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Behind Malone’s Plan To Modify Liberty Stock

Liberty Media chairman John Malone’s moves to split his company into two new tracking stocks is a sign that the cable legend, despite his failed attempt to take over Time Warner Cable, is still hell-bent on consolidating — if not the industry, then his own diverse holdings.

The two trackers will be Liberty Media Group and Liberty Broadband Group; the latter will include Liberty Media’s 27% interest in Charter Communications, its 5 million shares of Time Warner Cable and its controlling interest in satellite positioning company True Position. Also included in Liberty Broadband will be an undetermined amount of cash through a rights offering, which some analysts estimate could raise about $500 million, and a to-be-determined intercompany loan. The trackers are expected to debut in the third quarter.

The decision to create the trackers comes about a month after Charter’s $61 billion offer for TWC was bested by Comcast’s all-stock $69 billion bid for the company. Comcast expects the TWC deal to close by the end of the year. Liberty Media shares spiked on the tracker news — shares were up about 6.8% ($8.56 each) to $134.70 per share in early trading March 14.

“It’s a reminder that, with or without Time Warner Cable, Charter is still interested in getting bigger, and Liberty wants to help them make acquisitions,” MoffettNathanson principal and senior analyst Craig Moffett, who does not cover Liberty but follows Charter, said in a recent interview. Liberty Broadband could be used to increase Liberty’s position in Charter or to help fund deals, he added. “It certainly underscores the point that Charter hasn’t lost its ambitions to get bigger just because Comcast is buying Time Warner Cable.”

While Liberty officially stated that the reasoning behind the new trackers is to give its investors “greater choice, transparency and focus,” many believe it is a neater way to help fund Charter’s future M&A activity. Malone even alluded to that in a statement last week, praising Charter management and stating the Broadband tracker allows Liberty to “support Charter in its expansion efforts.”

Pivotal Research Group principal and senior media & communications analyst Jeff Wlodarczak said he doesn’t believe Liberty would use the tracker to make a competing bid for Time Warner Cable, but he said in a note to clients that it allows Liberty to contribute capital to potential Charter deals (to maintain its ownership stake above 25%) or to increase its stake in the MSO.

As far as potential Charter targets, Wlodarczak picked Cox Communications, Suddenlink Communications, Mediacom Communications and the 3 million subscribers Comcast has said it is willing to divest to gain regulatory approval of the TWC deal.

Sources have said Comcast and TWC currently favor spinning out those assets in a new publicly-traded company headed by TWC management.

Moffett said he believes top-five MSOs like Cox Communications and Cablevision Systems are most likely off Charter’s radar. But he agreed that the 3 million subscribers Comcast could divest, as well as smaller operators such as Bright House Networks, Suddenlink Communications and Mediacom Communications, could be fair game.

“There is no reason to think that Bright House is for sale, but it’s not crazy to imagine — if they lose their ability to buy content under the Time Warner Cable umbrella, they might evaluate strategic options,” Moff ett said. “The other companies have more of a traditional private-equity feel. And while they are fully committed to being in the cable business, they are, I think, more likely to be agnostic about being buyers or sellers.”

TAKEAWAY

Liberty Media chairman John Malone moves to ensure the company can help fund future Charter M&As and/or take a bigger stake in the MSO.