By Drew Weitz
Liberty Media (NASDAQ:LMCA) owns interests in companies across the media, entertainment and communications industries. The largest investments include publicly traded Sirius XM Holdings, Charter Communications and Live Nation Entertainment, as well as fully owned subsidiary The Atlanta National League Baseball Club (the Atlanta Braves). Liberty is led by its founder and Chairman John Malone and CEO Greg Maffei.
Long time shareholders will recognize Liberty and its chairman as having been fixtures of our portfolios for years. But one should not mistake this consistency for complacency, as few companies have successfully reinvented themselves more consistently than Liberty Media. Over the years, assets have been acquired, spun-off or merged with others, including Liberty Global, Discovery Communications and DIRECTV to name a few. In each case, the goal has been to maximize value for shareholders, not to simply grow management’s empire.
More than “Mark to Market”
Liberty Media is best thought of as an investment portfolio, with each individual investment and subsidiary contributing value to the whole. In instances where Liberty owns shares of a publicly traded entity (e.g. Live Nation Entertainment), a wealth of information is available to help investors form an opinion of the value of their holding – including a constantly updating market price. When evaluating Liberty Media, some choose to simply “mark” these assets at their current market value, and compare the result to Liberty’s stock price. Others (like us) choose to look at the potential underlying value of these investments, as we would for our own direct investments, and combine them to form a business value estimate for Liberty Media as a whole. Therefore, any discussion of Liberty must include a look at its primary assets.
The “Big Two”
Liberty’s portfolio ranges from baseball teams to booksellers, but its value is dominated by two holdings: Sirius XM and Charter Communications. Liberty received 40% of the equity in Sirius XM in return for an emergency loan at the depths of the financial crises – a loan that was repaid in less than one year. Sirius not only survived the crisis, it has thrived thanks to improved new car sales and cost savings generated by the merger with former rival, XM Satellite Radio. Over this period, Liberty added to its ownership stake (now totaling 53%) and gained control of the company. Improved sales, lower costs and a healthy balance sheet have combined to generate a steady and growing stream of cash flow – and few management teams have proven themselves more adept at shareholder-friendly capital allocation than Liberty. Competition for entertainment and information services in the car is high, but we remain confident that Sirius is well positioned for future value per share growth.
Charter Communications is a relatively recent investment, but marks John Malone’s return to the cable industry he helped pioneer. Charter is poised to rebound from a prolonged period of poor performance due to a legacy of over-borrowing and under-investment. After seeking bankruptcy protection in 2009, the company has emerged with a stronger balance sheet and attracted one of the industry’s top operators, Tom Rutledge, to the CEO role. Today, we believe Charter is on the right path, making the needed investments to have competitive products, particularly in high speed Internet service. Within the company’s footprint, Charter mostly competes with legacy DSL providers or satellite TV providers who cannot offer data products directly. Charter’s investments will allow them to press their broadband advantage and potentially reclaim lost video customers. Beyond operational improvements, Charter may also lower costs by pursing attractive acquisition opportunities to gain additional scale. Despite being recently outbid by Comcast for Time Warner Cable, we believe that success in this arena would be additive to our business value estimate.
Clarity through Complexity
The Company recently announced its intention to create two new tracking stocks at Liberty Media: Liberty Broadband, principally representing its existing investment in Charter, and a tracking stock that retains the Liberty Media name for all the remaining investments, including Sirius XM. (As a reminder, a tracking stock is a publicly tradable security meant to “track” the economic results of a subset of a company’s business without legal separation from the corporate parent.) A frequent criticism of all Liberty entities is the complexity of such corporate structures. As long-time Liberty watchers, however, we tend to applaud their creation of new tracking stocks, as the added complexity typically delivers greater clarity around previously under-appreciated opportunities. The creation of Liberty Broadband accomplishes this in three ways. First, it highlights the specific value of Liberty’s stake in Charter. Second, it provides investors a more direct method to participate in Malone’s return to domestic cable. Lastly, it provides Liberty the opportunity to raise additional equity, specifically from this self-selected shareholder base, to pursue new cable investment opportunities (potentially in conjunction with Charter).
Building our Business Value
As described above, our business value estimate for Liberty Media is derived using our valuation work for the constituent pieces. At quarter end's price ($131), we believe an investor that only considered the potential value of Liberty’s public company investments would find its shares trading at a discount to business value. Factoring in our estimates for the more opaque pieces (e.g. the Atlanta Braves) we believe shares are trading at a meaningful discount to our estimated base case business value in the $170s. With this discount to business value and the proven leadership of John Malone and Greg Maffei, we view Liberty Media shares as an attractive investment.
Andrew S. Weitz joined Weitz in 2008. He graduated from Carleton College and previously spent four years with Ariel Investments.
Investors should consider carefully the investment objectives, risks, and charges and expenses of the Funds before investing. The Funds' Prospectus or Summary Prospectus contains this and other information about the Funds and should be read carefully before investing. Portfolio composition is subject to change at any time and references to specific securities, industries, and sectors referenced in this letter are not recommendations to purchase or sell any particular security. Current and future portfolio holdings are subject to risk. See the Schedule of Investments in Securities included in the Funds' quarterly report for the percent of assets of each Fund invested in particular industries or sectors. As of March 31, 2014, Liberty Media represented 2.7% of Value Fund's net assets, 3.6% of Partners Value Fund's net assets, 4.2% of Partners III Opportunity Fund's net assets, 1.9% of Research Fund's net assets and 2.8% of Hickory Fund's net assets.
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