Liberty Media / DirecTV Merger Closes (I Plan to Hold Both for Now)

Includes: LMCA, LMDIA, T
by: Steve Birenberg, CFA

Last Thursday, shareholders of Liberty Media Entertainment (LMDIA) and DirecTV (DTV) formally approved the merger between the two companies. The merger closed Thursday night. Many Northlake clients owned shares in LMDIA. Each share of LMDIA is now one share of DTV. In addition, for every ten shares of LMDIA, shareholders received one share of Liberty Starz (LSTZA).

For example, if a Northlake client owned 500 shares of LMDIA they would now own 500 shares of DTV and 50 shares of LSTZA. Any fractional shares of LSTZA will be paid in cash.

As of early Monday morning, Schwab Institutional shows the new holding of LSTZA but has not yet converted the LMDIA to DTV. This means that account values are understated by the value of client DTV holdings. Schwab has assured me the DTV shares will be credited to accounts very soon.

I plan to hold both DTV and LSTZA for the time being. DTV is growing around 10% a year and producing lots of free cash flow which is being used to aggressively repurchase shares. In my opinion, the growth profile of the company, cash flow, and balance sheet strength are about 20% undervalued at the current DTV price of $31. DTV has further upside in the event that the long rumored takeover of the company by a major telecom company comes to fruition. Just last week, John Malone, the controlling shareholder of LMDIA and now the largest shareholder of DTV, indicated that he is willing to sell the company. In a takeover, DTV could be sold for a price of $40-50. I am less optimistic about a takeover but the ongoing speculation provides excellent support for the stock as do the aggressive share repurchases.

LSTZA operates the Starz and Encore movie channels that are available on a subscription basis via cable and satellite services. The company’s revenues come from splitting the subscription fee with the cable and satellite companies. Expenses are dominated by the fees paid to the movie studios for the rights to show the movies exclusively on Starz and Encore for a period of time. Revenue growth has been slow but the movie rights expenses have been falling driving good growth in profits the last few years. The outlook for growth is more mixed as online video rights complicate negotiations between the studios and LSTZA. Fortunately, the company’s current rights deals are good through 2012 and 2015. In the meantime, LSTZA produces significant free cash flow which I expect to be used to aggressively buyback shares. Current Northlake client holdings of LSTZA are small due to the 1:10 ratio. I suspect that will eventually lead me to sell the shares but for now I think they could rise another 20% to around $60.

If Media Talk readers have any questions about the LMDIA-DTV-LSTZA transaction, please do not hesitate to contact me or just leave your thoughts in the comments section below.

Disclosure: LMDIA and now DTV are widely held by clients of Northlake Capital Managemet, LLC including in Steve Birenberg's personal accounts.