Text size

Liberty Media investors could get a gift this holiday season that instills more than good cheer: the spinoff of Starz. The premium cable channel is one of the most valuable assets owned by Liberty (ticker: LMCA), the Englewood, Colo.-based holding company led by media maestro John Malone, who aims to complete the transaction by year end. Starz's valuation and growth prospects could improve significantly once it becomes a separate public entity. The spinoff also could unlock value at Liberty.

Spearheaded by the popularity of Spartacus, a television series about Roman gladiators, Starz increased its subscriber rolls by 9% in the latest quarter, to a record 20.8 million. Starz is worth an estimated $3 billion, or about $22 per Liberty share, a value that isn't reflected in the parent's $108-per-share stock price.

John Malone Paul Sakuma/AP Photo

Liberty trades at a big discount to the estimated value of its portfolio of assets. That discrepancy could mean opportunity in coming months, as the company adds to some holdings and spins off others, beginning with Starz. Liberty management expects a $1.8 billion cash dividend from the spinoff, which could be used to boost other assets.

Barry Konig, a portfolio manager at Cumberland Associates, and his partner Andrew Wallach have been investing in Malone's companies for 15 years. Konig thinks the stock is worth $130 on a sum-of-the-parts basis. "We know him, like him, and trust him," he says.

Canaccord's Thomas Eagan puts the value at $125 (see table below), 16% above the current quote.

Warren Buffett sees value, as well. His Berkshire Hathaway (BRK.A) added to its Liberty stake in the second quarter, according to a regulatory filing. Berkshire, the company's top institutional holder, now controls 5.5 million shares, or 5% of the company's outstanding shares. Malone owns 1.9 million shares.

Liberty Media was split from AT&T (T) in 2001, with assets such as Discovery Communications (DISCA), the QVC TV-shopping network, and not least, Malone as chairman. Formerly known as Liberty CapStarz, it changed its name to Liberty Media in 2011, when it split off from Liberty Interactive (LINTA), owner of QVC. Malone is also chairman of Liberty Interactive, and his longtime lieutenant Gregory Maffei is chief executive of both companies.

Malone began spinning off assets such as Discovery and a 50% stake in DirecTV (DTV) in 2004. Today Starz is just one of the goodies in a diversified portfolio of equity stakes in profitable public and private companies. Liberty's holdings include a 26% stake in Live Nation (LYV), the largest concert promoter in the country, and a 17% interest in Barnes & Noble (BKS). Earlier this year he offered to buy the bookseller outright, mainly to get hold of its Nook e-reader platform. Liberty also has $632 billion, or $5.25 a share, in net cash on its balance sheet.

But the company's most valuable asset is Sirius XM (SIRI), the satellite-radio operator, with 23 million subscribers. Liberty saved Sirius from a bankruptcy filing in 2009 with a $530 million loan, and received a 40% stake in return. That has grown to 49.8%, or more than $8 billion, exceeding 60% of Liberty's market value. Analysts figure Sirius is worth more than $70 per Liberty share.

A bet on Liberty in effect is a bet on Sirius, whose prospects are attractive. Barton Crockett, an analyst at Lazard Capital Markets, sees Sirius' market penetration and profit growing sharply in the next few years, as the number of cars with Sirius radio climbs to 150 million from 50 million now. Sirius shares are up 51% this year, to $2.74. Crockett thinks the stock could hit $3.50 in a year.

Liberty is awaiting regulatory approval to take full control of Sirius, which could come this year or early in 2013. It's likely to spin off Sirius, perhaps as early as next year.

LIBERTY SHAREHOLDER Ian Shaffer of Galliant Capital Management in Montreal thinks Liberty Media's shares will trade up as the company gets closer to attaining 100% of Sirius. Investors, he notes, could end up owning shares in three separate companies—Starz, Sirius and Liberty. As spinoffs increase the transparency of all three, investors are likely to accord each a higher valuation. Until then, Liberty shares are likely to sell well below net asset value because the market typically discounts holding companies, given the difficulty in assessing their varied assets.

The Bottom Line Liberty has been penalized by Wall Street for its holding-company structure, which makes it hard to tease out asset value. Shares trade for $108 but could be worth $130.

Fueled by gains in Sirius and Barnes & Noble, Liberty Media's shares hit a 52-week high of $116 early last month and are up 38% for the year. Shares took a hit recently when the company reported mixed results for the third quarter, with revenue rising 3%, to $555 million, while operating income was flat at $111 million. For the full year, analysts expect the company to earn $940 million, or $6.91 a share. But earnings aren't the point with Malone, who for decades has structured his companies and deals to avoid taxes, making money for shareholders every step of the way.

Says Andrew Weitz of Weitz Funds, which owns several Malone-related vehicles, Liberty is best viewed as a "public private-equity fund" led by managers with a "fantastic" track record. Investing alongside them could yield handsome results once again.

E-mail: editors@barrons.com