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Liberty Media Corporation: Stock Split and Spin-Off Will Drive Upside

Liberty Media  (NASDAQ: LMCA  )  recently dropped its plans to create tracking stocks and has taken a different direction. The company will split its shares through a stock dividend and spin-off the broadband assets into a new public company to make more cable-related investments. These actions will narrow the discount to net asset value for Liberty Media, which will drive big solid upside for shareholders in the long run.

Stock dividend and spin-off
Specifically, the company will issue two shares of non-voting Class C stock for each share held by current shareholders in the form of a dividend in July. After this stock split occurs, the company will structure its cable and broadband assets into a new publicly traded company called Liberty Broadband Group.

Included in Liberty Broadband Group will be the current entities' stake in Charter Communications  (NASDAQ: CHTR  ) , its TruePosition subsidiary, a small equity interest in Time Warner Cable, and some deferred tax assets and liabilities into the Liberty Broadband company. 

Liberty Media's existing shareholders will get one-fourth of a share of the Liberty Broadband stock for each share they hold when the spin-off occurs. In addition, the stockholders will also receive subscription rights to acquire a share of Liberty Broadband Class C stock for every five shares they own. The subscription rights will be issued at a 20% discount to the 20 day volume-weighted average price after the spin-off. Liberty's management stated that they intend to execute the spin-off of Liberty Broadband in the latter half of 2014. 

Bigger stake in Charter
Liberty sold off some of the equity holdings in its portfolio in the last quarter. The company sold shares worth $340 million  back to Sirius XM  (NASDAQ: SIRI  )  in April. Liberty also sold off 90% of its stake in Barnes & Noble recently. Liberty used these proceeds to retire more than $800 million of margin loans and also raised its stake in Charter.

Liberty bought another $124 million worth of Charter stock and its stake in Charter now stands at 26.4%. This was a good move by the company as Charter will serve more than 8 million video subscribers in the wake of its agreement with Comcast. Charter will also get lots of new subscribers in its partnership deal with Comcast, and will become the second-largest cable company in the U.S. 

Sirius XM ownership will increase
Liberty already has majority control over Sirius XM Holdings with a roughly 53% stake. The company's plans to back off from the buyout of Sirius XM at $3.68 have been a negative for the stock price of the satellite-radio company. As a result, the stock trades near 52-week lows.

Liberty doesn't have direct access to the cash flows of Sirius XM, but it has control over the cash flows due to its controlling position. Liberty's management has been a strong proponent of share repurchases, and is using the strategy to drive the stock price of Liberty Media and now, Sirius XM.

Sirius XM has $1.7 billion of share repurchase authorization remaining under its program. Considering the notable drop in Sirius XM's stock price, there is a very high probability that the company has been opportunistic in aggressively buying back its stock recently. In addition, Sirius raised an additional $1.5 billion in unsecured notes, and this increased cash will likely be used to fund share repurchases. 

After the current share repurchase authorization expires, the high free cash flow growth and stable subscription revenues will enable Sirius XM to add another $2-$3 billion in share repurchase authorizations. Since Liberty Media will not be selling any more shares of Sirius XM, its proportionate ownership stake in Sirius will go up.

Going forward
The split in Liberty's stock to 3:1 in the form of a dividend will narrow the discount to the company's net asset value. The company's CEO stated that Liberty Media's stock price reflected a discount to net asset value of roughly 10%-12% recently, and this gap should close and drive upside for shareholders following the split. Liberty Media still has $327 million left in its share repurchase program as well. 

The spin-off of Liberty Broadband will also give shareholders discounted subscription rights which astute investors can use to acquire shares at a sizable discount. Also, since a large percentage of Liberty Media's stock price is driven by Sirius XM, the leveraged share repurchases at Sirius XM will drive a lot of upside for Liberty Media shareholders as well.


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