I like to keep an eye on any insider or director dealings that go on in the market. Most of the time, these deals are just option exercises or small transactions where the executive officers are making minor changes to their portfolios.
Occasionally, however, some deals are so large, they just can't be ignored.
A $75 million deal
Even for the billionaire chairman of Liberty Media, this is a significant transaction. He has since been joined by David Wargo, another director of the company, who spent $4.6 million to acquire 162,000 shares of the media group on Nov. 15.
Malone's acquisition takes his total stake in Discovery to around 10.4 million shares. He holds the most voting shares at almost 30%.
The last time Malone made such a significant acquisition of stock was in December 2017, when he acquired a total of 435,000 shares of the company at a price of around $19.80 for a total cost of $8.6 million.
Malone was buying in 2017 after Discovery acquired Scripps Network. The market didn't think much of the deal and sent the stock down 30% soon after it closed. However, in an interview with CNBC in mid-November 2017, Malone declared:
"I'm gonna bet that Discovery, with its ownership and control of its content, will be able to transition to direct consumer platforms in a reasonably efficient way...And if they successfully do that, then [the stock is] dirt cheap right now. If they can partly get there, they're still cheap."
I am willing to bet that he invested based on the same logic this time around, as Discovery has improved substantially from where it was two years ago.
Progress on the deal
At the time of the merger with Scripps, Wall Street was skeptical that Discovery could make the deal work considering the amount of money it was going to have to borrow to purchase the business and the environment in the cable business. In the eyes of analysts, the company was taking on way too much debt at just the wrong moment.
Discovery's management believed, on the other hand, that the deal was perfectly timed. Scripps was trading at a double-digit free cash flow yield, and Discovery was able to raise finance at rates below 5%.
As Malone told CNBC in 2017, "If you buy something that's generating a 12% cash return and you buy it with 3.5% money, it creates a lot of free cash flow."
Two years on, and it looks as if Malone was right. According to its third-quarter earnings release, Discovery's revenue increased 3% or 5% excluding foreign exchange. Free cash flow for the quarter declined 3% to $884 million due to an increase in digital investments.
Speaking on the quarterly earnings conference call, President and CEO David M. Zaslav announced Discovery had produced $2.9 billion in free cash flow for the trailing 12 months to the end of September.
This robust free cash flow has allowed the company to reduce debt and invest in the business at the same time. From the post-merger peak of nearly 4.8 times net debt to adjusted operating income before depreciation and amortization, leverage hit 3.1 at the end of the third quarter, which was "close to the low end of our target range." With extra capital to deploy, Discovery announced a $1 billion share repurchase authorization earlier this year.
Considering how the company has performed since Malone's last significant investment, I think his recent purchases can be interpreted as a buy signal. If Discovery continues to throw off cash, delever and return money to investors, the stock could have substantial upside from current levels.
Disclosure: The author owns shares of Discovery Communications.
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