Liberty Media (LMCA/LMCK) reported quarterly results last week and as usual the focus was on the company’s portfolio of assets.  Liberty trades in relation to its net asset value rather than its earnings and cash flow like most stocks.

There were three interesting pieces of news from the press release and conference call.  First, Liberty settled its long running lawsuit against Vivendi and received $420 million in after-tax cash proceeds.  We had assumed Liberty would receive about this amount of proceeds but not until later this year.  Given the current stress in global financial markets, we are pleased that Liberty has extra cash to invest.  This is exactly how the company has built asset value in the past.

Second, management indicated that the company’s plan to split into three tracking is proceeding and could close by the end of April.  Liberty has recently traded at a larger than usual discount to its underlying net asset value.  Management has decided to create separate tracking stocks for its majority ownership stake in Sirius XM Satellite Radio (SIRI) and its full ownership of the Atlanta Braves baseball team.  The third piece will be the remaining Liberty Media that is composed mostly of 35% of Live Nation Entertainment (LYV) and cash and other liquid assets.  With each new stock reflecting a simple underlying asset base, there is a little reason for the discount to NAV to persist.  Furthermore, strategic flexibility is enhanced to use each asset to create further value.

This last point is directly related to the final interesting tidbit we culled from the company’s conference call.  In response to the final analyst question, CEO Greg Maffei provided the firmest indication yet that Liberty will eventually own 100% of SIRI.  SIRI is aggressively buying its own stock, a wise investment in Northlake’s view, while Liberty is not selling.  As a result, in just a couple of years, Liberty’s ownership has gone from 50% to 62%.  We suspect that Liberty probably wants full control of SIRI’s high free cash flow for the same reason that we like Liberty receiving the Vivendi cash settlement:  get access to firepower when the markets are in flux.

Northlake continues to think both SIRI and LYV are significantly undervalued.  As a result, LMCA/LMCK are undervalued as well.  We like the strategic direction at Liberty and expect the upcoming split into three companies to be a catalyst for the shares.

LMCA and LMCK 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 LMCK are net long positions in the Entermedia Funds.  Steve is portfolio manager and managing partner of Entermedia, long/short equity hedge funds focused on media, entertainment, leisure, communications, and related technologies.