Hi Sixty2nds,
I find these takes to be far to speculative JMO. His interest is in the common shares as that's where his position is at and thus every conclusion somehow turns back into how everyone else loses but commons somehow win....fits the position I guess. I was wrong prior and have zero issue admitting as such, but these current Substack posts do not seem to provide the same perspective even as data continues to worsen. I saw elsewhere he wrote he has an "elephant sized" position in QVCGA and it's his only position.
I have yet to really see anyone with a current bullish case explain where the revenue offset comes from. Where's the tipping point? So far QVC has been pivoting into streaming and digital for a few years and yet keep losing customers and revenue, but somehow this poster states they've already turned around! My model has been holding on existing customers and yet I am to take this Substack narrative as there's hidden value? Where is it?
I also find it interesting that many state QVC equity is undervalued and market is wrong but provide no financial analysis into what is the intrinsic value range? Is the equity worth $3.31? Is it worth $10.00? Is it worth $30.00? Perhaps, and I would argue, given current declines, the equity is worth $0.00 thus making current price of $3.22 overvalued.
2024 revenue at QVC, INC (not QVC GROUP but true QVC) was $8,997M which is down from 2019 at $10,986M. Where does this stop given main distribution method is in secular decline and QVC own customer group is 50+ year old women? Interest expense in 2019 was $240M off $5,119M in total debt vs. 2024 at $251M with $3,898M. The cash on hand at QVC, Inc is only $295M from Q1 10-Q and operating cash flow margin is at some 8% compared to 13% in 2019. Property and equipment are at $388M compared to $1,215M in 2019 - they have survived by selling off value. SG&A in 2024 was 14.7% of revenue and in Q1 it was 15.7% compared to 2019 where it was 10.3%. EBITDA is at $1,078M compared to 2019 at $1,942M (44% decline).
I also tackled some of the debt topics he brings up. In my view there are too many differing senior secured maturities at QVC, Inc (OpCo) level to get a complete buy-in and orchestrate an LME. Why in the world would any senior bond holder take a haircut when they own/have claim on the QVC, Inc equity and all that senior debt is pari passu? I struggle to see how the all powerful Greg Maffei, who led them here by the way, is now going to convince senior bond holders to take a haircut meanwhile there's no sign business is stable. Only path I see given OpCo debt is to attempt a prepack (which is why board members were added and law firms engaged) as that's best for all parties and if that works but I challenge this won't end positively for existing equity - it's either diluted out or cancelled altogether as senior bond holders take equity swaps.
I also do not see the value in Liberty Interactive only declaring bankruptcy and tackling their unsecured debt. They have no assets except owning QVC, Inc, ~30% of CBI, and their other investment assets. What does one think happens here? Also it doesn't solve the problem which is QVC, Inc is restricted in upstreaming cash because of it's debt levels. Now because Liberty files it's likely ParCo can't get any cash except whatever their ~60% ownership of CBI gets them while this goes on because Liberty owns 100% of QVC, Inc and QVC Group owns Liberty.
In my view QVC Group passed the zone of insolvency and from a legal view they have a fiduciary responsibility to not just shareholders anymore. This notion Maffei is going to fight for them doesn't have legs and not anything I would risk putting my money into. If it was so easy why are they here? Why did Maffei let them get here? Did they hire Kirkland & Ellis + Evercore, Inc & spend $100K a month on two board members that are restructuring experts because this looks to be in shareholder favor? What needs to go right for shareholders to win is what one should be asking.
And one does not need a default to trigger a bankruptcy as he seems to indicate. Chapter 11, either prepacked or freefall, is a strategy that can have a default be the trigger but look at Claire's today...no default but did it as a strategy:
Now he may ask why would QVC volunteer for this and reality is no one happily goes this route, but it is a strategy. If they can't get bond holders to agree to anything out of court then they go into freefall and they control the business plan in this situation which could create some problems for senior holders. Also possible business continues to decline and value falls apart so even threat of going in is a strategy for QVC board. Regardless this situation isn't clean and I find it hard to see where common holders win.
I also see no realistic analysis about credit facility in these Substacks. FWIW the banks can 100% freeze QVC, Inc from drawing on the facility further if they think it's being used to fund debt buyback (which it has been). At $1.85B drawn on it and EBITDA showing cash flows are volatile I am not so sure JPM is just going to let them keep drawing. I also already wrote I expect if they successfully refi the balance will be smaller as Zulily and Cornerstone are removed as borrowers - so facility is likely close to fully drawn in future state. Throw in SOFR is at 4.34% and QVC has received two credit downgrades from FITCH this year alone (plus one from Moodys) so new interest will be higher than current 6.06%. It's also very possible tighter cash restrictions come into play during refinance.
All of that to say I don't agree with the Substack poster :). If it works out that would be nice, but not seeing the road as clearly as they do.
Happy investing :)
Sean |
