Liberty Media is Telling You to Buy Live Nation and Charter Communications

Liberty Media's increased equity investment in Live Nation and Charter Communications will drive upside for Liberty shareholders.

Jun 17, 2014 at 9:00AM

Media holding company Liberty Media (NASDAQ:LMCA) has a great portfolio of highly valuable assets and the company, which essential functions as an investment vehicle chaired by John Malone, recently increased its stake in two of its major equity investment holdings. The two companies -- Charter Communications(NASDAQ:CHTR) and Live Nation(NYSE:LYV) -- have been very profitable investments for Liberty Media, and now the company is upping its bets on both the cable operator and the live entertainment company. Mr. Malone might just be pointing Foolish investors towards two solid investment ideas. 

Live Nation is growing distribution
Liberty disclosed its intention to ramp up its Live Nation stake by up to 3.7 million shares in addition to the 52 million shares it already owns. The purchase was in connection with Live Nation offering up to $500 million in convertible notes. Liberty Media already owns a 26% stake in the concert promoter and ticket seller, and this new purchase will increase its stake slightly. Live Nation is the largest promoter of live events in the world, and is the major ticketing company in the U.S. Its stock price has done very well in the last year with the company trading at 52-week highs.

Recently, Live Nation has struck a deal with Yahoo! to debut Live Nation Channel on Yahoo's online video portal. The ad-supported channel on Yahoo will feature a live concert from Live Nation every day, and the two companies will split the advertising revenue between them equally. Live Nation organized almost 23,000 concerts in 2013, so the company will have a lot of original content to feature on this channel. Live Nation holds concerts for high-profile artists like Madonna, Jay-Z, U2 etc.; therefore. the company's channel should have a nice fan following, which should lead to solid incremental revenues for Live Nation.

Considering that Yahoo! has almost 800 million monthly users, the distribution of Live Nation's events should perform very well, and make the live events company a more valuable one down the road.

Charter is becoming No. 2
Liberty Media increased its investment in Charter by $125 million, and now owns 26.4% of Charter's outstanding shares. Charter struck very good deals with Comcast and, in the process, will become the second-largest cable operator in the U.S from its prior position of being No. 4.

Charter will acquire 1.4 million Time Warner Cable (NYSE:TWC) video users, which will lead Charter's video customer base to increase to 5.7 million from 4.4 million. The purchase price for this subscriber acquisition deal was $7.3 billion, and these 1.4 million subscribers are expected to generate $1 billion in EBITDA in 2014. Charter is already a heavily leveraged firm, and now the company's debt load will increase from $14.1 billion to $21.8 billion, and the company's debt to EBITDA leverage ratio will stand at 5x.

In addition, Charter will buy a 33% stake in a newly publicly traded company (SpinCo), which will be spun-off by Comcast for 2.5 million subscribers. Charter will provide management services for SpinCo, and issue $2.1 billion in new Charter stock for this deal to existing Comcast and Time Warner Cable shareholders. After the deal goes through, SpinCo shareholders will own 13% of Charter's total outstanding shares.

Charter will have 5.7 million subscribers, and manage another 2.5 million subscribers on behalf of SpinCo. For this management servicing deal, Charter will be entitled to receive management service fees of roughly 4.25% of SpinCo's top-line revenues, and get reimbursed all costs while being 33% owner of SpinCo. Such lucrative deals by Charter will lead to a lot of upside in Charter's future revenues and earnings, and Liberty Media will gain from a much bigger Charter as a result.

Going Forward
Liberty Media increasing its stakes in Charter Communications and Live Nation is a very good sign for the shareholders of those companies. Neither company trades at a cheap valuation when looked at from a basic P/E multiple; but both the companies have focused on their competitive advantages and are generating healthy amounts of cash flow. As Charter and Live Nation become more valuable companies, Liberty Media's intrinsic value will increase a great deal which makes all three businesses worthy of a closer look by Foolish investors. 

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Ishfaque Faruk owns shares of Liberty Media. The Motley Fool owns shares of Liberty Media. 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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