Liberty Media: A Strong Buy Before the Split

Liberty Media shares will see strong upside after they split into three in July and the company's assets are packaged into a separate company called Liberty Broadband.

Jun 6, 2014 at 4:00PM

Media holding company Liberty Media (NASDAQ:LMCA) has extremely valuable assets in its portfolio of holdings. The company trades at a steep discount to its underlying net asset value. The company's management is splitting the stock into three through a special dividend. Incremental clarity about some of the company's privately held assets will lead to heightened transparency, and lead to higher valuation for the company's stock price.

Break-up will enhance transparency|
Liberty Media will be spinning off a portion of its business next month by handing out a special dividend of two non-voting Class C shares for each Class A share of Liberty Media. Liberty owns a large variety of media, entertainment, and broadcasting assets. After the instigation of the stock split, the company will package its ownership stake in Charter Communications (NASDAQ:CHTR), its small equity interest in Time Warner Cable, and its TruePosition subsidiary into one company called Liberty Broadband and spin-off those assets as a separate public company. 

Existing shareholders of Liberty Media will receive one share of Liberty Broadband for every four shares of Liberty Media. In addition, shareholders will receive subscription rights to acquire one share of Liberty Broadband for every five shares of Liberty Broadband held at a 20% discount to the 20 trading-day-volume-weighted average trading price of Liberty Broadband. This series of complex transactions by Liberty's management will lead to higher price multiples in the public markets for both pieces of the company. 

Liberty Media trades at a sizable discount of more than 15% to its net asset value, and these actions will improve transparency regarding the company's various assets. For example, its baseball company has an estimated value of more than $730 million but the current trading price of Liberty Media indicates that investors have attached a very small value to that asset. So asset separation will lead to value creation for shareholders. 

Deal-making and share repurchases
Liberty Media has fantastic deal-making capacity thanks to financially savvy media and cable investors in its leadership who include John Malone and Greg Maffei. As a result of its shrewd deal-making capacities the company has majority control over satellite radio giant Sirius XM (NASDAQ:SIRI). Liberty owns more than 53% of Sirius XM and that ownership percentage is almost certain to go up over time. 

Sirius XM trades at a market cap of roughly $20 billion. It will repurchase shares worth $1.7 billion by using more debt in its capital structure and this will ramp up its ownership stake in Liberty Media. John Malone has been a proponent of share repurchases ever since his days at TCI, and that strategy is being utilized at Sirius XM and Liberty Media. 

Liberty Media still has $327 million left in its own share repurchase program, and buying back stock when it is trading at a notable discount to NAV will boost the future value per share. If that wasn't enough, Liberty Media also ramped up its stake in Charter Communications.

Liberty bought another $125 million worth of Charter stock and now owns 26.4% of the cable company. Charter has struck deals with Comcast and Time Warner Cable, which will become the second-biggest cable operator in the country with the Comcast subscribers gained after the Comcast-Time Warner Cable deal goes through. And as a result, Charter's earnings and cash flow should see robust improvements in the future as it will be a much bigger company because of its deal with Comcast, and Liberty Media stands to benefit. 

Going forward
Liberty Media's investors have a lot to be optimistic about: the company's new structure will reduce its discount to NAV and the two separate companies should benefit from strong market positions. The Liberty Media entity will benefit from leveraged share repurchases at Sirius XM, and Liberty Broadband investors will benefit from discounted subscription rights as well as a stronger Charter. Investors would be remiss not to consider picking up some shares before the spinoff this summer. As always Foolish investors should do their own research before making any investment decisions. 

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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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