Hiya 60,
Final post on this for 2025 unless some news event occurs. I saw this SI thread was shared on X with a few not finding my analysis worth the time, which is fine, I write for myself and not for others so doesn't make any difference to me I suppose. That said hopefully a few still reading get some value here and can pick up a few things that transcend QVC and can give some ideas on how to analyze future investments. I was discussing with a user on Dr. Michael Burry's substack though. My final comment on the topic of Liberty taking out their debentures and the topic of the DTL can be found here.
TikTok Update:
It would appear the TikTok sales have slowed down quite a bit from when you shared that last post on December 5th which likely confirms my prior analysis that this was likely a pay-to-play pump they did with Q4 advertising spend. As it stands right now if TikTok updates tomorrow their daily average will have dropped to 7.1K which is down from the 12-16K they were at moving into November. There was a huge spike into Black Friday but from what I can tell the 12-16K was where they were really around overall in Q4.
There was definitely some positive movements in TikTok though but the questions I have come back down to: 1) How much does it cost them to scale?
For Q4, given Q3 ad spend was up 24%, I am possibly estimating that ad spend was close to $80-90M to get the boosts we saw. This is a new model I developed and not enough data to really back-test BUT so far has given me some direction to not get carried away when I see these TikTok growth numbers.
2) How much does it eat existing linear TV revenues since we can assume some portion (small?) maybe bought via TiKTok instead?
3) How much EBITDA does TikTok create?
4) How much of this really turns into cash flows?
I estimate they will finish 2025 maybe a bit below $150M in gross revenue based on what I have tracked so far and for my analysis I will just assume $150M gross revenue to make this "clean". QVC has reported their returns are typically around 14-15% so I will go in the middle and use 14.5% which takes that $150M gross down to $128.25M (TikTok itself could be +/- 14.5% but no data to confirm so will use what we know about QxH as a whole). QVC, Inc has been running with an EBITDA margin of a bit below 11% so I will round up to 11% - prior to 2022 this EBITDA margin was ~18% but I suspect with advertising spend they will not get a higher one via TikTok so we will be conservative here and use what they have been averaging post 2022.
With these assumptions then I would model that TikTok would maybe only add $14.11M to EBITDA in 2025 which is really nothing. Even if we scaled revenue into 2026 and they grossed $450M in revenue if we used the same 14.5% for returns and 11% EBITDA margin this maybe only adds $42.32M to EBITDA. As their covenants are based on a consolidated DEBT/EBTIDA I think looking at it this way makes sense. Sure there are add-backs and funny things they can do, but without factoring what I can see this isn't really a needle mover today.
The other thing is then how much of this converts into cash flows. For this I am going to specifically look at "core" cash flow which smooths out for WC needs and basically is the cash flows of the core operation. Historically from 2017-2021 this averaged ~52% conversion of EBITDA to core cash flow but since 2022 it's dropped to 41% and if you exclude and/or adjust 2023 (which bumps this average) for the insurance proceeds it's likely below 40%. To give a "best case" I will use 55% conversion of EBITDA to core cash flow.
If we use this 55% then of that $150M gross revenue which maybe generated $14.11M in EBITDA this then only creates ~$7.76M of core cash flow to the business. At that future state of $450M gross revenue which creates maybe $42.32M of EBITDA that's then maybe $23.28M of core cash flow. Once you then factor WC adjustments this can +/- but core operations is what we are looking at here but either way I am not sure if I am a lender this is something I am confident in - especially as linear cable continues to decline at the exact same time.
What's next?:
I still believe an LME is not likely. In fact the only thing holding an LME up is the banks at this stage so if they wanted to the question is why wait? In fact one can argue the banks entire position has continued to weaken by waiting. Since discussions started in Nov/Dec 2024 we have since seen:
- Liberty Media & QVC Group end their shared resources which saw Ben Oren and a few other key Liberty experts no longer in the mix - not ideal given the experience on the Liberty side.
- Senior bonds have hired legal counsel on the QVC, Inc side and also on the HoldCo side.
- ParCo brought in two restructuring board members and is paying them $50K each a month.
- Management converted their equity packages into cash to get paid today which is an immediate bleed for creditors.
- OpCo restated their by-laws and then formed their own board also with restructuring experts.
- The banks then saw $75M drawn from their facility in Q2 followed by an after period draw of $975M bringing the total to $1,050M further exposing them and essentially diluting their recoveries as this new draw is pari passu with the rest of the holders.
- Banks then formed their own 75% co-op (likely happened well before it leaked to WSJ) and also hired Simpson Thatcher and Lazard.
- A&E waited long enough for the company to add going-concern language to their financial which banks were well aware would be done which alone can impact brands deals & other vendor relationships at a time where brand strength is needed.
I could go on, but I have already laid this out well enough and linked to some of these core posts below. I just am not seeing the incentives align for an OOC LME when no matter who gets taken out the banks position isn't better.
Either parent(s) blow cash to nuke Liberty debts or preferreds, but neither HoldCo or ParCo generate any cash so it's not like they are freed up and the cash savings can be downstreamed to help OpCo; so sure they save some coin but now OpCo is still in the exact same situation they were before this "LME" with leverage ratio still restricted and declining earnings. I also find blowing the banks money (and recall ~75% of this cash is the banks at OpCo) to take out long-dated senior notes unlikely too. If I am right about TikTok then this is no MOAT for the banks to feel secure in and they risk letting cash leave but also in any A&E they risk EBITDA falling further by extended date and both situations erode their recoveries. As another reminder the purpose of an LME is to buy more time and possibly reduce cash interest to boost FCF and the banks could have done an A&E a year ago to extend facility maturity but the risk is they wait and further value erodes.
One can argue QVC, Inc (OpCo) did an LME of sorts in September 2024 when they executed Project Nomi with Morgan Stanley. While most think of LME as the nasty drop-downs, uptiers, and other violent creditor moves, what OpCo did in September 2024 by exchanging their 2027/2028 into new 2029 bonds was a liability exercise which BTW saw further value erosion with those bonds already discounted and the company performing worse too. Seems the maturity extension was already given which I would think impacts some of the banking syndicates tactics.
If I had to guess from here I would think with the holidays ending we see them file in January-February. As I wrote prior when they didn't file in between Q2-Q3 I then saw this moving until after the holidays so they can capture the retail cash flows. The semi-annual LITNA 8.5% is due around January 13-15th which would be a $12.2M cash outflow there or about ~6% of the LI LLC cash on hand. Then as we move into February 15th a good chunk of the QVC, Inc bonds have coupons due. It would make sense that "if" they are indeed going to file it will be before this cash exits their hands. When they file most of these debenture/note payments will be paused so they can preserve cash so it makes sense.
I will continue to look for a re-entry point on OpCo bonds but in the meantime I took a small investment in QVCGA short dated puts. Nothing serious by ANY means and a speculative position on this timing. If the company does file there is risk of a GAP down on bonds as forced selling occurs and given my current analysis if I am going to take the risk I think a lower entry creates a better MOS if it can be achieved. If not then so be it.
I don't wish this situation on the employees and hope I am wrong because of it.
Happy investing,
Sean
P.S. Kirkland & Ellis (same K&E QVC hired BTW) had a recent LME deck they put out. In this deck they note the closer the debt gets to the maturity wall, the more power and control siphons out to creditors. Given the bank revolver is now current and going concern language has been added, if we go by QVC's own firm then power has indeed been transferred to creditors.
P.P.S:
I took the posts I think best track my evolving thinking on this matter as the following core:
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