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November 12, 2013

Liberty Media Simplifies, Starz Hunts Hits

Liberty Media (LMCA) and its former subsidiary Starz (STRZA) reported earnings last week. LMCA is an asset play where value is created through its ownership of significant stakes in other public companies, including a majority interest in Sirius XM Satellite Radio and 25-30% stakes in Live Nation Entertainment (LYV) and Charter Communications (CHTR). LMCA also owns a variety of other investments generally connected to media and communications. Given LMCA does not operate an actual business, the earnings reports are usually just a chance to hear management thinking on strategies for enhancing the net asset value of the company’s portfolio. Given the steallar tracke record of LMCA’s controlling shareholder, John Malone, and his top lieutenant, Greg Maffei, I always look forward to the conference calls.

On the latest call, it became apparent that for now, LMCA has simplified its investment portfolio and balance sheet including building some liquidity for possible future investments. A recent transaction with Comcast was critical in this regard and included a buyback of about 5% of the outstanding shares. With a simpler profile, LMCA shares have closed the discount to net asset value to under 10%. This leaves the shares more directly connected to performance of SIRI, LYV, and CHTR. All three are in good shape fundamentally with significant upside in their own shares over the next year. Most of the speculation now revolves around CHTR as John Malone has made clear he wants to use CHTR as a vehicle to consolidate the non-Comcast cable industry in the United States. LMCA is likely to create extra value for itself by acting as a financier for any large merger involving CHTR. If SIRI, LYVV, and CHTR all perform as I hope, I can see LMCA shares trading up to $180+ before any incremental value is made by the Malone/Maffei deal making. LMCA remains an excellent investment.

Starz has now been independent for several quarters. The most recent results were mixed with decent subscriber growth and financial upside driven by the company’s content distribution business. The core business is the operation of the Starz and Encore pay TV channels. Starz is attempting to duplicate the success of HBO and Showtime in original programming. This would drive subscriptions and allow further financial upside through ownership of successful shows that are sold in digital and DVD form around the world. STRZA faces some pressure to find hit shows quickly as the company will lose its access to Disney movies after 2016. As STRZA rolls out new shows, a few of which are showing potential, the company has been aggressively buying its stock using the company’s high free cash flow and debt free balance sheet. STRZA would be a good acquisition for larger entertainment conglomerate but that has been the case for a couple of years since Liberty Media first made its interest in selling STRZA public. I think it is worth the wait to see if the company is sold or hit shows are developed that build value for investors. Upside is hard to determine but if the shares attained a premium valuation to peer entertainment companies, which the shares may not deserve absent a buyout, a target of $35-40 in 2014 is plausible.

LMCA and STRZA are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg’s personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Northlake’s regulatory filings can be found at www.sec.gov. LMCA and STRZA are net long positions in the Entermedia Funds. Entermedia is a long/short equity hedge fund focused on media, entertainment, leisure, consumer retail, communications, and related technologies. Steve is portfolio manager of Entermedia, owns a controlling stake in Entermedia’s investment management company, and has personal monies invested in the funds.

Posted by Steve Birenberg at November 12, 2013 01:06 PM in LCAPA