No. of Recommendations: 5
So the YouTube analysis I have watched talking about a 20% arbitrage opportunity is incorrect probably because it failed to account for the debt in LSXMK. A 20% discount, for a transaction with a short time frame and high probability of going through made no sense.
So Berkshire likes the business longer term.
A couple of things not mentioned so far about the underlying business.
Management say that capex drops dramatically in a year or two. Boosting FCF.
Management say customers like a host lead service. That makes a lot of sense to me. There is a place for both on demand content but also host lead.
Berkshire obviously has a window into car sales and industry trends through BH Automotive.
Apple Play relies on phone connectivity seems to be a clear technical disadvantage.
Management say they have new app delivery technology going live soon that enhance user experience e.g. when you leave the car you will be able to continue listening on phone or in home.
They can merge the streaming service into the radio service. This sounds like a benefit for customers but a risk to subscription income.
Maybe a little speculative but maybe Berkshire thinks Apple could acquire the business to access the satellite technology and deliver Apple Play over that.
It looks like a business that has been disrupted, like many others in last 20 years but maybe there is still something there of value. It’s generating significant cashflows and with big capex complete. The idea of competing with Apple and the customer demographics probably means it needs to be cheap. 10x feels okay but nothing too exciting.
Anyway, Berkshire (Tedd) likes it. Hopefully it works out well for him. Berkshire needs future capital allocators that are getting the odd thing right now and again.
I’d love to know if Berkshire sees just a safe c.10% or if there is some special competitive advantage that could lead to higher returns. It does have a monopoly on the radio satellite business. Is that valuable, or is it like owning the last newspaper in town but eventually all your readers die.
For me personally, it has been interesting learning about Berkshire’s investment here. It started out as a potential arbitrage to copy and now my brain is trying to justify something else. Thanks for the comments folks. I’m not in the US, so great to get the customer perspective and hear from others that understand the situation better.
