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March 02, 2010
Swapping Discovery Share Classes
On March 1st, all Northlake client positions in Discovery Communications voting shares (DISCA) were swapped to Discovery Communications non-voting shares (DISCK) on a dollar for dollar basis.
DISCA shares were added to the S&P 500 as of the close of trading on February 26th. The non-voting DISCK shares are not being added to the S&P. Several other companies with multiple classes of stock also have only their voting shares in the S&P 500.
The addition of DISCA to the S&P 500 caused the shares to spike relative to DISCK as index funds had to buy DISCA. What had been about a $3 premium expanded to over $4. The swap was completed at $4.23.
An added wrinkle in Discovery's share structure is that a third class of high voting shares (10 votes per share) exists and are completely controlled by insiders. As a result, the one vote per share "A" shares offer little value over the no vote "K" shares. After all, the A shares can't override the wishes of the insiders. All other aspects of the A and K shares are equal so there really is no reason for the A shares to trade at a significant premium.
I think the premium should be less than $2. It was headed steadily in that direction prior to the S&P move, having fallen from $4.50 since December. Other similar situations in News Corporation (NWS/NWSA), Comcast (CMCSK/CMCSA) and Liberty Global (LBTYK/LBTYA) all have spreads of less than $1 or less than 10% on a percentage basis.
Disclosure: DISCK is widely held by clients of Northlake Capital Management, LLC including in Steve Birenberg's personal accounts. The Entermedia Funds are net long DISCK, NWSA, CMCSK, LBTYK, and LBTYA. Pair trades on NWS/NWSA and DISCA/DISCK are held in the Entermedia Funds. Steve Birenberg is co-manager of the Entermedia Funds, owns a portion of the Funds' investment management company, and has personal monies invested in the Funds.
Posted by Steve Birenberg at March 2, 2010 08:37 AM in DISCA
THE MARKET IN GENERAL AND MEDIA[CETV,MICC,ETC.]IN PARTICULAR ARE SURGING.DO YOU THINK THE CORRECTION IS OVER AND WE SHOULD BE BUYING,OR ARE WE JUST IN A RALLY WITHIN A CORRECTION AND SHOULD BE SELLING?
Posted by: MP at March 5, 2010 12:52 PMSorry for the slow response. I was traveling all weekend and Friday.
I think the latest correction is over. We have gotten steadily longer in the hedge fund and while not aggressive, at the moment we are the longest we have been all year.
I think the market is going to make a run at the yearly highs base don continued signs the economy is recovering.
Media stocks should continue to perform well as they are correctly viewed as cyclical. MICC is surging because it had much better than expected earnings and subscriber growth. CETV remains attractive for later this year but business remains slow limiting upside in the near-term. Emerging markets in general are surging and leading the rally which helps both of these stocks.
WITH S/P OVER 1150, ARE WE NEAR ANOTHER CORRECTION OR HAVE WE STARTED ANOTHER UP LEG?
Posted by: MP at March 19, 2010 01:34 PMJust got your voicemail. Sorry I missed you.
I think we are due for a correction but it will be modest and should be bought. The economic statistics continue to improve and monetary is not a threat for several more quarters at least.
The rode will remain bumpy but I think we are higher a few months from now.
Media stocks should participate as ad trends strengthen. Central Europe is still lacking and the issues in Greece are just another excuse for multinationals to delay spending.
Have not done too much lately. Added small to shorts in the hedge fund but still close to our highest long position so far in 2010. Just looking for quick, short move lower to work off the overbought position.
Posted by: at March 19, 2010 01:54 PM