Liberty Media's(NASDAQ:FWONA) stock has been an under-performer relative to the broader market in 2014. However, the company has a very strong management team with excellent acquisition experience, and that is major plus for the company's fortunes in the near future.
In addition to being captained by a solid management team some interesting events are on the horizon. First, Liberty Media is planning a 3 for 1 stock split later this month, and after that will put all its cable and wireless investment holdings into a separate company spin-off this new entity to be called 'Liberty Broadband'. This string of financially sophisticated transactions will reduce the net asset value (NAV) discount to the company's valuation. In other words, the underlying assets held by Liberty Media are worth far more than what the company's stock price is currently trading for.
Big NAV Discount
So just what does having a NAV discount really mean? Liberty Media is a holding company with a couple of subsidiaries including TruePosition and ANLBC, but mostly its assets are comprised of equity investments in publicly traded firms. Liberty's biggest holding is satellite radio company, Sirius XM(NASDAQ:SIRI), in which it owns a 53% stake.
The share price of Liberty Media is heavily correlated with the stock price of Sirius XM because Liberty's Sirius XM stake makes up roughly two-thirds of Liberty Media's net asset value. Sirius XM is a fundamentally sound company with growth in subscribers and free cash flow that also happens to be buying back a large amount of its shares. Over time that will increase Liberty Media's ownership stake from 53% and drive more value for Liberty Media's stock price.
The second biggest holding of Liberty Media is Charter Communications(NASDAQ:CHTR). The cable company's stock price is at all-time highs as it struck extremely lucrative deals with Comcast to acquire subscribers. Charter's video customer count will grow from 4.4 million to 8.2 million customers, after the deal with Comcast closes and this will make Charter the second largest cable company in the U.S. Liberty Media hiked its stake in Charter in Q1 2014, and has an ownership stake of roughly 26.4%. With Charter quickly growing its customer foot-print it will become a far more valuable company, and as a result, Liberty Media stands to benefit.
The last major holding for Liberty Media is Live Nation(NYSE:LYV) which is the world's largest live events company. Live Nation has recently come up with newer ways to monetize its shows by broadening its digital footprint with Yahoo! and generate incremental revenues from Internet video with a highly valued partner. And as a result, Live Nation stands to grow its revenues and cash flows further down the road. Liberty Media owns 27% of Live Nation and will be a beneficiary of Live Nation's future growth.
All these assets and other smaller underlying stakes are worth a lot more than what the current share price of Liberty Media implies. And Liberty Media has $327 million in its share repurchase program, which will only increase the NAV per share due to low valuation of the company.
Morgan Stanley recently upgraded shares of Liberty Media from Hold to Buy with a $158 target price. The firm cited the widening NAV discount and the future corporate actions including the spin-off as reasons for the upgrade. I personally think that the shares of Liberty Media are worth more than $180 because of the strength in Sirius XM's business, and also the actions by management will unlock a lot of value for Liberty Media shareholders.
Split and spin-off
Liberty Media will undergo a stock split by distributing 2 non-voting Class C shares for every Class A share of the company. Once the stock split takes place, the company will conduct a spin-off of its broadband assets including stake in Charter, small equity holding in Time Warner Cable and TruePosition subsidiary. The newly formed company will be called Liberty Broadband and is expected to be publicly traded before the end of 2014.
Current shareholders of Liberty will receive 1 share of Liberty Broadband for every 4 shares of Liberty Media. And the company will also hand-out subscription rights at a 20% discount to the first 20 days of trading of Liberty Broadband. These complicated financial transactions will lead to the NAV discount of the company to reduce substantially. Liberty Media's stock trades at a 16% discount to its net asset value and once the stock split of the company and the spin-off of Liberty Broadband takes place, the NAV discount should get wiped away for both the parts of the company.
Liberty Media has multiple catalysts in the near-term that will translate into a much higher stock price. The assets that will be held at Liberty Media--including Sirius XM, Live Nation and smaller equity interests and ANLBC are all fundamentally very strong. In particular, Sirius XM should see big growth in its stock price due to its subscriber additions. And also Liberty Broadband shareholders will get to buy a piece of the company at a discount while simultaneously benefiting from Charter's scale advantages. Liberty Media's shareholders will see healthy upside in the near-future.