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August 16, 2011

Starz Aligning While Capital is Quiet

Liberty Starz (LSTZA) and Liberty Capital (LCAPA) reported largely uneventful second quarter earnings. Both stock still offer excellent value on an asset basis. LSTZA also has a solid underlying business producing moderate growth and significant free cash flow.

LSTZA reported slightly better than expected second quarter results. Revenue rose 5% and EBITDA rose 6%. Subscribers were flat with Starz channels up and Encore channels down. Given all the concern about cord cutting and cord shaving and the direct attack by Netflix on pay TV movie services, I think these sub numbers are good news. In fact, this makes the second straight quarter where subs surprised to the upside. Despite a cash hoard that now stands over $1 billion, LSTZA did not buy any shares again this quarter. The lack of share buybacks is due to the pending spin-off of QVC from the Liberty Media empire and an ongoing strategic review of what do with the valuable LSTZA assets. Pending negotiations with Netflix over renewal of digital rights to Disney and Starz movies that LSTZA controls until 2015-2018 is the next catalyst. With the right outcome, the share repurchase is released and the underlying value of the business is enhanced. I can see the stock in the $90s in that scenario. Downside is protected by the cash reserves, cheap valuation, and John Malone's support.

LCAPA had an extremely quiet quarter. Share buybacks were minimal. Most likely, the pending QVC spin has the company sidelined. The pending offer to take control of Barnes and Noble remains outstanding. Management offered no fresh comments. On the conference call Malone said if his lawyers were not so cautious he'd be a buyer after all his stocks had gotten hit in the recent market rout. The QVC spin cold be complete by the end of September pending a judicial ruling. It could slip to the end of December. For LCAPA, restart of the share repurchase is the next catalyst. Of course, movement in Sirius XM shares (SIRI) is critical as they represent almost half of LCAPA's asset value. Each penny move in SIRI is worth about 30 cents in LCAPA all else equal. Looking a little further ahead, the standstill with SIRI (LCAPA owns 40%) expires in Spring 2012. SIRI will also be in a position to buyback its own shares at that point. I expect a complicated transaction that spins SIRI and closes the 30% discount at which SIRI shares are reflected within LCAPA. This scenario could get LCAPA north of $100 if SIRI bounces back above of $2.

Disclosure: LSTZA, LCAPA, and DIS 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. LCAPA AND LSTZA are net long positions in the Entermedia Funds. SIRI is a net short position in the Entermedia Funds. Steve Birenberg is co-portfolio of Entermedia, owns a stake in Entermedia's investment management company, and has personal monies invested in the Funds. Entermedia is a long/short equity hedge fund focused on media, communications, and related technologies.

Posted by Steve Birenberg at August 16, 2011 10:10 AM in LCAPA