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Something New at Liberty Media: Value


By standard reckonings, John Malone's Liberty Media (L) is a mess. Just out of a brief, bad marriage to AT&T (T), Liberty last year lost $6.2 billion. Early this year, German regulators blocked its high-profile bid to buy cable-TV operations from Deutsche Telekom. Now, a mere eight days after saying it would buy back some shares, Liberty turned around and canceled the offer. Liberty's stock, $2.4 billion of which resides in Malone's own portfolios, now is stuck near lows around $11 a share (chart).

It's all a dramatic descent from the days when Malone was hailed as King of Cable. So why have some of Wall Street's best stock-pickers piled into Liberty? "No stock is a no-brainer," one veteran growth-stock manager told me. "But Liberty starts out with a lot of the risk taken out."

It's not that Malone hasn't made mistakes. But cushioning Liberty's downside now is the array of assets that Malone stuffed into it. Liberty started as a programming arm of Tele-Communications Inc., the giant cable operator Ma- lone built and in 1999 merged into AT&T. There, it traded as a tracking stock until last summer when Malone quit AT&T's board and AT&T spun Liberty off as a separate company.

The odd offspring is a public company that's best seen as a media-sector mutual fund. With just 55 employees, offices in Englewood, Colo., and Malone as its $2,600-a-year chairman, Liberty manages a group of closely held cable interests. Among them: half of Discovery Communications, producer of Discovery Channel, the Learning Channel, Animal Planet, and more; 42% of home-shopping channel QVC; all of Starz Encore Group, which furnishes premium movie channels; as well as a slew of foreign cable operations from Britain to Chile to Japan. Last year, each segment saw sales and operating cash flow grow smartly. Most units see further gains in 2002.

So what's the problem? It's the huge portfolio of publicly traded stocks in other communications companies that Liberty also runs. From 18% of Rupert Murdoch's News Corp. (NWS) and 4% of AOL Time Warner (AOL), to 3% of Motorola (MOT) and 19% of Sprint PCS (PCS), Liberty's portfolio is full of beleaguered big names. Reflecting steep losses in these stocks, Liberty last year had to write down their collective value by $4.1 billion.

For anyone in Liberty stock, that has been painful, without question. But for prospective investors, this is where things get interesting. For Liberty's own share price has fallen even faster than those of the stocks it owns. The recent values of Liberty's public-company holdings total $22.5 billion (table). Liberty wisely used options to hedge some of its stock-market risk in several positions, adding an estimated $4 billion-plus in value. Altogether, the stock and options portfolio works out to about $10.50 per share of Liberty.

Far harder to put a value on are Liberty's sundry private-company assets. Bill Nygren, manager of Oakmark Fund, has squinted over Liberty's balance sheets since 1990. At last report, he had nearly 2% of the $3.8 billion fund in Liberty. Nygren now figures each share holds about $8 of value in Discovery, Starz, QVC, and other closely held assets. If so, after accounting for its cash and debt, Liberty may be worth $17 to $18 a share.

What might close the gap? In a word, Malone, whose nominal salary from Liberty means it's the stock he counts on to make his workdays pay. Big investors in Liberty are perplexed at why it first offered to buy shares and then backed off. Neither Malone nor Liberty CEO Robert Bennett is talking, but their spokeswoman told me they were disappointed at the market's ho-hum reaction to the tender offer. They now are "exploring other options," she added. My translation: Count on stronger measures to come. By Robert Barker


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