor to Sirius XM. And I'm like, I don't see how you could possibly say that somebody that's dominating share of year is not a competitor. I'm 100% with you, you know. Now, I do kind of agree like one of the things, Greg, because Liberty has a controlling stake in Syria, Greg Maffa, you know, pretty much in charge at this point. He'll come on and he'll go on to see NBC and I'll say, I don't understand, like, Spotify signed Joe Rogan and they're up 10%.

And, you know, I do think it got a little silly where every time they did a podcast deal, the stock would go up another 10% and eventually like, you know, 10% on $100 billion is a lot of money. But, you know, I listen to Spotify five hours a day. And I was, Spotify is one of the ones I really kicked myself with where it was so clear, like, you know, the time share, like show me another app that's front page of your screen that people are spending multiple hours a day that has 100 million. in credit cards across the globe. Showing another app that has any of those in trades for less than $200 billion

like they're working on. I know, man. I'll tell you what pisses me off is that when Eck re-did his option package or his pay package, I can't believe I didn't buy that day. It was like still kicking myself for that. And Francisco Oliver was in my ear the whole time being like, dude, we got to buy this thing like Disney would take them out. It makes like a ton of sense

strategically. And here we both watched it rip. So I don't know that it's gone. To be fair, it's still only a $45 billion company. Yeah. But it's hard for me to get my head around terminal economics on that business. You know, I try not to kick myself when I miss something that's up a lot. But there's just a couple in my past. And Spotify's one where I wrote on the blog tons of times. I'm like bullish on this thing.

And for some reason, you know, maybe I just need to get over, hey, yeah, it doesn't trade at five times price earnings. But, you know, when you can see the ball that clearly and it looks that cheap, maybe you just got a swing one last thing on uh kvc and then uh i will let you go this has been awesome kvc one of the things i was surprised about you know it probably makes it in hindsight but their results have been incredible during the pandemic right like people are home and it turns up when people are home they want to watch kvc and they want to buy stuff on tvc uh everybody man they're no restoration hardware restoration hardware is the fish it got away from me but

i i could not see them selling out like that but whatever Anyway, back to QVC. So, you know, nobody thinks that the pandemic results are going to last forever, right? Like, fingers crossed, at some point we're back to normal life. But how much of a boost, ignoring the short-term cash flow boost, how much of boost do you think this is medium long-term where maybe some people who didn't come in have discovered QVC and they're going to generate a couple extra fans? Like, how are those results tracking so far?

I think it's huge. And I think that that's something that some people are missing because of the, way that people interact with the business and the ability to increase shots on goal for lack of a better term. I mean, let's say that this year, rather than 33,000 fans, they convert 45,000 or 50,000. Like, that's a big, big, I mean, I understand on a million and a half base or 1.8 million or whatever, it's not, that's not like going to make or break a company. But I think it destigmatizes the brand in people's mind a little bit. I think it opens. them up to what they're delivering and I you know I asked QVC I said will you price match

Amazon on this and they said no we won't price match and I was actually pretty pleased to see that because I think that the reason that they're saying that is like they know that they can't beat Amazon at some price match ship fast game so they're in it for the relationships so you know I do think a lot of the business probably came from the cornerstone brands which, for those that don't know, it's like a catalog group that came from HSN, which is, I'm going to blank on it, but Ballard Designs, Front Gate, and then like two other brands, those probably don't have the same sort of like customer stickiness attributes to them, but I think that this is a real tale, and I think it's a good thing that, I mean, I hate to say it's a good thing that

happened to them, but for their business, I think it's a benefit. And actually, I think the most powerful anecdote you said on this whole podcast was when you asked them the price match something. They said no. And that means they're in it for the relationships because they're not going to match Amazon on price. But they can absolutely win by having the rabid fans who they know they're there for the relationship and monetizing those. Let's see. Last question I ask everyone. Any other guests you'd be interested in hearing on the podcast or anything?

Oh, man. If you could get Connor Leonard out of his shell, I'd love to hear Connor. does find me value is he doxed himself yet you know i have uh i have emailed him and he he was the guy i kind of wanted to have as the first guest on to be honest he's resisted so far but i have a feeling i have a feeling he'd be a good gift at some point he'd be a good guest uh i you know i mean i i really like francisco oliver i think he goes super deep on stuff um i'm gonna have him on when uh mandolorean season two comes out so we can do part then part just oh my god baby yoda good man uh and then you know i i know that you talk to science a hitting he's going to come on

and um i don't know who else man there's so many good ones out there i just i i i uh i feel like fin twit is uh it's so weird but i feel like it's like a work family uh and there's so many good ones it's in a good place right now too i think uh for a while it was overwhelmed by just like memes and just everyone dunked on people but at least the parts i traffic and i feel like it's a very supportive and good community right now and uh you're certainly a part of that uh it's been great having you on you're going to have a standing invite whenever you've got a new idea just come on this been a lot of fun and uh i think people are going to be surprised by how much they're interested in uh home shopping after this podcast oh man i hope i didn't lead anybody into

a dark dark place fingers crossed man but hey thank you i appreciate it and we'll talk soon yeah man it was nice talking to you have a good one Thank you.