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May 23, 2011

Liberty Capital Makes a play for Barnes and Noble

Liberty Capital (LCAPA) is an asset play. The stock trades with the value of the assets it owns including 40% of Sirius XM (SIRI), a double digit stake in Live Nation Ticketmaster (LYV), and smaller holdings in a variety of publicly traded media and telecom companies. LCAPA also owns a few significant private assets including the Atlanta Braves and TruePosition. LCAPA has traded at anywhere from a 20% to 40% discount to the value of its assets. Over the past 18 months the discount has narrowed and the value of the assets has risen sharply(SIRI has gone for 60 cents to $2.20) leading to huge gains for LCAPA shares.

I see more gains ahead for LCAPA driven by (1) further rises in the price of SIRI due to its favorable fundamentals, particularly free cash flow, and (2) the March 2012 expiration of the standstill agreement with SIRI. I expect LCAPA to tax efficiently unlock the value of SIRI through a transaction similar to what was done with DirecTV (DTV) and Liberty Media Entertainment (LMDIA) a few years ago. Leaving aside other deals within LCAPA, I think these two items can drive LCAPA shares into the $120s or higher.

Of course, when John Malone is involved, leaving aside other deals is not an option. The latest move is last week's bid for 70% of Barnes and Noble (BKS). BKS would add a large operating asset (worth over $1 billion) to LCAPA. BKS is a value play as Malone believes in the growth of e-readers, economies of scale drive the elimination of hardware losses for the Nook e-reader, and a big near-term boost at the bookstores from market shares gains due to the bankruptcy of Borders. Some analysts think BKS EBITDA could double driving significant free cash flow.

One the one had, I see great value in LCAPA as is and would prefer to just let the asset value build and the trading discount narrow. BKS seems like an unnecessary and potential risky distraction given the downside in print books. On the other hand, the BKS growth story is plausible, the deal is not that large (LCAPA likely putting up just $500 million), and Malone has a good long-term record in acquisition of down and out assets. I think BKS is an acceptable move for LCAPA but I'll admit there is an element of "In Malone We Trust."

Disclosure: Liberty Capital is 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. Liberty Capital, Live Nation Ticketmaster, and DirecTV are net long positions in The Entermedia Funds. Sirius XM is a net short postion as a hedge against Liberty Capital in the 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.

Posted by Steve Birenberg at May 23, 2011 09:45 AM in LCAPA