Making Sense of the Liberty Empire, Part 4: Making Capital Out of Liberty Media

We come closer now to the heart of the mysterious Malone empire. The main Liberty company is called Liberty Media Group. But because that was too easy, two sets of tracking stocks were created - Liberty Capital (LCAPA) and Liberty Interactive (LINTA). By popular demand and the press of events, in this part we shall consider Capital.

Like William James's universe, Liberty Capital turns out to be a turtle resting on an infinite array of other turtles. The bits of Liberty it tracks are various, if not quite infinite. We start at the bottom, its impressive holdings in other traded securities. These are valued at $18.3 billion and include big chunks of Time Warner (TWX), Sprint Nextel (S) and Motorola (MOT).

The largest security holding, and the one in the news, is the $10.3 billion in News Corp (NWS) stock. The heavily trailed but somewhat elusive announcement will apparently lead to a swap of this stock for Murdoch's all but controlling 38.6% stake in DirecTV (DTV), the satellite broadcaster. This is a sweet deal, and let's count the ways:

- Malone was never going to get control of News without assassinating Murdoch and his ever expanding brood.
- The DTV stake, on the other hand, brings de facto control, including a number of board seats.
- While Murdoch may have hit a sweet spot with MySpace, the rest of his group is rather mouldy except, ironically, his satellite interests. Moreover, he is fantastically entrepreneurial on his own behalf but perhaps not the best partner.
- News Corp has rather agressive accounting and looks like it is trading at thirty times underlying earnings whereas DirecTV is at more like twenty, so it's a value swap.
- No taxes.
- Liberty manages to secure the distribution pipeline for its content.
- Possible upside if the Echostar (DISH) merger is revived.

There are additionally some wholly owned operations, most materially the Starz movie channels and content creation unit. However, as best we read the dense and unrewarding SEC filing, the earnings of all the subsidiaries are just about sunk by corporate overhead, so we are attributing no value here. The rest of the picture is as follows, as of September but adjusted for the likely swap [assumes DTV @ $11.8bn]:

..............................................Value ($ bn)

Equity stakes..........................19.8
Net debt..................................0
Net derivatives......................(1.7)

Total.......................................18.1

The debt numbers are not at all clear in the last 10-Q, so these numbers could be out. But with 140m tracking units outstanding, this gives $129.29 in value per share, a 38% premium to the current stock price. Even without further work to establish floor prices for Time Warner and the rest this looks a good value.

For more background, check out part one, part two and part three of this enthralling story!

Disclaimer: We have a position in nearly all stocks mentioned in this series.