Liberty Media Splits in Two to Drive Value Creation

The big news surrounding Liberty Media’s (LMCA/LMCK)) quarterly earnings was the split of LMCA into two companies as shareholders received one share of Liberty Broadband (LBRDA/LBRDK) for every four shares of LMCA/LMCK.

LMCA/K now is dominated by its 57.5% ownership stake in Sirius XM Satellite Radio. Sirius now represents over 7% of LMCA/K net asset value. Another 10% is a 35% ownership stake in Live Nation Ticketmaster. Sirius and Live Nation had both reported good quarterly results prior to LMCA/K’s report so there was little new information in the latest earnings report from LMCA/K. The reasoning behind splitting Liberty into two companies is so that each new Liberty more closely tracks its underlying asset value. LMCA/K trades at about a 15% discount to its net asset value, an unwarranted large discount given the lack of complexity now that Sirius dominates the asset value. Closing of that discount and continued 20% growth in cash flow at Sirius should produce a superior return for LMCA/K shareholders over the next year. LMCA/K shares are unchanged this year and catch up move now that the split is complete should take place. Future plans for the stake in Sirius – a possible merger or spin-off could become clearer at Liberty’s analyst meeting later this month. We plan to attend.

LBRDA/K holds a 27% stake in Charter Communications (CHTR) and a few other assets. CHTR represents 95% of the net asset value of LBRDA/K. CHTR has been leading cable industry growth this year and is poised for continued gains after it sells, swaps, and buys subscribers from Comcast post the completion of the Comcast-Time Warner Cable merger in the first half of 2015. LBRDA/K trade at a 9% discount to net asset value which I expect to grow nicely as CHTR continues to operate well and then benefits form the transactions with Comcast. Additional upside will come from a rights offering of LBRDA and LBRDK shares coming in December when shares holders will receive for every five LBRDA and LBRDK shares entitling purchase of additional shares at a 20% discount. Northlake intends to exercise those rights and increase ownership of LBRDA and LBRDK in client accounts.

LMCA, LMCK, LDRBA, and LBRDK 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, LMCK, LDRBA, and LBRDK 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.

A Bubble in Stock Splits

Several companies held in Northlake client portfolio recently announced stock splits. Discovery Communications (DISCK) and Liberty Media (LMCA) announced stock splits that will become effective over the summer. Apple (AAPL) also announced a split effective in early June. These announcements follow Google issuing new non-voting shares as a 2 for 1 split. As a reminder, what used to trade as GOOG is now GOOGL and new non-voting GOOG shares were distributed to create a 2 for 1 split.

Discovery will complete a straightforward 2 for 1 split by issuing one new DISCK share for each currently outstanding share of DISCK and DISCA. DISCK is non-voting stock, while DISCA has one vote. There are also ten vote per share DISCB shares. Discovery has been a heavy buyer of its own stock, focused on the lower priced DISCK. The buybacks had reduced the liquidity in the DISCK shares which were recently trading at a wider discount to the DISCA shares. The plan announcement worked beautifully as DISCA, and DISCK both rose sharply with DISCK rising several percent more and reducing the discount. The new DISCK shares will be distributed on August 6th.

Liberty Media will distribute two shares of newly created, non-voting Class C shares for each share of LMCA and LMCB on July 10th. This is effectively a 2 for 1 split but instead of giving each shareholder an extra share of what they already own, new non-voting shares will be issued. This is similar to the Google split without the added complication of changing ticker symbols. The concept for both companies is to issue shares that do not dilute the control of current shareholders, in particular, the control of the founders. In the case of LMCA, investors are interpreting the issuance of new LMCC shares as a signal that Liberty may have a large acquisition up its sleeve where they would be willing to issue equity. In turn, that would mean, that management sees the current valuation of LMCA and LMCB as full --- you issue shares instead of paying cash when the shares are richly valued. The combination of issuing non-voting shares and the possible implications are contributing to lagging performance for LMCA so far this year.

AAPL is keeping this pretty straightforward by completing a 7 for 1 split. Yes, 7 for 1 is unusual but like most splits it just additional shares of what you already own and Apple only has one class of stock to begin with. Apple investors will receive 7 shares of AAPL for each current share they hold on June 9th. AAPL is signaling its confidence in the company’s outlook with the split and also bring the shares down to a more normal price (around $90 at today’s near $630).

Splits have no economic impact. You own the same value in the stock as you owned previously. Splits can signal confidence from management. Splits can also be used to accomplish other corporate purposes such as what Google, Liberty Media, and Discovery Communications did as described above.

AAPL, DISCK, GOOG, GOOGL, and LMCA 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. AAPL, GOOG, GOOGL, and LMCA 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.

Quiet Quarter at Liberty Media

Liberty Media (LMCA) had a quiet March quarter earnings report. Earnings do not really matter to LMCA as the stock trades relative to its asset value. As a reminder about 2/3rds of the asset value is a 51% stake in Sirius XM (SIRI). Another 25% is a 26% stake in Charter Communications (CHTR). The other large investments are a 30% stake in Live Nation Ticketmaster (LYV) and ownership of the Atlanta Braves baseball team. By the time LMCA reports each of its publicly held investments has already reported so focus is more on commentary plans for those investments or for the structure of LMCA.

SIRI reported a good quarter that seemed to offset recent investor worries about the company’s growth trajectory. Financial metrics were good but the focus is on subscriber metrics and those were mixed but did not produce some hoped for upside in net subscriber guidance. LMCA indicated that SIRI would be buying back its own stock aggressively and that LMCA would not be participating in the sales. This is a nice vote of confidence in SIRI.

CHTR and LYV reported good results as well in the past few weeks so it appears that the core assets of LMCA are good shape. This means focus can be on the future of LMCA. Earlier this year, management announced a plan to create two tracking stocks: Liberty Broadband for CHTR and associated smaller investments and Liberty Media for SIR, LYV, the Braves and other remaining investments. In a slight adjustment to the plan, Liberty Broadband will now be a separate company rather than a tracking stock. I see little impact from this change as there are plusses and minuses to the tracking stock structure.
LMCA shares have dropped 12% this year mostly reflecting a sharp decline in SIRI doe to the aforementioned fears about is future growth. A recovery in SIRI shares is necessary to get LMCA moving again to the upside. I think continued good earnings reports from SIRI, including a pickup in subscriber growth will be the catalyst. SIRI’s massive share buyback will also help. SIRI is not unlike DirecTV (DTV) which has thrived a a stock even as the growth rate slowed because management used the high free cash flow to fund a consistent, large share buyback over many years. SIRI shares are still more highly valued than DTV on traditional measures which creates some of the controversy. But DTV does now have 20% plus growth in free cash flow in its profile, something for which SIRI deserves a premium valuation.

Ultimately, an investment in LMCA is an investment in John Malone, oe of the most successful investors in recent history, especially when it comes to media investors. I have said it before but here it goes again: In Malone We Trust.

LMCA is 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 is a net long position 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.

Liberty in Limbo

Liberty Media (LMCA) reported earnings last week. As usual, the numbers were meaningless as LMCA is a collection of assets including a majority stake in Sirius XM (SIRI) and meaningful minority stakes in Live Nation (LYV), Charter Communications (CHTR), and Barnes and Noble (BKS). Each of these companies had already reported their latest earnings leaving little fresh information for LMCA to disclose.

LMCA is trying to buy the 47% of SIRI they do not own. The goal is to get full control of SIRI's massive and rapidly growing free cash flow. LMCA would use the cash flow to (1) make more investments, and (2) buy back its own shares. One plan for the cash flow was to help finance CHTR's attempted takeover of Time Warner Cable. With Comcast now buying Time Warner Cable, that option appears off the table.

While LMCA waits for the independent directors of SIRI to respond to their offer, LMCA shares are caught in limbo. LMCA is controlled by John Malone, who can arguably be called the Warren Buffet of the media world. LMCA shares have struggled after a year of great performance given the uncertainty over the immediate future. Given his track record, I think "In Malone We Trust" is the best strategy for right now. Adding comfort during this period of uncertainty, LMCA shares are trading at about a 20% discount to underlying net asset value, the largest discount in over a year.

LMCA is 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 is a net long position 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.

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.

Focus on M&A At Liberties

Liberty Media (LMCA) and Liberty Global (LBTYK) reported earnings last week, finishing off the latest quarterly reports for Northlake's portfolio of individual stocks. Both stocks reacted favorably to their results although the real focus of investor attention at both companies is on recent merger and acquisition activity.

LMCA recently announced it was taking a 25% stake in Charter Communications (CHTR), one of the largest cable companies in the US. CHTR previously was a successful investment for Northlake's clients. Clearly, I should have held on although the proceeds were put into Disney (DIS), which has also performed very well. LMCA is essentially a holding company for John Malone's domestic media investments. CHTR now represents about 17% of LMCA's net asset value. Sirius XM (SIRI) remains by far LMCA's biggest investment at 65% of net asset value. The major point of discussion related to LMCA's earnings was how the company would finance its purchase of CHTR. For now, the company plans to borrow but eventually some monetization of the SIRI stake could occur. Presently, LMCA does not want to sell any SIRI even as SIRI aggressively buys back its own shares. LMCA has some tax issues that prevent tax-effective liquidation of SIRI share prior to this summer. LMCA remains an investment in John Malone's expertise and deal-making capabilities. By using LMCA's balance sheet capacity, the CHTR investment makes the future path a bit more clear which I see as a positive for LMCA. Ultimately, the upside in SIRI and CHTR will drive LMCA shares. I am especially optimistic on SIRI and see upside ahead for LMCA to $150 or more.

LBTYK shares have lagged a bit recently as the company nears closing of its acquisition of Virgin Media (VMED). I think it is mostly arbitrage pressure that should clear up after the deal close in late June. In the meantime, both LBTYK and VMED continue to grow nicely. LBTYK reported 6% revenue growth and 4% EBITDA growth on an adjusted basis for the first quarter. Growth in Northern Europe, in particular, Germany, is driving the company, despite the troubles in Europe. Cable and broadband remain underpenetrated in Germany. In England, VMED faces competitive pressure but continues to produce low single digit organic growth that is leveraged to double digit free cash flow growth. This fits the LBTYK profile perfectly and explains the acquisition. LBYTK is also benefiting by refinancing its balance sheet at cheap interest rates and pushing the maturity profile out to the end of this decade and beyond. With the tailwind from cable's leading competitive position in Northern Europe likely to remain in place for many years, LBYTK is on track for rapid free cash flow growth. That is music to shareholders ears as the company aggressively buys its own stock. I think LBTYK shares can reach $100 by the end of 2014 when the company could be looking ahead to over $10 per share in free cash flow.

LMCA and LBTYK and DIS are widely held by clients of Northlake Capital Management, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Filings can be found at www.sec.gov. LMCA and LBTYK and DIS are net long positions in the Entermedia Funds. Steve is the portfolio manager of the Entermedia Funds, owns a majority stake in the Funds investment management company, and has personal monies invested in the Funds.

Mixed Media Earnings Better Than Stock Reactions

Most major media companies reported earnings this week including those in Northlake’s portfolio of individual stocks. As has been the case with the broader market, earnings reports and guidance from Northlake’s portfolio was mixed. CBS was the clear winner with a solid quarter amid tough circumstances and a confident outlook for the December quarter and 2013. Liberty Global was as expected although the market greeted the results with a sell-off in the shares. Charter Communications and Discovery Communications were a little light on reported numbers and guidance but a lot of the issues were one-time or unsurprising. Liberty Media is an asset value play where earnings mean little.

Here’s a closer look at the results for each company with some thoughts about where the stocks go from here.

CBS reported a slightly disappointing 2% rise in revenue but this was more than offset by a better than expected 7% increase in operating cash flow. Margins expanded again, a hallmark of CBS financial performance the last few years. The biggest takeaway though is the confidence management showed in future performance despite poor ratings so far this fall at the CBS Network. I think the long-term setup remain good and the shares can reach the low $40s but not until confidence in the economic outlook returns and ratings improve.

Liberty Global began to show the acceleration in revenue and cash flow that was predicted by rapid growth in subscribers over the past year. Honestly, I am not sure why the stock sold off 5% on this news. This acceleration is just beginning and 2013 is set up well. Another positive is that the company promised to pick up the pace of its share buyback in the fourth quarter. It seems farfetched but I can easily compile a target for LBTYK shares north of $100 in a few years given the pickup in growth, massive free cash flow that will follow as the cost of obtaining the new subscribers subsides, and the company continues to very aggressively buyback shares.

Charter Communications shares have been selling off for a few weeks as the company has announced its intention to accelerate capital investment and promotions in order to gain new subscribers. Charter has a real opportunity given that its penetration of homes passed severely trials its cable company peers. The new management team at Charter has instituted this strategy successfully before. The story is not unlike Liberty Global – subs first, financial payoff later – and the upside is similar. Charter is a few years behind, however. I think the shares may have a hard time regaining lost ground in the near-term but valuation at current levels provides support. Charter is on the watch list.

Discovery Communications reported a little worse than expected results for revenue and EPS but better than expected gains in operating income. This set up often suggests one-time items and that was the case. Advertising growth of 8% was a good print given Olympic competition. Guidance was the biggest issue for the stock, which sold off several percent on the report. Management forecast December quarter ad growth of 8%, no sequential improvement despite extremely strong ratings and positive seasonality. Discovery remains superbly positioned given its strong ratings, emerging networks (OWN and ID), and especially the growth opportunities abroad for its low cost, non-fiction programing. Discovery remains one of the few real growth stories in media.

Liberty Media is a collection of assets dominated by a t 49% stake in Sirius XM Satellite Radio. The second largest asset is the Starz Encore suite of pay TV channels. Liberty trades at 20% discount to the value of its assets. Those assets also have excellent growth prospects. This quarter management did indicate that Starz, due to be spun off before year end, would have a little less growth in 2013 as contracts with cable and satellite companies are renegotiated. The bigger question though is how the company will close the discount to its asset value while monetizing a portion of its ownership in Sirius. The conference call offered little fresh insight. John Malone, Liberty’s controlling shareholder, has a superb track record of realizing value form his investments. In Malone we trust. I see the shares between $130 and $150 in 2013 as long as business trends at Sirius remain firm. Fortunately, Sirius has been steadily adding more subscribers than expected in 2012, setting 2013 up favorably.

CBS, Charter Communications, Discovery Communications, Liberty Global, and Liberty Media are widely held by Northlake Capital Management LLC, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, a long only registered investment adviser. CBS, Charter Communications, Discovery Communications, Liberty Global, and Liberty Media are net long positions in the Entermedia Funds. Entermedia is a long/short equity hedge fund focused on media, entertainment, leisure, 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

Liberties Still Shining and Charter Plots Growth

Last week saw the final three holdings in Northlake's individual stock portfolio report their latest quarterly earnings. The news was good across the board, rounding out an excellent earnings season for Northlake's portfolio that has been well received by investors.

Liberty Global continues to grow its subscriber base in Europe at a rapid clip. Good cost management is allowing modest growth in operating cash flow despite the added expense of bringing new subscribers aboard. Importantly, several quarters of better than expected sub growth means that financial results will accelerate later this year and in 2013 as the new subs begin paying for their services and subscriber acquisition costs decrease. Just as in the U.S., cable TV, broadband, and telephony services in Europe are proving resilient to economic pressures. This is especially the case in Germany where Liberty Global made timely acquisitions right as German households were finally beginning to spend significant money for cable TV and broadband. It is an odd quirk but Germany has always significantly trailed other wealthy nations in the use of higher end cable TV packages and high speed broadband. Liberty Global is riding the wave now as household penetration accelerates. I see upside to $65-70 for the shares in the next 12 months.

Liberty Media (LMCA), unrelated to Liberty Global, except for having John Malone as its controlling shareholder, also continues to make good progress. LMCA is an asset value story composed of three big pieces. Sirius XM Satellite Radio represents over half of the asset value. The Starz Encore pay TV business is about 25% and the balance is a portfolio of publicly traded securities, a few private investments, and cash reserves. LMCA trades at a 20% discount to its asset value which has been growing steadily thanks mostly to Sirius. Over the past six months, LMCA has taken increasing steps to unlock and increase the value. When it reported earnings, LMCA announced it would spin-off Starz, further simplifying the remaining LMCA and setting up an end game for its investment in Sirius. Subsequently, LMCA has increased its stake in Sirius and now has a direct path to taking control. It is not clear exactly what the next steps will be but driving the value of Sirius higher, closing the gap to net asset value, and massively buying back its own stock could create value of $150 or more in LMCA.

Charter Communications reported very slightly weaker than expected results but the big news was the decision by its new, highly regarded CEO to accelerate the company's transition to an all-digital network. This will lift capital spending for the next six to eighteen months but seems certain to accelerate growth as Charter's penetration of its more rural and mid-size markets is quite low. The opportunity is especially large in high speed internet. The shares initially traded lower as the story for cable companies is falling capital spending, growing free cash flow, and rising share repurchases and dividends. Confidence in the CEO and the realization that Charter is merely delaying the inevitable explosion in free cash flow and likely increasing the free cash flow capability turned the shares around quickly. I think another 20% upside remains with share repurchases and dividends kicking in during 2014 making Charter shares a solid long-term holding.

Disclosure: Liberty Global, Liberty Media, and Charter Communications are widely held by Northlake Capital Management LLC, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, a long only registered investment adviser. Regulatory filings can be found at SEC.gov. Liberty Global, Liberty Media, and Charter Communications are net long positions in the Entermedia Funds. Entermedia is a long/short equity hedge fund focused on media, entertainment, leisure, 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.

Media Earnings - Good Numbers, Bad Stocks

The final batch of earnings this quarter for Northlake holdings comes from the media stocks. Much like with the earlier reports from the technology stocks, the results and guidance were good but the stocks went lower. The stock reactions are mostly a function of the market correction underway so far in May, a decline of 3-4% on top of a loss of 1-2% in April. In the short-term, market trend is a controlling factor. In the long run, the good results and positive outlooks will win out.

Let's take a quick look at the recent reports:

CBS continued its string of great earnings. Results exceeded expectations with operating margins expanding to all-time records yet again. Top line growth reflects a rebound in advertising growth at the CBS Network, slow and steady recovery in the local TV, radio, and outdoor segments. Cost controls have been excellent and programming expenses are under control thanks to many years of steady ratings at the CBS Network. Margins are also benefiting from sales of content to digital distributors like Netflix and Amazon. Retransmission fees paid by cable and satellite companies for the rights to carry the TV network are also growing quickly and highly profitable. Key for CBS shares is that the new, high margin revenue streams are very stable and predictable. This should allow the multiple investors pay for CBS shares to continue to rise. It remains below other entertainment stocks.

Discovery Communications reported better than expected results and increased guidance. The stock fell 6%. DISCK shares have been among the best performers in media as everyone has seen the great ratings for the US networks (Discovery, TLC, Animal Planet, ID) and continued expansion of the international reach with 20% advertising gains. The company forecast moderating advertising growth in the current quarter but still at industry leading levels. Management also reminded investors that timing of expenses meant that the next two quarters would see slower profit growth followed by a big spurt at year end. The only problem with DISCK is that expectations were so high. If ratings and ad growth hold, a period of pause should give way to continued gains in the stock to the upper $50s.

Charter Communications reported a surprising increase in cable TV subscribers. Since AT&T and Verizon launched TV and housing went into a severe recession, cable TV companies have been slowly losing customers. Investors worry that the losses are cord cutting as viewers give up cable to watch TV via Netflix or on the web. The trend across the industry over the past year has been for fewer lost subs. Charter turned the corner this quarter. This is not a big deal as Charter and other cable companies are driven now by high speed data and small and mid-size business accounts but it does relieve big picture worries which is good for the stocks. Charter also reported better than expected high speed data subscribers. The cost of signing up these new subs pressured margins but new subs lock in future growth. Charter shares are also benefiting as the company uses free cash flow to pay down debt, effectively transferring value from bondholders to stockholders. I think the stock can reach the mid to upper $70s.

Liberty Media's earnings don't matter as the company is effectively an investment vehicle for John Malone. The only meaningful operating business is Starz Encore. The numbers there were decent but don't drive the stock. Instead, management comments about what it will do with its 40% stake in Sirius XM is what investors hope to hear. This quarter there was big news on that front as Liberty indicated it would be increasing its stake in SIRI to 45.2% via purchase of a forward contract to buy 302 million shares of SIRI at $2.15. This is positive news for LMCA as the stock trades at a 25-30% discount to the value of its assets. The purchase or more SIRI indicates LMCA is working towards monetizing the SIRI stake sooner rather than later. The sooner the long-term relationship between the two companies is determined the lower the discount at which LMCA should trade. LMCA has multiple options for resolving the SIRI stake. Given value created in the past when LMCA faced a similar situation with big stakes in Discovery Communications, Liberty Global, and DirecTV, there is every reason to have confidence that management will do whatever makes the most money for LMCA shareholders. It is no coincidence that John Malone is LMCA's biggest shareholder and the management team is compensated mostly with LMCA stock. I think the stock would be trading at $110 today with no discount and if SIRI rises to $2.50-3.00 as I expect, LMCA would be worth closer to $125.

Disclosure: CBS, DISCK, CHTR and LMCA are widely held by clients of Northlake Capital Management, LLC, including in Steve Birenberg's personal accounts. Northlake is a registered investment advisor. Filings can be found at www.sec.gov. CBS, DISCK, CHTR, and LMCA are net long positions in the Entermedia Funds. Steve is co-portfolio manager of Entermedia, owns a stake in Entermedia's investment management company, and has personal monies invested in the Funds.

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.

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.

Liberty Capital Makes a play for Barnes and Noble

Liberty Capital (LCAPA) is an asset play. The stock trades with the value of the assets it owns including 40% of Sirius XM (SIRI), a double digit stake in Live Nation Ticketmaster (LYV), and smaller holdings in a variety of publicly traded media and telecom companies. LCAPA also owns a few significant private assets including the Atlanta Braves and TruePosition. LCAPA has traded at anywhere from a 20% to 40% discount to the value of its assets. Over the past 18 months the discount has narrowed and the value of the assets has risen sharply(SIRI has gone for 60 cents to $2.20) leading to huge gains for LCAPA shares.

I see more gains ahead for LCAPA driven by (1) further rises in the price of SIRI due to its favorable fundamentals, particularly free cash flow, and (2) the March 2012 expiration of the standstill agreement with SIRI. I expect LCAPA to tax efficiently unlock the value of SIRI through a transaction similar to what was done with DirecTV (DTV) and Liberty Media Entertainment (LMDIA) a few years ago. Leaving aside other deals within LCAPA, I think these two items can drive LCAPA shares into the $120s or higher.

Of course, when John Malone is involved, leaving aside other deals is not an option. The latest move is last week's bid for 70% of Barnes and Noble (BKS). BKS would add a large operating asset (worth over $1 billion) to LCAPA. BKS is a value play as Malone believes in the growth of e-readers, economies of scale drive the elimination of hardware losses for the Nook e-reader, and a big near-term boost at the bookstores from market shares gains due to the bankruptcy of Borders. Some analysts think BKS EBITDA could double driving significant free cash flow.

One the one had, I see great value in LCAPA as is and would prefer to just let the asset value build and the trading discount narrow. BKS seems like an unnecessary and potential risky distraction given the downside in print books. On the other hand, the BKS growth story is plausible, the deal is not that large (LCAPA likely putting up just $500 million), and Malone has a good long-term record in acquisition of down and out assets. I think BKS is an acceptable move for LCAPA but I'll admit there is an element of "In Malone We Trust."

Disclosure: Liberty Capital is 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. Liberty Capital, Live Nation Ticketmaster, and DirecTV are net long positions in The Entermedia Funds. Sirius XM is a net short postion as a hedge against Liberty Capital in the The Entermedia Funds. Steve Birenberg is co-portfolio manager of Entermedia, owns a stake in Entermedia's investment management company, and has personal monies invested in the Funds.

Liberty is Growing

Egypt, Libya and the rest of the Middle East are not the only places where Liberty is on the March. The latest earnings report from Liberty Media indicates that all is well at Liberty Starz (LSTZA) and Liberty Capital (LCAPA), two of the three tracking stocks making up John Malone's domestic media empire.

The big news out of Liberty Media's 4Q10 earnings report came from LSTZA. The company reported better than expected revenue and EBITDA growth driven by surprisingly robust growth in subscribers at the Starz and Encore pay TV channels and initial revenue from post TV windows for Spartacus. Both positives bode well for the future as subscriber growth flows through to 2011 and 2012 estimates and Spartacus raises confidence in the company's original programming strategy, now being led by former HBO head Chris Albrecht.

Also interesting at LSTZA is that despite the generous terms of its deal with Netflix that makes Disney and Sony films available on Netflix at the same time they appear on Starz, there appears to be no impact on Starz subscriber growth. This supports the idea that Netflix is an add-on service -- not a substitute for cable or satellite. This is positive for the entire cable and cable network industry. More importantly for LSTZA, the fact that Netflix does not appear to be hurting Starz puts LSTZA in a stronger position to negotiate a new deal with Netflix. The current deal, at $25 million annually from Netflix to Starz expires in early 2012. The two sides appear to be negotiating already. LSTZA is in a tricky position, having to balance the desires of Disney and Sony, the multichannel distributors who sell Starz and Encore, and its own need to maximize the inflow from Netflix. The bottom line is that LSTZA appears to be in a stronger position to get the rumored $250 million annually from Netflix in the new deal. Overall, the quarter supports higher estimates on the core business and a higher valuation multiple as the company's position versus its suppliers and customers has improved.

As usual the news out of LCAPA is unimportant as far as earnings go. LCAPA is a collection of investments with a 40% stake in Sirirus XM (SIRI) being the largest, representing about half of LCAPA's net asset value. Based on disclosures in Liberty Media's press release and management comments on the conference call, I updated my valuation spreadsheet, which now suggests that LCAPA is worth $90-100 before applying any tracking stock discount. Furthermore, with the key parts of standstill agreement with SIRI expiring in March 2012, there are now clear catalysts in a near-term time frame to unlock the value and arguably drive it further. Just simplifying the ownership structure between the two entities, as LCAPA did when it had a similar stake in DirecTV (DTV), would mostly eliminate the tracking stock discount and provide approximately 30% upside in LCAPA. Ultimately, to own LCAPA you have to like SIRI's outlook, I do, and trust John Malone, I do.

Disclosure: Liberty Capital, Liberty Starz and Disney are net long positions in the Entermedia Funds. Sirius XM is a short hedge against Liberty Capital in the Entermedia Funds. Steve Birenberg is co-portfolio manager of Entermedia, owns a stake in Entermedia's investment management company, and has personal monies invested in the Funds. Liberty Starz,and Liberty Capital 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.

Liberty Capital: New Buy Based on Asset Value and Narrowing Discount

Yesterday I began building client positions in the shares of Liberty Capital (LCAPA). Not all client positions were purchased but I expect to complete the buys within a few days. LCAPA is somewhat thinly traded and its shares are tied closely to those of Sirius XM (SIRI) making trading a bit tricky.

LCAPA is the investment vehicle of legendary cable and media investor John Malone. Malone controls a private company called Liberty Media which has interests in assets including QVC, Discovery Communications, Starz Encore, Sirius, and Liberty Global (the largest cable company outside the US). Historically, Malone has used tracking stocks to reflect the values of different portions of his media empire. Right now, there is a tracking stock that predominately reflects QVC Liberty Interactive – LINTA) and Starz Encore (Liberty Starz). The third tracking stock presently is LCAPA.

LCAPA is a collection of investments made by Malone over many years. Most of the assets tracked by LCAPA are publicly traded securities. The largest by far is a 40% stake in SIRI that accounts for over half of LCAPA's asset value. Malone made a perfectly timed investment in SIRI at the bottom of the financial crisis, providing financing to keep SIRI out of bankruptcy in exchange for 40% of the company. After SIRI repaid the loan with interest, LCAPA essentially got 40% for SIRI for nothing. Today that investment is worth almost $4 billion or more than $45 per LCAPA share!

SIRI has staged a strong turnaround over the past year as domestic auto sales have begun to improve and cost synergies related to the merger of Sirius and XM have taken hold. SIRI is now producing free cash flow and enjoying renewed subscriber growth and expanding margins. Assuming the US economy continues its recovery, auto sales should grow and SIRI is setup for a strong 2011. Each penny move in SIRI shares is worth 25-30 cents in LCAPA. I think SIRI can approach $1.75, possibly $2.00 in 2011 providing plenty of upside for LCAPA.

Other LCAPA holdings include stakes in Time Warner, Sprint, Motorola, Viacom, Live Nation, and CenturyLink. Significant privately held assets include the Atlanta Braves baseball team, a stake in satellite company TruePosition, and an annual fee paid by CNBC .

Add it all together and subtract LCAPA's modest level of debt and net asset value is around $85 per share. LCAPA trades at just $60, about a 30% discount. Tracking stocks always trade at discounts because shareholders do not have a direct claim on the assets. In addition, LCAPA trades at a complexity discount due to its many holdings and Malone's history of moving assets around and making new investments.. Finally, the significant weighting of SIRI is LCAPA's asset mix leads to a discount.

The discount has narrowed somewhat in the past year as SIRI's turnaround has become more secure. I think further narrowing can occur in 2011as SIRI continues to perform well and and a March 2012 date approaches that will free LCAPA and SIRI to restructure their relationship such that LCAPA shareholders may get a direct stake in SIRI. This would narrow or eliminate most of the discount. I also expect further upside from most of LCAPA's other investments.

The bottom line is that LCAPA's net asset value should continue to grow while the discount to net asset value narrows providing two ways to make money on the shares. I believe LCAPA can reach $80 in 2011, providing upside of over 30%.

Disclosure: LCAPA is widely held by clients of Northlake Capital Management, LLC including in Steve Birenberg's personal accounts. LCAPA, TWX, S, VIA, and LYV are net long positions in the Entermedia Funds. SIRI is a net short position in the Entermedia Funds as a partial hedge against LCAPA. 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.