With earnings in the rearview mirror and the final weeks of summer upon us, Wall Street is a quiet place. This has been true for news flow and the market. In fact, the market has seen measures of volatility drop to their lowest levels in several years. This has not stopped the summer rally, however, and the S&P 500 is tickling a 52-week high as I type. The moves have been small, but the trend has been steadily higher.
Coming off a successful earnings season, media and communications stocks are performing well and continuing their year-long role as one of the market’s leadership groups.
Your intrepid writer is working through the late summer doldrums. My focus of late has been on John Malone’s portfolio companies where there has been plenty of action even as the Street takes its final summer vacation.
There is always excitement at Malone’s stable of companies, but news and activity has been unusually high lately. Just ahead of its earnings call, Liberty Media
(LMCA) announced that it would split off Starz into a separate asset-backed company with moderate leverage. Cash raised at Starz when it borrows money ahead of the split would be transferred Liberty Media, further building an already very liquid balance sheet. In other Liberty Media news, the company is already signaling use of some of the cash on its balance sheet by steadily increasing its ownership of Sirius XM Satellite Radio
Since May, Liberty Media has built its ownership of Sirius from 40% to 48.1% through a series of open market and forward contract purchases. Liberty Media also changed its filing with the FCC and is not asking for DeJure control (actual control) of Sirius and has committed to going over 50% ownership once the FCC agrees to the transfer. It is not entirely clear what will happen next, but all factors indicate that Sirius is initially likely to announce major share buyback. Sirius appears to be supporting Liberty Media’s latest moves and has refinanced one tranche of debt with covenant restrictions early and at a modest cost. The implication is that a share buyback is coming, which is consistent with Liberty’s stated desire (on its most recent conference call) to be paid back for its increased ownership. Liberty could accomplish this by buying up its preferred stock, which would not be subject to the repurchase program at Sirius.
I still believe the end game is for Liberty Media to spin off its ownership of Sirius in a tax-efficient transaction similar to what was done when Liberty divested its stake in DirecTV
(DTV). In fact, the financial profile of Sirius and DirecTV is quite similar: Stable businesses with high free cash flow. Regardless, I see upside for Liberty Media and Sirius, as buyback programs at both companies are highly accretive to shareholder value.
The Malone universe also saw the official creation of tracking stocks for Liberty Interactive (QVC and e-commerce) and Liberty Ventures (financial assets and tax liabilities). The official split, announced several months ago, took place on August 10. Interactive is already a spate, asset-backed security so the tracking stocks here are independent of Liberty Media. I am long Interactive as I feel the market values QVC too cheaply given its growth and profitability profile compared to traditional retailers and online retailers. I sold Ventures that I received on a 1:20 basis when it popped 20% on its first day of trading.
Ventures has since pulled back and I am strongly considering buying a small position to hold for the long-term. Ventures is a blind trust for John Malone to again work his magic. In this case, I am expecting more financial-based than media-based investments, however. Ventures may take five years to work out, but Malone’s track record suggests it is worth tying up money for a long period. I run a diversified portfolio so having a 1% - 2% position in a slow-moving deep value stock requiring patience is acceptable.
This column was previously published by SNL Kagan on www.snl.com.
Entermedia is a long/short equity hedge fund focused on media, communic=
ations, and related technologies. Steve Birenberg is co-portfolio manager o=
f Entermedia, owns a stake in the Funds' investment management compan=
y, and has personal monies invested in the Funds. CBS and Discovery Communi=
cations are widely held by Northlake Capital Management, LLC, including in =
Steve Birenberg's personal accounts. Steve is sole proprietor of Nort=
hlake, a long only registered investment advisor.
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