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March 13, 2006

Liberty Media: Split In Two Offers Little Near-Term Upside

Not a lot of value added in the Liberty Media (L) 4Q05 earnings release or conference call. As expected, all of the discussion concerned operating results at QVC and Starz Encore and the upcoming restructuring of L into two stocks. I can accept the complex analyst spreadsheets that suggest L shares have a net asset value of over $10. However, I don’t see the split of the company serving to lower the 20% discount where L shares trade. Analysts and investors are accurately valuing these assets on a net asset value basis and the inability to realize value from the significant public and private holdings leaves little room for the shares unless public and private multiples across media and telecom rise. Continued growth at QVC and a turnaround at Starz could offer upside but I think it will be tough for either operating asset to exceed estimates over the next few years, again making it difficult to drive value in L shares....

QVC had a strong 4Q05. Domestic sales growth of 14% exceeded analyst estimates driven by higher average selling prices and more units sold to existing subscribers. Units rose 9% and ASPs rose 4%. Strength on the top line ought to have produced a positive surprise on the EBITDA line but a year end writedown of obsolete inventory pressured margins and led to an 8% gain in U.S. EBITDA.

International results at QVC continue their rapid growth with revenue up 14% and EBITDA rising 42%. Currency penalized the results, masking local currency gains of 24% for revenue and 42% for EBITDA. Margins benefited from the operating leverage inherent in the home shopping business. One analyst also commented that the obsolescence charge at International was lower than expected.

Management did not issue any guidance on the call. They will be on a road show related to the May split of the company and stated that they would issue guidance at that point. Nevertheless, management did comment that 2005 would be tough to replicate in 2006 for QVC. This comment generated a lot of questions. Management more or less said that it was an above trend year so they are just being cautious. Also, as international markets become more fully penetrated, subscriber growth will slow. Ultimately, management stated that QVC remains a 10% CAGR business with some years above and others below the trendline.

Starz had a horrible quarter as expected with EBITDA falling 37% on flat revenues. Programming and marketing expenses led to negative operative leverage as did spending on a movie download service. Subscribers were up 7-8% on a year-over-year basis but revenues were flat indicating pricing pressure. The press release noted that there has been no subscriber growth since 4Q05 as cable and satellite companies have focused their marketing on other products and services.

Management did indicate that programming expense growth should moderate in 2006 to the mid-single digit level. They repeatedly used the term that the expenses were peaking. I am not sure if that means they will remain flat or actually fall in 2007 and beyond. In theory, Starz could offer several years of above trend growth off the 2006 base but I am not sure the Street will pay for the growth.

In news related to the split of the company, management announced that Expedia would join QVC, the stake in Barry Diller's Interactive Corp, and other recently acquired e-commerce assets in the Liberty Interactive tracking stock. This generated a lot of questions but I did not get the impression that the questions were about a shift in the overall value of current L shares. Management also repeated that the split would take place in May and that Liberty Interactive would use free cash flow from QVC t shrink the equity base hoping to drive share value.

Posted by Steve Birenberg at March 13, 2006 09:19 AM in L