Liberty Media (NASDAQ:LMCA) has dropped its plans to fully own Sirius XM (NASDAQ:SIRI) and plans to pursue an alternative value creation route. It stated that it will reclassify its common shares into two different tracking stocks, Liberty Media Group and Liberty Broadband Group. Since the company trades at a discount to its intrinsic value, this split comes as a strong positive for the company's shareholders. 

Expanding cable footprint
Shareholders of Liberty Media will get one share of Liberty Media Group and four shares of Liberty Broadband Group for each share they own. In addition, shareholders will also receive subscription rights which will allow them to acquire more shares of Liberty Broadband Group at a discount. The company has stated that the Liberty Broadband Group will consist of its 27% stake in Charter Communications (NASDAQ:CHTR), its wholly owned subsidiary TruePosition, and its small interest in Time Warner Cable(NYSE:TWC)

Liberty's Chairman John Malone stated that the company will utilize the cash it raises from these subscription rights to support Charter's expansion plans. As the two leading cable companies in the U.S., Time Warner Cable and Comcast struck a deal earlier this year. The move by Liberty Media likely involves an effort to acquire a portion of Time Warner Cable's subscribers or to acquire another smaller cable provider.

If Charter can acquire another cable provider or acquire customers at a decent price, the shareholders of Liberty Broadband will do very well. Also, this simplified structure will enable the company's tracking stock to trade at a lower discount to its net asset value as well. 

Media will get a higher valuation
Right after the company disclosed its newly laid-out plans, the stock price of the company shot up by 7% as investors and analysts alike expect the discount to net asset value to narrow. Liberty Media Group will hold the other assets of the company which include its 53% majority stake in Sirius XM, its 26% stake in Live Nation, its subsidiary Atlanta National League Baseball Club or ANLBC, and other smaller equity interests in various media and entertainment companies including Time Warner and Viacom.

Sirius XM will resume its share repurchase program of which $2.2 billion remains to be executed.  Sirius' share repurchase plan includes buying back $340 million in stock from Liberty Media. 

This separation will result in a higher valuation for the company, as investors who want to participate in a Liberty-driven cable consolidation can continue to own shares of Liberty Broadband Group after the split occurs in the third quarter of 2014, and media investors will get to participate in leveraged share repurchases at Sirius XM.

In addition, a number of sell-side analysts hiked their price targets for Sirius XM recently as they cited its strong growth prospects, so shares of Liberty Media Group will benefit as Sirius grows its revenue and free cash flow.

Good strategic move
Liberty desired to acquire Sirius so it could leverage the strong balance sheet of Sirius XM and make a bid for Time Warner Cable. Now that Time Warner Cable has struck a deal with Comcast, the company doesn't need to own Sirius XM. As a result, the break-up of the company into two segments will not only allow the two stocks to trade higher in the public equity markets, it will also help Liberty raise incremental cash from the subscription rights offered to Liberty Broadband Group shareholders.

So, Liberty Media shareholders will get to participate in the company's media holdings as well as its plans to consolidate the cable industry. As a result, the split-up of the company will drive additional upside for shareholders going forward.

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Ishfaque Faruk owns shares of Liberty Media. and Sirius XM Radio. The Motley Fool owns shares of Liberty Media. and Sirius XM Radio. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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