Liberty in thick of foggy future

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NEW YORK -- Despite the progress John Malone's Liberty Media has made under CEO Greg Maffei toward making its Liberty Capital a more cohesive operating entity, some on Wall Street said they still don't have a clear picture of what that part of the company, which has housed its stakes in many big media firms, wants to be longer-term.

With Liberty Capital's tracking stock close to a 52-week high, analysts have differing predictions for where the shares will go in the medium-term.

Maffei is optimistic that there is further upside for the stock. "Liberty Capital continues to trade at a discount to its asset value," he said in his firm's latest quarterly earnings call. "We continue to work on perfecting our structure, creating a more focused operating company."

Liberty in recent months has struck deals to unwind its minority stakes in such media conglomerates as News Corp., Time Warner Inc. and CBS Corp. in return for cash and operating businesses, leaving only holdings in Viacom Inc. and telecommunications firms to be dissolved.

Under the deals, Liberty Capital is adding to its core Starz cable network group businesses that range from DirecTV Group -- the largest U.S. satellite TV firm, regional sports networks in Denver, Pittsburgh and Seattle and a TV station in Green Bay, Wis., to the Atlanta Braves baseball franchise and magazines.

The slew of recent transactions also will boost Liberty Capital's cash war chest by more than $2 billion, according to Merrill Lynch analyst Jessica Reif Cohen. But its next steps "remain unclear," she said recently in maintaining her "neutral" rating on the stock.

"While the company has made significant strides in eliminating the tax liability associated with its public-equity holdings, Liberty Capital has yet to transition into a pure operating company," the analyst said. "In addition, it remains unclear as to what types of operating assets the company will be comprised of once it has rationalized its remaining equity holdings."

Observers also wonder whether the recent unwinding of its media holdings has brought the company control over assets that it really wants to hang on to longer-term for strategic reasons.

While the tax benefits are clear, "we do not view the Braves acquisition as a compelling strategic transaction," Reif Cohen recently argued. "Baseball teams are not ordinarily considered significant free-cash-flow operating assets given their significant team payroll requirements."

To get the tax benefits, Liberty will in many cases have to hold on to acquired properties for at least several years.

But there also are those on Wall Street who -- like Maffei -- already see more upside in Liberty shares.

Citigroup analyst Jason Bazinet raised his price target on Liberty Capital shares from $102 to $121 last month because of the recent tax-efficient News Corp., which he called "the biggest step" to date to make the firm into a real operating business, and other deals.

He calculated a $17-per-share direct benefit to shareholders from the DirecTV deal alone, adding: "Viacom is now the only sizable transaction that's left."

Overall, with the recent deals, "a new and better Liberty Capital will emerge," Bazinet said.

Nonetheless, he did agree that the newly acquired assets could be too disparate to excite investors enough to completely abolish Liberty's old problem of trading at a discount to its net asset value, which some Wall Street observers put as high as $145 a share.

"The company would likely benefit from a smaller conglomerate discount if it owns a large operating asset like DirecTV rather than an eclectic collection of assets (such as television stations and sports teams)," Bazinet wrote in his report.

With that in mind, observers have been wondering whether Liberty could make a big takeover play in the entertainment space to further narrow the gap to its net asset value. Cablevision Systems' Rainbow Media unit of cable networks has been a favorite name that Street folks have bandied about, even though Cablevision recently declined to discuss the possible future of that unit and Maffei has in the past signaled no real interest in Rainbow.

Despite such talk, many have put the chances of a big Liberty Capital acquisition on the back burner, with the competition from private equity being a key reason.

Maffei has admitted "a lot of the old-media assets remain very attractive" and undervalued, but the financial power of private-equity groups has made deal making difficult (HR 3/1).

So, many on the Street can't wait to see how Liberty will integrate its new assets and use them to create value -- for itself and its shareholders.
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