Analyst Maps Out DISCA Swap

Pali Research media analyst Richard Greenfield published a note Friday mapping out how he believes a consolidation of Discovery Holding could take place, slapping a $35 per share 12-month price target on the company.

Greenfield rejuvenated speculation that Discovery Holding (DISCA) – which includes Liberty Media’s 66% interest in Discovery Communications Inc. and 100% interest in Ascent Media – late last month when he wrote that DCI’s other owner Advance/Newhouse Communications was in talks to consolidate its stake in return for DISCA shares. 

Greenfield wrote that during a conversation after Liberty’s annual investor meeting in New York, Liberty chairman John Malone said that term sheets were being exchanges between Liberty and Advance Newhouse.

That prompted DISCA to file a document with the Securities and Exchange Commission that it was in preliminary discussions with Advance/Newhouse Programming Partners about a possible consolidation.

In his note Friday, Greenfield estimated that the value of Ascent Media and cash on hand at DISCA is worth about $560 million, or about 19 million DISCA shares at current prices. Excluding Ascent and the net cash at the holding company level, DISCA’s 66% ownership is represented by the remaining 261 million DISCA shares outstanding, Greenfield wrote. That implies that Newhouse should therefore receive about 130 million shares of DISCA in return for consolidating their 33% interest in DCI.

According to Greenfield’s report, issuing those 130 million shares to Newhouse would increase total shares outstanding to about 410 million with a market capitalization of just under $12 billion, assuming a $35 per share value for the stock.

Greenfield estimates that total consolidated cash flow at DISCA would be $1.174 billion in 2008, with debt at about $3 billion. Greenfield applied a 12.7 times cash flow multiple to his 2009 cash flow estimates for the company to arrive at the $35 price target.

DISCA shares were up 34 cents each to $29.48 per share in early trading Friday.