Buy Liberty Capital at a 66% Discount to NAV

Liberty Capital (LCAPA) is a holding company of Liberty Media that contains public and private investments in a broad range of media, mobile technology and entertainment assets. The company is led by longtime media industry veteran John Malone.

Over the last three months, Liberty management has undertaken multiple transactions which have created significant value that are not reflected in the current stock price. Liberty has significantly increased net asset value, strengthened the balance sheet by decreasing debt at a significant discount to face value and eliminated all its derivative counterparty risk.

The stock is not well followed by the sell-side and many of the banks have junior analysts in charge of modeling the net asset value (NAV). Currently the stock is trading at 34% of NAV or a 66% discount. Recently the CEO bought 300k shares on March 20-23^rd and I expect additional catalysts over the next 6 months to close this discount.

RECENT TRANSACTIONS

1. Investment in Sirius XM Radio Inc. (SIRI)

On February 17^th, Liberty Media announced it would invest $530mm in the form of loans to Sirius XM Radio Inc. and receive an equity interest in SIRI. Liberty gained control of almost $5 billion of hard assets (including value of FCC licenses which has been valued at ~$2bn) for just $530 million of debt, or about $0.10 on the dollar. Liberty also received 12.5mm shares of preferred stock which are convertible into 40% of the common stock of SIRI.

a. Preferred Stock - ~2.6bn shares = $10.54 NAV (SIRI share price $0.40 as of 5/11)

Each incremental $0.01 movement in SIRI stock creates $26mm of equity value or $0.26 of incremental NAV to LCAPA.

SIRI’s most valuable asset could be all the money it has lost. Sirius XM has at least $6 billion of tax losses, according to securities filings. That means that the losses it has accumulated over the years can be used as deductions to cut taxes on future profits. Liberty also obtained substantial control of the future of the company obtaining two seats on the board of directors.

2. Early Retirement of Debt

On April 7, Liberty Capital announced that it had used ~$503 million in cash to pay off debt at Liberty Capital. The cash was used for the early retirement of $750 million in the face value of exchangeable debentures.

• Eliminating $750 million of face debt for $503 million = $247 million in incremental value or $2.60 of additional NAV

3. TWX / TWC

Receipt of LCAPA’s allotted share of TWC as a result of the distribution from TWX

• 8.6mm shares of TWC = $2.96 of addt’l NAV (TWC share price $33.80 as of 5/11)

SUMMARY

In the last two months there has been ~$16 of incremental net asset value created. Liberty management has stated on past conference calls that the NAV of LCAPA was $15-$18 before any of these transactions occurred.

The majority of the sell-side analysts that have updated their models have NAVs that are in the mid to high $30’s. On April 8^th Deutsche Bank published a detailed sum-of-the-parts analysis that listed the NAV at $30. (That NAV does not take into account the recent move of SIRI stock.)

Due to internal compliance, many of the other sell-side analysts are unable to publish price targets that are significantly higher then the current share price due to potential liability (consequence of the Internet boom & bust). Thus you have price targets that take ~50% discounts to NAV to make the upside seem less dramatic. This gap will close.

SUM OF THE PARTS:

(click to enlarge)

Historically, LCAPA has traded at a 25% discount to NAV due to complexity and corporate structure. The discount has been as high as 75%. Analysts have not given Liberty credit for the recent transactions as well as an improved credit and equity market. There should be a minimal discount to NAV, if any. The stock is worth $41.00 or over ~200% upside from current prices. Liberty management is squarely focused on closing the NAV discount over the next 6-9 months.

CATALYST

Liberty management is nearing completion of a simplified structure of another entity, Liberty Entertainment (LMDIA). LMDIA is spinning off its stake in DirectTV (DTV) and the transaction should be completed by September. This dramatically simplifies the corporate structure and was designed to unlock value and reduce a similar discount to NAV. This was transaction was time consuming and Liberty management is now focused on unlocking value at LCAPA. Management owns over 10% of LCAPA and I expect a similar process to reduce the massive discount to NAV of LCAPA to take place over the next 6-9 months.

Disclosure: Author is long LCAPA shares.

Comments

[gspet:]

I purchased a fair number of shares of LCAPA below $5.00 about two months back. So, I don't need to be convinced about the value of this stock. However, you built one giant premium into your math. LCAPA can not sell their 2.6bn for $10.54. Matter of fact, they wouldn't be able to sell 2.6bn shares of SIRI for it's current $.40. You might as well take SIRI out of the equation all together.

May 13 07:07 AM

[burnout:]

If the house next door sold for 100k and your house was identical would that not make your house worth 100k? Just because it is not for sale at this time would you take that value out of your net worth? I fail to see why you think the market value of Liberty's Sirius stock should be taken out of the equation. Would you care to explain you reasoning behind that statement?


On May 13 07:07 AM gspet wrote:

> I purchased a fair number of shares of LCAPA below $5.00 about two
> months back. So, I don't need to be convinced about the value of
> this stock. However, you built one giant premium into your math.
> LCAPA can not sell their 2.6bn for $10.54. Matter of fact, they wouldn't
> be able to sell 2.6bn shares of SIRI for it's current $.40. You might
> as well take SIRI out of the equation all together.

May 13 08:06 AM

[WildMN:]

They own way too much of Sirius XM to think that they could sell it all for the current price. Excess supply plus no change in demand pushes price down.

May 13 10:25 AM

[captmanning:]

If I understand the article above, the analyst is not talking about selling SIRI, the question is valuing it for accounting purposes to arrive at NAV. Current market value seems more honest than some abstract predicted value. Like it or not SIRI is worth something. You may be right to insist on "mark to market" but I'm not sure you can do it in advance. But I could be wrong.

May 15 09:25 AM