« Mid Cap and Value Remain in Favor for March | Main | Another Month Favoring Mid Cap and Value »

March 02, 2011

Liberty is Growing

Egypt, Libya and the rest of the Middle East are not the only places where Liberty is on the March. The latest earnings report from Liberty Media indicates that all is well at Liberty Starz (LSTZA) and Liberty Capital (LCAPA), two of the three tracking stocks making up John Malone's domestic media empire.

The big news out of Liberty Media's 4Q10 earnings report came from LSTZA. The company reported better than expected revenue and EBITDA growth driven by surprisingly robust growth in subscribers at the Starz and Encore pay TV channels and initial revenue from post TV windows for Spartacus. Both positives bode well for the future as subscriber growth flows through to 2011 and 2012 estimates and Spartacus raises confidence in the company's original programming strategy, now being led by former HBO head Chris Albrecht.

Also interesting at LSTZA is that despite the generous terms of its deal with Netflix that makes Disney and Sony films available on Netflix at the same time they appear on Starz, there appears to be no impact on Starz subscriber growth. This supports the idea that Netflix is an add-on service -- not a substitute for cable or satellite. This is positive for the entire cable and cable network industry. More importantly for LSTZA, the fact that Netflix does not appear to be hurting Starz puts LSTZA in a stronger position to negotiate a new deal with Netflix. The current deal, at $25 million annually from Netflix to Starz expires in early 2012. The two sides appear to be negotiating already. LSTZA is in a tricky position, having to balance the desires of Disney and Sony, the multichannel distributors who sell Starz and Encore, and its own need to maximize the inflow from Netflix. The bottom line is that LSTZA appears to be in a stronger position to get the rumored $250 million annually from Netflix in the new deal. Overall, the quarter supports higher estimates on the core business and a higher valuation multiple as the company's position versus its suppliers and customers has improved.

As usual the news out of LCAPA is unimportant as far as earnings go. LCAPA is a collection of investments with a 40% stake in Sirirus XM (SIRI) being the largest, representing about half of LCAPA's net asset value. Based on disclosures in Liberty Media's press release and management comments on the conference call, I updated my valuation spreadsheet, which now suggests that LCAPA is worth $90-100 before applying any tracking stock discount. Furthermore, with the key parts of standstill agreement with SIRI expiring in March 2012, there are now clear catalysts in a near-term time frame to unlock the value and arguably drive it further. Just simplifying the ownership structure between the two entities, as LCAPA did when it had a similar stake in DirecTV (DTV), would mostly eliminate the tracking stock discount and provide approximately 30% upside in LCAPA. Ultimately, to own LCAPA you have to like SIRI's outlook, I do, and trust John Malone, I do.

Disclosure: Liberty Capital, Liberty Starz and Disney are net long positions in the Entermedia Funds. Sirius XM is a short hedge against Liberty Capital in the Entermedia Funds. Steve Birenberg is co-portfolio manager of Entermedia, owns a stake in Entermedia's investment management company, and has personal monies invested in the Funds. Liberty Starz,and Liberty Capital are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, an SEC registered investment advisor.

Posted by Steve Birenberg at March 2, 2011 09:06 AM in LCAPA