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November 29, 2011

New Liberty Media and Qualcomm

Two transactions have occurred in Northlake client accounts as of this morning. Last week, shares of Qualcomm (QCOM) were purchased as a new investment idea. More on QCOM in a moment. Today, a merger concluded between Liberty Capital (LCAPA) and Liberty Starz (LSTZA). The new Liberty Media will trade as LMCA.

As of this morning, Schwab has converted LCAPA to LMCA on a 1:1 basis as the merger terms dictate. However, the conversion of LSTZA into .88129 LMCA is not yet reflected. It appears that Wall Street's central depository has not yet completed conversion. I would expected that to happen sometime today. I will post further updates should there be any hangup with the LSTZA conversion.

I think there is at least 30% upside in LMCA over the next 6-12 months, so Northlake will continue to hold the shares in client accounts. The purpose of the merger is to combine the asset rich LCAPA with the cash rich balance sheet and free cash flow of LSTZA. Both stocks have traded at a significant discount to their theoretical value. A simpler corporate structure and an aggressive share repurchase funded by the LSTZA balance sheet and business operations should serve to gradually narrow the discount. Furthermore, the simpler corporate structure should give LMCA more and better options for realizing full value for its vast selection of media assets including stakes in Sirius XM, Live Nation Ticketmaster, and Barnes and Noble.

Qualcomm (QCOM) is a leading semiconductor company producing and licensing products that are used primarily in mobile applications such as smartphones and tablets. QCOM is an excellent way to play the larger trends in mobile broadband without having to pick winners and losers among the gadget manufacturers. QCOM is on virtually every major platform including Apple, Android, Nokia, and Blackberry. The company recently reported better than expected earnings and announced an outlook ahead of analyst estimates. I expect this momentum to continue throughout 2012 during which I think QCOM can reach $70. I do not expect a smooth ride given the volatility normally associated with semiconductor shares but as long as underlying business trends are sustained at least at current levels the value in the shares will ultimately be realized.

The addition of QCOM follows Northlake's recent purchase of EMC Corporation (EMC). EMC is the world leader in storage solutions. Similar to QCOM, EMC is a winner as adoption of broadband drives demand for access to more and more and more information. EMC's growth is contingent on internet usage, not on the success of any one of its customers. Both purchases represent a shift away from traditional media toward enablers of the digital media and internet revolution. This is a purposeful choice by Northlake as the digital world is creating uncertainty for traditional media. Better balance in client portfolios between media and technology makes sense.

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

Posted by Steve Birenberg at November 29, 2011 07:57 AM in LCAPA