LBRDB - Michael Burry (Of 'The Big Short') Buys The Liberty Complex Stocks And A Broken Merger Arb

Summary

• Michael Burry's Fund added new positions in Charter Communications, Liberty Latin America and Qurate Retail.
• Aerojet Rocketdyne was also added.
• Stake in private prison operators expanded.

Michael Burry rose to fame during the 2008-2009 financial crisis as one of the people who profited from betting against subprime mortgages, but the only reason he had a fund to make that bet was previously established prowess as a value investor. He rose to fame as a result of the movie about that time period, but he also closed his fund after the financial crisis. I've been profiling his picks ever since his re-launched fund became large enough to require SEC disclosure of his positions. You can see the most recent installment of this series here .

In that piece, I noted that he had sold all of his positions except for one, which he still has. The GEO Group ( GEO ) has made a fairly regular appearance on this list, along with the other major private prison stock CoreCivic ( CXW ), which has been added back to the portfolio this quarter. I've covered the private prisons in previous updates, so won't add to commentary on them this time.

I'm not surprised to see more long positions this quarter as the positions reported now are as of September 30, 2022, and the market was down quite a bit compared to the prior quarter, which provided some opportunities for Dr Burry to hunt for value as you can see in the table below.

Source: Scion Asset SEC Filing

The Liberty Complex

Astute readers will have already observed that three of the six positions in the table are associated with the Liberty group of companies controlled by John Malone and Greg Maffei. Masters of corporate maneuvering, they have generated so many spin-offs, tracking shares, etc that there are a wide variety of affiliated firms from which to choose.

Burry has purchased stakes in three of those firms. The largest of the stakes by value is Qurate Retail - this is a home shopping firm, with roots in the shopping channels on cable. The firm has been described as having some extremely loyal customers, but also has a relatively significant level of debt. I actually think the debt is a bit of a potentially interesting way to invest here. Their 2024s are the lowest yielding debt in their capital stack and have a yield to maturity of nearly 10% (CUSIP 747262AS2), while the 2029s are trading distressed with a yield to maturity of over 25% (CUSIP 530715AD3). These would have less potential upside than the uncapped upside of the common stock, but also do well in situations where the common does poorly, and have a much lower threshold for success than an investment in the common. Burry has had mixed success with distressed retail - his GameStop ( GME ) buy was a huge success, whereas he rode Tailored Brands ( TLRD ) much of the way down. Qurate is cut from the same cloth as those two, as they are ultimately a distressed retailer. Having the Liberty folks on side makes a profitable restructuring more likely, but having the more senior position in the bonds also seems potentially wise to me.

The next two positions are Liberty Latin America, which is a cable and wireless roll-up in the Caribbean and Central America, and Charter Communications, the US based cable firm. Liberty holds its stake in Charter via Liberty Broadband ( LBRDA )( OTCQB:LBRDB )( LBRDK ), which has an agreement to keep its stake at the current level. Charter continues to use a leveraged recapitalization strategy, where as their EBITDA grows they issue new debt and use the proceeds to buy back shares, keeping leverage relatively constant. That has resulted in excess cash flow for Liberty Broadband which they have been using to buy back their own shares, which is very accretive as Liberty Broadband trades at a discount to their net asset value, most of which is Charter shares although they do own an Alaskan operation as well. I think the eventual endgame here would be for the two entities to get rolled together. I actually added a stake in Liberty Broadband myself this last quarter, and it will have all the same drivers as Charter.

Aerojet Rocketdyne

I think this is actually the most interesting of Dr Burry's new positions. The firm is a tier 2 supplier of space related items (e.g. rocket engines). They had agreed to sell the firm to Lockheed Martin ( LMT ), but that deal was cancelled after antitrust issues relating to Lockheed having control over the last independent supplier. However, that "last independent supplier" factor also makes them an extremely interesting target for private equity, and the shares trade below the previous takeover price. The firm has a very strong balance sheet with a net cash position, and also owns a significant amount of excess real estate in the Sacramento area which could be sold. Given the current layoffs in the tech area and general real estate weakness this isn't an ideal time to be marketing the real estate, but that is the type of asset that would have enduring value. Elliot Capital Management has taken a stake, so some level of shakeup seems likely, and the firm is looking at a stronger backlog for missiles as a great many are being used in Ukraine right now and will need to be replaced. For more on the firm, see this piece by Seeking Alpha author Yannick Frey.

Conclusion

Michael Burry isn't always correct, like anyone. But his portfolio is generally quite concentrated (at least the portion that is made public) and so it is reasonable to assume that the ideas it contains are held with some conviction. That doesn't necessarily make them good ideas, but I do think it makes them worthy of further study. Aerojet is an interesting idea that has quite a bit of downside protection from a strong balance sheet/real estate assets, while the Liberty complex has so many moving parts that there is almost always something worth looking at any given time.

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