Positive 'Spin' Elevates Liberty

Liberty Entertainment stock got a much needed lift last week — rising more than 40% ($5.33) to $18.29 between Dec. 12 and Dec. 17 after parent Liberty Media said the on-again, off-again “hard spin” of the tracking stock into an asset-backed security was back on again.

No matter that Liberty Media gave no indication when the spin would take place. Investors simply were relieved that Liberty made a commitment to a transaction taking place.

Liberty announced in September its intention to split off the Liberty Entertainment tracker in a “hard spin” that would include its 52% interest in satellite-TV giant DirecTV, its 100% interest in Starz Entertainment, its three regional sports networks and other assets. Some analysts had believed the spin was a first step in obtaining 100% ownership of DirecTV.

The logic behind the hard spin has been to close the gap between the price of the tracker and the value of the assets it contains. The new, asset-based stock would be easier for investors to value and could merge with another entity — including DirecTV — or be sold to third parties.

According to Collins Stewart media analyst Tom Eagan, that gap is already narrowing. In a research report last Tuesday, Eagan estimated that the most recent announcement has narrowed the stock's discount to net asset value to 33% on Dec. 17 from 52% on Dec. 12.

CEO Greg Maffei tried to quash any speculation Liberty would seek a buyer for its DirecTV stake. He said that while in a worst-case scenario Liberty might sell some DirecTV shares, the intention is to keep a majority stake in the leading U.S. satellite-TV provider.

On Dec. 9 at the UBS Media and Communications conference, Maffei said that the hard spin of Liberty Entertainment was the “preferred path,” but cautioned that with the current condition of the markets “we can't take off the table that it might not get done.” The stock ticked up 30 cents, to $11.41, that day. Three days later, on Dec. 12, Liberty declared it was committed to a deal and the stock started to spike.

By reiterating its commitment to completing a deal, Liberty effectively removed one of the big overhangs on the Liberty Entertainment stock — the fear a deal would never get done.

Liberty Entertainment (LMDIA) shares have fallen precipitously since September. It traded as high as $27.53 on Sept. 3 but dipped to $9.90 in December, a decrease of 64%.

Liberty Entertainment shares closed at $18.29 on Dec. 17, up 60 cents and an overall gain of $5.33 since Dec. 12 close.

In a statement, Liberty said owners of the tracker would receive shares in a subsidiary that will hold the interest in DirecTV, three regional sports networks (Liberty Sports Entertainment), a 50% interest in cable network GSN, 100% of FUN Technologies and about $2 billion in debt. The Liberty Entertainment tracker (LMDI) will continue to exist and will contain Liberty Media's 100% interest in Starz Entertainment, its 37% interest in wireless broadband company WildBlue Communications and an undetermined amount of cash.

On a conference call with analysts Dec. 17, Maffei said it would take four to six months to complete the split. Next on the agenda would be a favorable tax ruling on the split from the Internal Revenue Service, the filing of a registration statement with the Securities and Exchange Commission and a passing vote from Liberty Entertainment shareholders.

Maffei also said the tracker would contain more cash than the asset-based stock (although he did not specify how much cash).

Eagan has speculated Liberty could put Starz Entertainment into its Liberty Interactive tracking stock — which includes troubled home-shopping channel QVC — a move Maffei said was possible but unlikely. “That's really not part of our plan,” he said.

Maffei said Starz is expected to throw off about $300 million in cash flow this year, exceeding many analyst expectations. That, coupled with QVC's debt-covenant restrictions — its leverage ratio must not exceed 4 times cash flow — had caused Eagan and others to think that placing Starz in the Interactive tracker would take some pressure off QVC, allowing the company to borrow as much as $1 billion to pay down some of its $5.2 billion in debt.