Why Liberty Media Has Immense Upside

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Liberty Media  (NASDAQ: LMCA  )  is set to make a number of big-money moves in 2014. John Malone's investment vehicle recently made a bid to acquire full ownership of Sirius XM  (NASDAQ: SIRI  ) , and he has publicly stated his intention to go after cable assets as well. Liberty Media's asset portfolio is largely undervalued by the market and deserves a much higher valuation.

Acquiring Sirius at a bargain                                                                                                      Liberty has control over Sirius with 52% ownership. Now Liberty's management wants to acquire the remaining 48% of the rapidly growing Sirius. Based on Liberty's preliminary offer, each share of Sirius is being valued at $3.68 and Sirius minority shareholders would receive Liberty's Class C shares in the deal.

The market initially believed that the offer was too low and that Liberty would have to raise the offer to more than $3.85 to buy out the minority shareholders of Sirius. Now Sirius shares trade near the price that Liberty Media offered. Even if Liberty makes a more generous offer for Sirius of roughly $4 per share, Liberty will still gobble up Sirius at a sizable discount to its intrinsic value and future growth prospects. 

Sirius has more than 25.6 million subscribers. The company hopes to add another 1.25 million subscribers in this year and laid out a revenue estimate of $4 billion.  Both the Liberty and Sirius XM share repurchase plans will be blended. Currently, Liberty has $327 million in share repurchase authorization available, and Sirius XM had roughly $2.4 billion. Liberty Media's CEO stated in the conference call that the Sirius share repurchase plan will blend into Liberty's share authorization plan.

With stellar subscriber growth and a very strong financial position, Sirius XM has a very good footing. The average one-year price target for Sirius among the sell-side analysts is $4.52, and the highest price target for the company stands at $5.80 per share. This seems to indicate Liberty Media would get a fantastic bargain at the aforementioned price.

Consolidation among cable operators                                                                                     Liberty wants to own the rest of Sirius because it plans to consolidate the cable industry. Liberty has significant influence over Charter Communications  (NASDAQ: CHTR  ) with a 27% stake. Liberty also plans to leverage Sirius's strong balance sheet and take on more debt.   

This added debt will enable the consolidated company to make a higher bid for Time Warner Cable  (NYSE: TWC  ) using Charter as a vehicle. Charter recently offered $132.50 a share for Time Warner, which was unanimously rejected by Time Warner's board. The market believes that a higher offer will be on the table and sent the stock price of Time Warner above $137.

Time Warner Cable has long been an acquisition target for other cable players including Charter and Comcast. Cable companies do not compete with each other because they operate in different geographies, and thus real synergies will emerge from consolidation. Enhanced collaboration will lead to efficiency gains and solid cost savings for the combined entity that includes Time Warner Cable and Charter. John Malone's Liberty Media will enjoy strong returns from its investment in the combined entity due to this acquisition.

Numerous value drivers                                                                                                            In addition to buying Sirius at an inexpensive price, there are a number of assets in the Liberty Media portfolio which have big upside. Liberty Media owns a 26% stake in Live Nation, as well as small interests in a number of high-quality media and entertainment titans that include Time WarnerViacom, etc. 

The company's portfolio is being undervalued by the market. A sizable stake in the combined Time Warner Cable and Charter Communications would drive big earnings potential for shareholders. The company's CEO Greg Maffei has been a vocal proponent of share repurchases and he will use them to create value for shareholders.

Big stakes in high-quality companies, consolidation in the cable space, the acquisition of Sirius at a discount, and share repurchases could all play meaningful roles in driving tremendous upside for Liberty Media stock in the long run.

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Comments from our Foolish Readers

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  • Report this Comment On January 21, 2014, at 10:55 AM, nofoolingforme wrote:

    Why would Sirius shareholders accept a measley $4 offer when, as you note, the analysts price targets are between $4.52 and $5.80 per share?

    Liberty would still be getting a bargain at $5.80 since they are only offering unsubstantial Class C shares in return for a diamond mine.

  • Report this Comment On January 21, 2014, at 11:16 AM, Guggerpaul wrote:

    Interesting you just put out a story about Siriousxm and how it was a bad investment and it would loose market share ect. then you put out a story about Liberty and how good it will be when they get ahold of fast growing Siriousxm. Your so obvious. Liberty will not get my vote for $4 or even $5 dollars a share. Now go back and tell John Malone you tried

  • Report this Comment On January 21, 2014, at 11:34 AM, NoWayGM wrote:

    So the guy with 52% can screw the other 48% with a low low low ball offer. I rode Sirius to the bottom because I thought the stock had value. I want to keep that value for myself and not give it to Malone. As long as Malone keeps his boot on neck of the minority holders the stock price will not go too high all to the benefit of Malone.

  • Report this Comment On January 21, 2014, at 2:44 PM, sirifair6 wrote:

    I have been following what today is called liberty media since the time they bailed out Sirius XM in February 2009, that is almost four years. If I am not mistaken liberty share price has risen since then almost seven fold at its peak. The question is, "Does its stake in Sirius HM have anything to do with that?" My answer is 100%. Liberty would have never ever gotten to these levels had it not taken the risk in Sirius XM that paid off in the gain of $10B.

    If the companies do combine eventually (merger conditions have to change drastically ACCOUNTING FOR SIRI’S HUGE FCF POWER AND POTENTAIL) the main driver of the joint company will be the overall growth and fcf potential of Sirius XM? Then, you ask yourself a natural question. Who needs more whom? And you will get a natural answer. Of course, liberty needs TODAY Sirius XM ten time more than the other way.

    In my view, the author contradicts himself in his article more than once. First, he says that Sirius XM is a great company. Then, he believes that liberty media should buy Sirius XM on the cheap. How can you marry cheapness with the greatness? I can’t but the author can. My kudos to him! For some reason he believes that we are all fools. Do the readers also believe that?

  • Report this Comment On January 21, 2014, at 4:30 PM, gvInvestments wrote:

    As a long siri investor I'm not letting maloney Rip me off! I have invested allot of money and waited a long time and now he just wants to rip us off by treating us like a step child and giving us a measly 3.68. Give me Class A shares not Class c shares that stand for crap. Then he wants to treat us like a step child with no Voting rights.

    Let the Lawsuits begin ! We will Fight you maloney. Give us Class A shares and a $5.00 value or be prepared for the Fight of your life.

  • Report this Comment On January 21, 2014, at 7:56 PM, blade3colorado wrote:

    I find it hard to believe the author owns SIRI shares. Sounds like he was hired by Liberty Media to write their propaganda BS articles. Quite frankly, as others have indicated, I will vote NO at the current offer and wont be swayed until the offer is at LEAST $4.52 a share. Insofar as the author is concerned, he should report back to Malone and let him know ". . . we aren't (Motley) fooled."

  • Report this Comment On January 22, 2014, at 12:06 AM, ara1029 wrote:

    Very intelligent comments made already which I am grateful for. I would like to chime in and point out that on Jan 16th, this same author said "[SIRI] is a greatly undervalued company and...growing at a healthy clip......Almost certainly, Liberty will have to raise its bid to take this undervalued company private."

    YES! I wish you (author) left it at that. That's the bottom line. I don't give a rats &@# what Liberty's POTENTIAL upside CAN be (mind you, we are speaking of class C shares on top of it, not class A) The bottom line is, this "deal" as it stands SCREWS us SIRI shareholders over and it is UNACCEPTABLE. PERIOD. I want to own SIRI and SIRI alone. I do not care for any offer made under $5. Frankly, I do not care for any offer made under 20, but need to be somewhat realistic here in determining CURRENT value.

  • Report this Comment On January 22, 2014, at 9:38 AM, dannysboy wrote:

    I have been waiting for someone to tell me that what Malone and Liberty is doing "is just good business."

    Well, Josef Stalin and Adolf Hitler thought it was "good business" to put people in labor camps and factories and get all of the work you could out of them before they starved to death.

    Recently, I had a conversation with a criminal psychologist who told me 1 in every 4 people have a diminished conscience or no conscience at all!

    I know that greed is certainly present in the Liberty offer -------and maybe some diminished conscience too.

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