Liberty Media: A Nice Combination of Offense and Defense

I took a new position in Liberty Media Entertainment Group (LMDIA) Friday. LMDIA is being acquired by DirecTV (DTV). LMDIA owns 54% of DTV along with several billion dollars in other assets composed primarily of the Starz movie channels, three regional sports networks, and cash. When the deal closes near year end, each LMDIA will have turned into 1 share of DTV and a stub containing the majority of LMDIA's non-DTV assets. I think the stub is worth at least $4 per LMDIA share, so buying one share of LMDIA today at $23.65 nets you $26 (one share of DTV at $22.10 plus the $4 stub).

That is a pretty nice discount on its own but I think there is more upside as both DTV and the stub could have upside. DTV could rise to the upper $20s if my current expectations for earnings and cash flow growth in 2009 and 2010 are met. In addition, although I do not anticipate it will happen, there are persistent rumors that DTV will be sold to AT&T (T) or Verizon (VZ). The stub, which will consist primarily of Starz and cash, could be undervalued by a few dollars depending on valuation assumptions for the movie channels. I believe my $4 assumption is conservative, representing just 6 times operating cash flow for an asset forecast to have double digit growth for the next five years.

The bottom line is that purchasing LMDIA today provides a nice combination of offense and defense. Offense comes from the fact that LMDIA's primary assets (DTV and Starz) are undervalued. Defense is in the form of the 10% discount at which LMDIA can be purchased compared to today's price for DTV and a conservative assessment of the value of Starz.

I'll post a more complete analysis next week. In the meantime, here is an analysis of the merger I wrote in February when it was just a rumor. Click on the "download file" link to see a full listing of LMDIA's assets.

Disclosure: Long LMDIA

Comments

[Pfloyd234:]

What is so attractive about the Starz movie channels? Just a thought. :)

Jun 26 06:03 PM

[Steve Biren...:]

Nothing in particular but they do kick off nice free cash flow and if you back out the value of the other assets that are part of LMDIA it looks like Starz may be valued at just 3-4 times EBITDA which is too cheap. Put it up to 6 times and you get an extra couple of dollars in LMDIA in addition to the upside I see from DTV.

Jun 30 10:20 AM