In his famed book, “You Can Be a Stock Market Genius,” Joel Greenblatt discussed how John Malone made it extremely difficult and complex for investors to follow his plans for the spinoff of Liberty Media from TCI Communications. Anyone who bother to the read the prospectus, as Greenblatt said, would have realized that Liberty Media was extremely valuable – actually the market value increased from $50 million to $500 million in less than two years.
Following John Malone is never easy and he likes it that way. Today, there are several different Liberty companies and each is complex in its own way. The one that all the great investors - John Paulson, Dan Loeb, Seth Klarman, Steve Mandel and others - have a vested interest is in Liberty Media Corporation (LMDIA, Financial).
Company Description
LMDIA is a tracking stock whose interests include a 54% stake in Direct TV (DTV, Financial) as well as 100% interest in Starz/Encore and other media assets. Earlier this year, LMDIA announced that it was merging it DTV and spinning off Starz to its shareholders.
Tracking stocks have historically been a poor investment vehicle and this move should unmuddy the waters for investors. By merging with DTV, LMDIA will become DTV and shareholders will have complete rights to the solid satellite operator. DTV is the largest satellite provider, having 18 million customers. It also has several South American assets which serve approximately 6 million customers. After the merger is consummated, DTV will also get three regional sports networks and as well as a stake in two other entities.
Starz entity will consist of the following assets: Starz/Encore, 37% stake in WildBlue, Pickspal, Fanball, $660 million in cash and a $250 million inta-loan to another John Malone vehicle, LINTA. Starz’s main focus has been top movies and in recent years it has also created some original programming. Starz has been in the lead for several categories and the business has no exposure to advertising. Last week, ViaSat announced that it was purchasing WildBlue for nearly $500 million. What is most striking is that no one thought there was any value in WildBlue! This should increase the value of Starz, discussed below.
Valuation and Conclusion
Warren Buffett has said, “Teach a man to fish and he eats for one day. Teach a man arbritrage and he eats forever.” As mentioned above, LMDIA is merging its assets with DTV and LMDIA shareholders will receive one share of the merged entity along with .1 shares of Starz. One can short shares set up the spread by purchasing one share of LMDIA and shorting one share of DTV, thereby isolating the Starz stub. The FCC has given blessed the transaction, but the merger is still waiting IRS approval on the tax free nature of the deal. Additionally, shareholder approval is also needed. The transaction is expected to close sometime in December.
So what is one getting with Starz? It is trading around 31 with 56 million shares outstanding, implying a market capitalization over $1.7 billion. Starz is expected to generate $1.1 billion in revenues and nearly $400 million in EBITDA. Using a reasonable multiple of 8x for a stable media property, adding back the cash, loan (remember the loan is to a John Malone company so it should be safe), along with proceeds from WildBlue, it would suggest that the entity is worth nearly double its current price. Of course, Starz will remain a holding company so everyone likes to discount the value by 20 to 25%. Everyone but John Malone – it is certain that he does not believe in discounts and will maximize the value of the vehicle.
Arbitrage not for you? Cannot get a borrow in DTV because all the big boys have locked it up? Or you want exposure to DTV? It seems like everyone has had an interest in DTV – it was part of General Motors, then Rupert Murdoch owned it and now it is controlled by John Malone. For a few years it was suggested that AT&T wanted to buy it and last week, the Wall Street Journal suggested that Verizon might even be want to own the satellite company. What makes DTV so attractive?
Even in a lousy economy, DTV continues to attract customers. It has been smart enough to focus on client satisfaction and offer great content to its 18 million customers. Anyone who watches the NFL knows it has a niche following. While cable and phone companies are not known for putting customers first, this will surely change over time. Furthermore, DTV cannot offer Internet services that cable and phone companies can readily provide. That being said, it is a premium franchise and trading at very attractive metrics – approximately 6x trailing EBITDA and $1,500 per subscriber. It would be no surprise to see DTV get acquired by a cable or phone company after the merger is complete with LMDIA – after all, John Malone has done it before.
Following John Malone is never easy and he likes it that way. Today, there are several different Liberty companies and each is complex in its own way. The one that all the great investors - John Paulson, Dan Loeb, Seth Klarman, Steve Mandel and others - have a vested interest is in Liberty Media Corporation (LMDIA, Financial).
Company Description
LMDIA is a tracking stock whose interests include a 54% stake in Direct TV (DTV, Financial) as well as 100% interest in Starz/Encore and other media assets. Earlier this year, LMDIA announced that it was merging it DTV and spinning off Starz to its shareholders.
Tracking stocks have historically been a poor investment vehicle and this move should unmuddy the waters for investors. By merging with DTV, LMDIA will become DTV and shareholders will have complete rights to the solid satellite operator. DTV is the largest satellite provider, having 18 million customers. It also has several South American assets which serve approximately 6 million customers. After the merger is consummated, DTV will also get three regional sports networks and as well as a stake in two other entities.
Starz entity will consist of the following assets: Starz/Encore, 37% stake in WildBlue, Pickspal, Fanball, $660 million in cash and a $250 million inta-loan to another John Malone vehicle, LINTA. Starz’s main focus has been top movies and in recent years it has also created some original programming. Starz has been in the lead for several categories and the business has no exposure to advertising. Last week, ViaSat announced that it was purchasing WildBlue for nearly $500 million. What is most striking is that no one thought there was any value in WildBlue! This should increase the value of Starz, discussed below.
Valuation and Conclusion
Warren Buffett has said, “Teach a man to fish and he eats for one day. Teach a man arbritrage and he eats forever.” As mentioned above, LMDIA is merging its assets with DTV and LMDIA shareholders will receive one share of the merged entity along with .1 shares of Starz. One can short shares set up the spread by purchasing one share of LMDIA and shorting one share of DTV, thereby isolating the Starz stub. The FCC has given blessed the transaction, but the merger is still waiting IRS approval on the tax free nature of the deal. Additionally, shareholder approval is also needed. The transaction is expected to close sometime in December.
So what is one getting with Starz? It is trading around 31 with 56 million shares outstanding, implying a market capitalization over $1.7 billion. Starz is expected to generate $1.1 billion in revenues and nearly $400 million in EBITDA. Using a reasonable multiple of 8x for a stable media property, adding back the cash, loan (remember the loan is to a John Malone company so it should be safe), along with proceeds from WildBlue, it would suggest that the entity is worth nearly double its current price. Of course, Starz will remain a holding company so everyone likes to discount the value by 20 to 25%. Everyone but John Malone – it is certain that he does not believe in discounts and will maximize the value of the vehicle.
Arbitrage not for you? Cannot get a borrow in DTV because all the big boys have locked it up? Or you want exposure to DTV? It seems like everyone has had an interest in DTV – it was part of General Motors, then Rupert Murdoch owned it and now it is controlled by John Malone. For a few years it was suggested that AT&T wanted to buy it and last week, the Wall Street Journal suggested that Verizon might even be want to own the satellite company. What makes DTV so attractive?
Even in a lousy economy, DTV continues to attract customers. It has been smart enough to focus on client satisfaction and offer great content to its 18 million customers. Anyone who watches the NFL knows it has a niche following. While cable and phone companies are not known for putting customers first, this will surely change over time. Furthermore, DTV cannot offer Internet services that cable and phone companies can readily provide. That being said, it is a premium franchise and trading at very attractive metrics – approximately 6x trailing EBITDA and $1,500 per subscriber. It would be no surprise to see DTV get acquired by a cable or phone company after the merger is complete with LMDIA – after all, John Malone has done it before.
