Give Me Liberty and Give Me Gains

10/17/2007 12:00 am EST

Focus: STOCKS

Michael Brush

Columnist, MSN Money

Michael Brush, contributing editor to MSN Money, says the latest incarnation of John Malone’s Liberty Media is on the cusp of a breakup that could be very lucrative to investors. 

Liberty Media Capital (NASDAQ: LCAPA) is a misunderstood chunk of the vast empire that media mogul John Malone has pieced together. It is on the cusp of a grand corporate reshuffling of assets that will make it easier for investors to see their true worth down the road [and] 30% gains or more over the next year.

Liberty Media Capital carries what investors call a "complexity discount." In plain English, this means that investors take one glance at Liberty Media Capital and run away because it is too complicated to figure out.

One investor who hasn't done this is Tom Carney of the Weitz Value Fund, [who’s] glad he's taken the time to figure out the stock, because it is up over 30% since the start of the year. But Carney, like many other analysts, believes the upcoming reshuffle of Liberty Media assets could make it easier to grasp the true value of this part of Malone's media empire.

Liberty Media Capital is about to be split up into two more tracking stocks. One will house Liberty Media's financial assets—including stock positions in Time Warner, Sprint Nextel, Motorola and Viacom, as well as the Atlanta Braves and some smaller media assets.

Liberty Entertainment, the other new tracking stock, will hold a collection of media companies such as Starz Entertainment, online gamer FUN Technologies and rural broadband service WildBlue.

Carney estimates the entertainment piece alone has a value close to that currently afforded Liberty Media Capital: "You might be getting the complicated (financial) remainder for next to nothing." That financial piece is probably worth $40 a share or more of Liberty's current $129 price.

The new Liberty Entertainment tracker [also] will house Malone's 40% stake in DirecTV (NYSE: DTV), a satellite-TV company. Malone recently got his stake by giving News Corp. his shares in that company in exchange for the DirecTV position.

Speculation is rife that Malone will buy the rest of DirecTV. This would boost the value of Liberty Entertainment even more, since it would eliminate the "holding company discount" it suffers from owning only a part of DirecTV.

Here's how to play all of this now:

Buy shares of Liberty Media Capital, then hold on to the two tracking stocks. Chief executive officer Gregory Maffei recently bought $1.8 million worth of Liberty Media Capital at an average $117.63 a share at the end of June, according to InsiderScore.com. (Maffei was once Microsoft’s chief financial officer—Editor.)

Buy shares of DirecTV. In its own right, it is a solid company with decent growth in both the US and Latin America, says Citigroup analyst Jason Bazinet [who thinks] the stock, which recently traded above $26, will get a pop to $30 when Malone makes a play for it. "We believe there is a 75% chance that Liberty Capital tenders for DirecTV within the next 12 months," says Bazinet.

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