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Sweet Liberty
Liberty Media's shares look tempting -- with or without a restructuring.
By ANDREW BARY
LIBERTY MEDIA HAS LOST much of its cachet on Wall Street. First came some
poor investments during the Bubble era, then a growing sense that the
company has become too complex. Many figure that chairman John Malone just
isn't the force he was in the 1990s, when he built Liberty into one of the
country's most formidable media empires.
Liberty's Class A shares, at around 11.50, are way below their peak of 30 in
early 2000 and stand no higher than they did in late 1998. Liberty, a
holding company with stakes in dozens of media and telecom-related
properties, now trades at a nearly 25% discount to its asset value. Although
the company historically has traded below the estimated value of its assets,
the current discount is wider than the average of about 18% in the past 10
years.
Liberty's prime assets include equity stakes in News Corp., InterActiveCorp
and Time Warner. It also owns QVC, the top home-shopping network, and a half
interest in Discovery Communications, one of the leading cable networks.
Fans of the stock say that Liberty amounts to a cheap media mutual fund
headed by a somewhat tarnished but still-determined Malone, now 63.
There's renewed speculation that Liberty Media could be near a financial
restructuring that could unlock some of the value within the company.
Liberty won't comment, but it could say more on the matter when it releases
fourth-quarter financial results on March 15.
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Chairman John Malone may be weighing a breakup
"John Malone has proven his ability as one of the best investors in media,"
says Bill Nygren, manager of the Oakmark Fund. "Liberty has a great group of
assets and a management team that is solely focused on building value for
shareholders." Oakmark Fund is run by Harris Associates, which holds 59
million Liberty shares. Nygren says he doesn't want to get into a "guessing
game" about when Liberty may do something to unlock value. "They are smart
people and know more than we do about when to make these decisions."
With a breakup, Liberty could trade in the 16-17 range within a year, and if
nothing happens, the stock could rise to 14 or more, assuming some
appreciation in its key equity holdings and a continuation of solid
operating results. The company's market value is $34 billion. There's also
about $6 billion of net debt.
"Liberty is a safe stock. The pieces are worth more than the whole, but I
don't know how you unlock it," says Mark Boyar, president of Mark Boyar &
Co., a New York-based research and investment firm that owns a small amount
of Liberty shares.
Boyar says that while Liberty looks attractive, he sees better opportunity
in media stocks, such as Time Warner and Viacom, that have lagged behind the
overall market in recent months. "I think you'll make money in Liberty, but
you may be better off in other media stocks."
One of the problems with Liberty is its complexity, which investors can find
baffling. The company was formed in 1991 as a repository for cable
programming and other assets amassed by Malone's Telecommunications Inc., or
TCI, then the country's largest cable operator. A $250 million investment in
Turner Broadcasting System turned into the current Time Warner stake, and a
tiny initial investment in BET, the black entertainment network, turned into
a $600 million interest in Viacom.
The stock has also been held back by the low cost basis of many of
investments. Malone is renowned for being tax averse, but it's unclear how
Liberty could be liquidated without incurring a multi-billion-dollar tax
bite.
Table: Big Media on the Cheap
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Exactly what is the company worth? Valuing Liberty's public equity
investments is pretty simple, but estimating the value of its nonpublic
holdings is tougher. In the nearby table, we put Liberty's net asset value
at about $15 a share. This is partly based on the work of Rich Bilotti, the
media analyst at Morgan Stanley. Some put a higher value on the company;
Gloria Radeff of Bear Stearns recently estimated Liberty's net asset value
at almost $17 a share, assigning higher values to some of the nonpublic
businesses than Bilotti. Liberty has its own calculation, but doesn't share
that information publicly.
In the past year, Liberty has sought to simplify its structure and focus
more on its operating divisions. The most notable move came last summer,
when Liberty assumed full control of QVC by purchasing Comcast's 56.5%
interest in the company for $7.9 billion. Liberty and Comcast had been
partners in QVC. Liberty sold noncore stakes in Cendant and Vivendi in the
fourth quarter as part of a strategy to reduce debt by $2.5 billion in the
period.
Liberty now is organized internally into three groups. Its interactive
division includes QVC and the stake in InterActiveCorp. Its network division
holds Liberty's News Corp. interest, 50% stakes in Discovery, Court TV and
the Game Show network, and full ownership of Starz Encore, a group of movie
channels. The final piece is international, which holds Liberty's
controlling stake in UnitedGlobalCom, Europe's leading cable company; a 45%
stake in Jupiter Telecommunications, the leading Japanese cable TV operator,
and assorted cable properties in South America.
If Liberty were to be broken up, it could be along current divisional lines.
One Liberty holder says the network group company might appeal to News Corp.
This would allow News Corp. to repurchase the 17% block of its shares now
held by Liberty and gain control of Liberty's cable programming assets.
The interactive division, meanwhile could appeal to Barry Diller, who runs
InterActiveCorp, owner of Home Shopping Network. There would be obvious
benefits to combining HSN, the No. 2 home-shopping network, and QVC if
antitrust regulators would allow it.
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> Even without a restructuring, the stock could climb. Merrill Lynch's
Jessica Reif Cohen, a Liberty bull, carries a $17 price target. In a client
note last month, she called Liberty "a bona fide value story." She wrote
that Liberty's operating businesses effectively trade for about eight times
projected 2004 cash flow, a discount to Viacom at 14 and News Corp. at 11.
This calculation strips away the public equity stakes.
One of Liberty's jewels is its half-interest in Discovery, one of the most
valuable cable programming properties. Discovery's revenues likely grew 17%,
to $2 billion, last year, with cash flow rising 30%, to $500 million. Cash
flow is seen expanding at a 20% clip in the coming years. That's why
analysts value Discovery at a hefty $10 billion to $14 billion.
Liberty did err with some late-1990s investments such as Teligent, ICG and
Britain's Telewest. These deals soured, costing Liberty $3 billion and
denting Malone's reputation as a brilliant deal maker.
And investors need to accept that Malone is more equal than other Liberty
shareholders. He has a 3% economic interest in Liberty but his voting
control is 28%, thanks to his ownership of super-voting Class B shares.
Those shares, moreover, are entitled to as much as a 10% premium above the
Class A shares if Liberty ever gets sold.
But that doesn't dissuade Liberty fans. One calls the stock a "loaded
laggard," meaning that it may be primed for significant appreciation.
At a minimum, Liberty investors get some top media assets at a discount
while obtaining Malone's services at minimal cost. That's not a bad
combination at a time when bargains are tough to find in the stock market