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Paul LaMonica Commentary:
Media Biz by Paul R. La Monica Column archive
Give me Liberty ... times two
Investors are betting that the two tracking stocks for Liberty Media will both be winners as John Malone continues to shake up the entertainment world.
By Paul R. La Monica, CNNMoney.com senior writer

NEW YORK (CNNMoney.com) - Media mogul John Malone could probably use a vacation. He's been extremely busy lately.

Malone, the chairman of holding company Liberty Media, is one of the most influential people in the entertainment business. And during the past few weeks, he's made several moves to position his company for the future.

Value investors have faith in Liberty Media chairman John Malone since he's helped generate big returns for them before.
Value investors have faith in Liberty Media chairman John Malone since he's helped generate big returns for them before.
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Liberty sold its 50 percent stake in cable channel Court TV to Time Warner (Research), which already owned the other half. (Time Warner also owns CNN/Money.com.) In addition, Malone is said to be in talks to buy Time Warner's Atlanta Braves baseball team in exchange for a portion of the 4 percent stake that Liberty owns in Time Warner.

Liberty also announced last week that it was acquiring the entertainment assets of telecom firm IDT. IDT Entertainment consists primarily of computer generated imagery animation studios. CGI movies have been hot at the box office lately and that clearly hasn't been lost on Malone.

Finally, Liberty Media switched from trading on the New York Stock Exchange earlier this month to the Nasdaq. What's more, the company now trades as two tracking stocks as opposed to one operating entity. Liberty used to trade on the NYSE under the ticker symbol "L."

Now there's Liberty Capital (Research), which tracks the performance of the company's cable programming channels such as Starz and Encore, its online movie download service Vongo and Liberty's investments in Time Warner, media giant News Corp (Research) and other media and telecom stocks.

And there's Liberty Interactive (Research), which tracks the performance of home shopping network QVC, online floral retailer Provide Commerce, and Liberty's stake in Internet conglomerate IAC/InterActive (Research) and online travel firm Expedia.

Two stocks are better than one?

Before the switch to the Nasdaq, Liberty had been an underperformer on Wall Street. But some media experts think that Malone's recent moves could pay off handsomely.

Even though tracking stocks, which don't give investors an actual ownership stake in a public company, have typically been frowned upon by Wall Street as a gimmick, Robert Routh, an analyst with Jefferies & Co., thinks that Liberty is now easier for investors to follow. In other words, if you like the prospects for QVC and Malone's other online commerce assets just buy Liberty Interactive. But if you think there is more promise in cable programming, buy Liberty Capital.

"The tracking stocks did simplify the Liberty story," said Routh. "Malone is preparing the companies for a flurry of maneuvers that would have gotten lost if the company was still one entity."

So what might some of these maneuvers be that Malone is working on?

Ryan Jacob, manager of the Jacob Internet fund, said it would make sense for Liberty to try and convince IAC/InterActive, which Liberty owns more than 20 percent of, to merge its HSN unit with QVC to create a dominant home shopping business. Jacob's fund owns shares of IAC/InterActive.

Such a move could be a big coup for Liberty since it would make Liberty Interactive a stronger business in the event that Malone wanted to spin it off to shareholders. It would also allow Malone to unwind his stake in IAC/InterActive in a tax-efficient fashion.

Scott Black, manager of the Delphi Value fund, which owns both Liberty tracking stocks, thinks that Liberty Capital may also be in a position to improve its business.

Liberty owns nearly 20 percent of News Corp. and has hinted that it may vote against the extension of a News Corp. takeover defense since that would prevent Liberty from buying more News Corp. stock. So Black thinks it is possible that News Corp. could sell some TV assets to Liberty in order to end the brewing tensions.

And Routh said that investors should not forget another Malone-controlled entity either. Malone runs Discovery Holding (Research), a public company that owns a 50 percent stake in Discovery Communications, the cable programming company behind the Discovery Channel, Animal Planet, TLC and the Travel Channel.

The other half of Discovery Communications is owned by private media firms Cox Communications and Advance/Newhouse. Shares of Discovery Holding have dipped more than 10 percent since Liberty spun-off Discovery last July.

But Routh thinks that within the next six months, it's likely that Malone will try and shop his stake in Discovery to media firms such as Comcast or Viacom and that could eventually lead Cox and Newhouse to sell their stakes as well.

Value managers love Malone

Clearly, betting on Malone is a bit of an adventure given the Byzantine web of tracking stocks, equity stakes in other companies and spin-offs. (In addition to the two Liberty stocks and Discovery Holding, Malone also controls Liberty Global, which runs cable networks in Europe, Japan, Chile and Australia, and was spun-off in 2004.)

And Routh concedes that trying to value Liberty like a traditional company is not the best way to look at the company given all the moves Malone is making and the potential for more transactions. "The only way to value these companies is through a sum of the parts methodology," he said.

Black agrees. He said he's recently added to his stake in Liberty Capital, which he thinks is trading at about a 30 percent to 35 percent discount to what it could be worth in a breakup. He said Liberty Interactive is trading at just a 10 percent discount. Wall Street also seems to think that Liberty Capital is the better investment. The stock is up about 8 percent since its debut while Liberty Interactive has fallen about 10 percent.

But Routh thinks both stocks are undervalued. He said Liberty Capital could be worth as much as $120 a share, more than 50 percent higher than its current price, and that Liberty Interactive's fair value is $24, a 33 percent premium to its current price.

It's also worth noting that several of the most savvy value-oriented mutual funds, including Oakmark, Longleaf Partners, Dodge and Cox Stock and Sound Shore, all own Liberty.

It all boils down to a high degree of confidence in Malone. Many institutional investors still recall fondly how Malone sold his cable firm TCI to AT&T in 1998 for a sizable premium and have visions of another big payday dancing in their heads.

"I owned TCI back when Malone sold it to AT&T. Ultimately we all got rich with him," said Black. "Investing in Liberty is a leap of faith based on his track record."


For more about Time Warner's purchase of Liberty's Court TV stake, click here.

For FORTUNE's interview with Malone and Liberty CEO Greg Maffei, click here.

Jefferies' Routh owns both Liberty tracking stocks and Discovery Holding but his firm has no banking ties to the companies.

The reporter of this story owns shares of Time Warner and the Dodge & Cox Stock fund through his company's 401(k) plan. Top of page

John Malone
Liberty Media
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