The Elegant Solution to QVCGPThis Is Way More Fun Than Tender Offers
One of the big dangers in investing is that we will hinge our arguments on something that is unimportant. One thing many investors like to think about is a “catalyst,” something specific that will create value (or destroy value) in an investment. And maybe that’s a reasonable thing to think about, but where people get into trouble is that they say it’s going to happen soon. Or it’s going to happen on a specific date.
And then if it doesn’t happen when they expected, they lose their patience. They lose their resolve.
After announcing they were pursuing “strategic alternatives” during the Q1 earnings call, after hiring disinterested directors to their board, after all parties hiring lawyers and consultants, after reporting Q2 earnings in a “pre-screened” format with no live Q&A, and after withdrawing $1 billion from their revolver in July, one thing is very clear.
Something is brewing.
But when will we get an announcement? I haven’t the faintest idea.
It’s not about knowing when something will happen. It’s about knowing whatwill happen. And when you have a big margin of safety, you can afford to wait.
You will create all kinds of psychological harm for yourself if you start creating timing expectations for your investments. It is impossible to time things. The goal is to invest in things where timing doesn’t matter.
From my last post:
Predicting the timing of things is not my cup of tea, but just for fun, if I was making a “side bet,” I’d say that we’ll get some sort of announcement on Monday, September 8th.
And now that I’ve made that prediction, this means it’s definitely notgoing to happen on that date.
Told ya…
The Capital Structure Isn’t the PointEvery argument I’ve seen against QVCGA is presently focused on the capital structure. They see a ton of distressed debt between OpCo and HoldCo, and therefore they conclude the common shareholders can’t get anything out of this.
Well, that’s not exactly what they’re saying.
Every argument against QVC has a singular hinge, and that’s the business itself. The capital structure is merely a catalyst in people’s minds for the demise of QVCGA. When I argue that an LME is forthcoming that will benefit common shares, or that the bonds/banks won’t take over OpCo due to taxes, or whatever, this is why the naysayers move the goalposts and say, “Well, if earnings keep declining then taxes or an LME don’t matter.”
But they do matter! Even if earnings continue to decline, your job as a bank is to maximize recovery. Deliberately taking actions that harm recovery is dumb.
Besides (y’all can correct me if I’m wrong), I think I was the first person to bring up the fact that if lenders take over OpCo equity, they lose the ability to file a consolidated return, losing all tax attributes sitting at midco.
And then all of a sudden the naysayers had to move the goalposts, because they never considered that. Now some say the lenders will still get the equity, but they will structure it as contingent equity which will convert to ownership later, allowing the company to keep filing a consolidated return in the meantime while the tax assets roll off.
I’m glad these people aren’t my tax consultants.
The IRS would deem this a disguised transfer of ownership, forcing a deconsolidation, making all of the tax savings from consolidation get clawed back (with interest and penalties!) for all of the invalid consolidated years.
And this goes back to my point. The disagreement about QVC isn’t LMEs or taxes. It’s the business itself. The capital structure has just become a separate point of contention, because the people who don’t like QVC as a business see the capital structure as a catalyst for destruction of the common’s interest.
I obviously don’t.
The argument is really simple. When you have nearly $2 billion in cash, you don’t give away equity. You give away equity when you have no cash left for creditors. That clearly isn’t the case here.
Some people just cannot see past bad numbers. They’re incapable. To them, any recovery in QVC is impossible, because any return to stability or growth must be impossible based on recent trends. And this flaw is causing them to only see negative outcomes for equity owners in QVC Group.
Every time I mention the qualities of the business that are conducive to survival, the naysayers start talking about revenue declines. But the revenue declines are the noise, and the structural advantages that QVC still has are the signal. And if you keep mistaking noise for signals, 1) you won’t have long-term success as an investor, and 2) there’s nothing I can do to convince you.
I don’t know how many times I’ve seen “models” showing QVC’s future earnings, and they’re just a continuation of the trend of the last few years. Maybe they teach that in finance class, but it’s a losing strategy in the long run. You have no edge if you do this, because that’s what everybody does. When you make earnings models that just project recent results to the future, you tacitly believe that recent trends are indicative of the future. And most of the time, they are!
Most of the time.
But some of the time, they aren’t, and investing success is about finding those exceptions, making it a waste of time to partake in it.
A Recap on the Cap StructureAt the end of the day, I see an Executive Chairman who is very skilled in these situations, who has every incentive to benefit common shareholders, and has nearly $2 billion to play with and access to more. On this basis alone, any argument for a wipeout of the common is completely illogical. I just don’t see it as a risk. The risk is that something crazy occurs that dries up that cash, and that’s the risk I worry about. But the idea that Maffei will actively negotiate to wipe out his and his mentor’s ownership is an absolutely bizarre take. I’m surprised people keep saying it. If they had burned through all of their cash and there was no other choice, then fine. That actually makes sense. But they have the runway to negotiate with cash. Choosing equity now is a bad take.
Anyway, to summarize what I would do in this situation (none of this is a prediction—just my thoughts):
- QVC Bonds: Tender with consent solicitations to wipe substantially all covenants and non-sacred rights from the indenture. This forces bondholders into a choice of taking cash or holding out for weaker paper with fewer rights. S&P, with their new credit rating, gave a recovery range of 50–70% and an average of 55%. Given this report and where the bonds trade, a tender offer can be accomplished entirely with the revolver, including a premium price to market, consent fees, early tender fees, and bank fees—creating a cash cost about 25% higher than the current market values of the bonds. Even if 100% take the offer, there is enough liquidity to do it without needing extra bank cash beyond the revolver.
- LINTA Bonds: Use Midco cash only. These bonds are trading at 15–17 cents on the dollar. S&P just re-rated these, giving them a recovery expectation of 0–10%. That’s less than the current market value. Even if we offer a 40% premium to the market price, after fees, QVC Group can eliminate all of these bonds with the $200M sitting at Midco. Given where these trade and the recent downgrade, you could probably pull this off at an even lower price, saving some cash.
- Exchangeables: Ignore them. I initially said we should tender for 40% of them, and I’ve changed my mind. The main issue is taxes and IRS pushback. Since QVC avoided a lot of tax on retiring the MSI exchangeables, I’d be concerned doing the same strategy this year. If you avoid a large enough tax, the statute of limitations for IRS disputes can extend from 3 years to 6 years. If they do something similar in 2025, the IRS may challenge it and look back on similar strategies from the prior 6 years. To avoid a potential double dip, it’s best to leave these alone.
- Taxes: A non-issue here. They have NOLs and interest carryovers to cover any CODI tax. They should use them to offset taxable income here.
- Preferreds: I have previously said that we handle these like the Bonds. I have basically held that we should tender for these using nothing but HoldCo cash, attaching consent solicitations that waive all rights under the Certificate of Designations, including dividend rights, mandatory redemption, all restricted payments, effectively reducing the preferred stock to a piece of paper. This gives the preferred stockholders two choices: take the tender, or risk being left with nothing. The trick with the preferreds is getting the consents. The preferred stockholders are largely retail and fragmented. It’s harder to get their approval than with bonds. Since May, 70% of P shares have traded hands at an average price of less than $8. I’m sure there’s a lot of turnover. Yeah, I think it’s reasonable that a significant amount of new owners have low cost bases, but I doubt over 50% of the P shares have a cost basis below $8, so I think you’ll need a massive carrot here to get consents. There’s enough cash at HoldCo to offer double the current market price. That’s generally what I’ve been thinking.
Well, I think there may be a different option to deal with the preferreds.
An Elegant SolutionRemember, the rights of a preferred stockholder are limited to the four corners of their contract. If QVC stays within those four corners, the P holders cannot sue and win. Sure they can sue, but they’d just be paying legal fees to lose.
Under Section 3(e) of the Certificate of Designations, we are told that if the preferred dividend is in arrears, certain actions are not allowed, like dividends to common stock, buybacks of common stock, etc. But there are carve-outs. Here is the most fascinating one:
[N]othing contained in this Section 3(e) of this Certificate of Designations shall prevent…(I) direct or indirect distributions of equity interests of a Subsidiary or other Person (whether by redemption, dividend, share distribution, merger or otherwise) to all or substantially all of the holders of one or more classes or series of Common Stock, on a pro rata basis with respect to each such class or series… whether voluntary or involuntary…
What is this carve-out referring to? Spin-offs! The Liberty special! Even if they’re not current on the dividend, QVC is allowed to spin off subsidiaries to common stockholders.
Think about it:
- CBI was specifically removed from the revolver, leaving it with no debt and $105M in cash.
- LINTA is a subsidiary of HoldCo.
- QVC, Inc. is a subsidiary of LINTA.
LINTA and QVC, Inc. are subs! They can be spun off!
QVC can create a New HoldCo, organize the same structure we have now under this New HoldCo, and put LINTA and QVC, Inc. under it. It can take current HoldCo (Old HoldCo) and put the remaining 32% of CBI underneath it, giving it full ownership while spinning off New HoldCo to common stockholders.
So common shareholders will receive stock in roughly the same company they own today but without CBI or the preferred stock overhang. What remains will still be owned by QVCGA stockholders, housing the preferred stock and CBI.
Essentially, this is a way to retire the preferreds for CBI and some cash without requiring preferred consent or a vote.
And this is 100% allowed under contract. The only constraint is a common shareholder vote to approve it, and that’s an easy hurdle to clear.
Some might claim fraudulent transfer, but they can’t, because CBI has no debt, and preferred holders aren’t creditors. Also, this would qualify as a tax-free spin-off, because CBI is an active trade or business.
I think this is the most elegant way to handle the preferred, and it requires no messy consent solicitations at all. Took me a while to see it, but I’m a huge fan. And there is precedent for this. Go back forty years, and something like this happened with Valero. The preferred stockholders sued and lost, because their contract allowed for this sort of thing. And that’s the key here: if it’s contractual, it’s contractual. You can’t argue against it.
I asked ChatGPT to create a before-and-after visualization, and I thought it did a good job. I used Q2 cash balances to make it easier to understand rather than using pro forma post-LME cash.
© 2025 T.J. Detweiler
548 Market Street PMB 72296, San Francisco, CA 94104
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