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November 23, 2009
Liberty Media Entertainment Merger with DirecTV Closes
Last Thursday, shareholders of Liberty Media Entertainment (LMDIA) and DirecTV (DTV) formally approved the merger between the two companies. The merger closed Thursday night. Many Northlake clients owned shares in LMDIA. Each share of LMDIA is now one share of DTV. In addition, for every ten shares of LMDIA, shareholders received one share of Liberty Starz (LSTZA).
For example, if a Northlake client owned 500 shares of LMDIA they would now own 500 shares of DTV and 50 shares of LSTZA. Any fractional shares of LSTZA will be paid in cash.
As of early Monday morning, Schwab Institutional shows the new holding of LSTZA but has not yet converted the LMDIA to DTV. This means that account values are understated by the value of client DTV holdings. Schwab has assured me the DTV shares will be credited to accounts very soon.
I plan to hold both DTV and LSTZA for the time being. DTV is growing around 10% a year and producing lots of free cash flow which is being used to aggressively repurchase shares. In my opinion, the growth profile of the company, cash flow, and balance sheet strength are about 20% undervalued at the current DTV price of $31. DTV has further upside in the event that the long rumored takeover of the company by a major telecom company comes to fruition. Just last week, John Malone, the controlling shareholder of LMDIA and now the largest shareholder of DTV, indicated that he is willing to sell the company. In a takeover, DTV could be sold for a price of $40-50. I am less optimistic about a takeover but the ongoing speculation provides excellent support for the stock as do the aggressive share repurchases.
LSTZA operates the Starz and Encore movie channels that are available on a subscription basis via cable and satellite services. The company’s revenues come from splitting the subscription fee with the cable and satellite companies. Expenses are dominated by the fees paid to the movie studios for the rights to show the movies exclusively on Starz and Encore for a period of time. Revenue growth has been slow but the movie rights expenses have been falling driving good growth in profits the last few years. The outlook for growth is more mixed as online video rights complicate negotiations between the studios and LSTZA. Fortunately, the company’s current rights deals are good through 2012 and 2015. In the meantime, LSTZA produces significant free cash flow which I expect to be used to aggressively buyback shares. Current Northlake client holdings of LSTZA are small due to the 1:10 ratio. I suspect that will eventually lead me to sell the shares but for now I think they could rise another 20% to around $60.
If Media Talk readers have any questions about the LMDIA-DTV-LSTZA transaction, please do not hesitate to contact me or just leave your thoughts in the comments section below.
Disclosure: LMDIA and now DTV are widely held by clients of Northlake Capital Managemet, LLC including in Steve Birenberg's personal accounts.
Posted by Steve Birenberg at November 23, 2009 02:06 PM in DTV
DO YOU THINK DUBAI IS JUST A MOMENTARY GLITCH OR CAN BE THE CAUSE OF A SHORT AND INTERMEDIATE TIME CORRECTION?WOULD YOU BUY TODAY OR WAIT FOR A GREATER CORRECTION?
Posted by: MP at November 27, 2009 09:11 AMI think the impact of Dubai on trading will require a look at the markets on Monday and Tuesday when investors return from the holiday. We also could use a few more days to get a sense of the fallout. I added a bit at the open but only in accounts where cash reserves were unusually high.
The situation in Dubai is difficult for me to analyze. When I am uncertain and I feel my expertise is limited I turn to those in the business who I most greatly respect. When it comes to global economies and markets, there are few better than Marc Chandler. Here is is his read on Dubai as copied form a post he made on theStreet.com's Real Money service earlier this morning:
Dubai Bubble
11/27/2009 10:21 AM EST
More thoughts on Dubai World. We stress again that the current troubles being seen in Dubai are a direct result of its efforts to tie its fortunes to global real estate, tourism and services, and are particularly unique to Dubai and should not have wider implications for sovereign EM risk. The property boom helped this strategy work in the good times, but the popping of the global real estate market has put severe strains on Dubai.
Developments in Dubai should thus be seen in the context of the entire country basically being geared toward real estate development and not in the context of EM sovereign risk and fundamentals. Thus, while the current period of risk-off trading could yet persist, longer-term investors should be looking for buying opportunities in EM during this correction.
Dubai's economy used to be heavily dependent on the oil industry, but its oil reserves have diminished significantly and are expected to be exhausted in 20 years. That is the reason behind the shift in the economy away from oil and energy and toward real estate and construction, trade and entrepot services, and financial services (11%). What is making things so difficult for Dubai World is not just that the domestic real estate market has collapsed. Rather, it's the fact that there is no safe haven for the company. Its operations are worldwide (which should imply some sort of geographical diversification) but they are concentrated in property and real estate development.
Every country is undergoing a painful recession and/or deep correction in the property market, so Dubai World is simply getting squeezed in all of its investments. The fact that it is a quasi-sovereign muddies up the water a bit, but we stress again that Dubai's woes should not reflect badly on most other EM credits, which we believe remain sound and on an improving path.
Posted by: Steve at November 27, 2009 09:50 AMWE ARE NOT GETTING THE SEASONAL BOUNCE. INSTEAD WE ARE SELLING OFF AS THE DOLLAR STRENGTHENS[ SAFETY PLAY]. DO YOU THINK THE CYCLICAL BULL MARKET IS OVER AND WE ARE GOING BACK INTO DEEP BEAR MARKET?
Posted by: MP at December 17, 2009 12:20 PMThe market is up 22% this year with many indices up better. Two days ago we closed at the high for the year. Given the magnitude of dollar strength I think the market has held up well so far.
I think we can still go higher though that will be dictated by the economic data. I think the data will be good enough but choppy. I DO NOT think we are going back into a deep bear market.
I have above average cash balances and would but on weakness.
Posted by: Steve at December 17, 2009 05:35 PM