Discovery's spinoff wobbles

Doubts: Fifty percent of Discovery cable TV is being offered in an unusual IPO by mogul John C. Malone.

July 21, 2005|By Leon Lazaroff | Leon Lazaroff,CHICAGO TRIBUNE

NEW YORK - Owning Liberty Media Corp. has always been about owning a piece of John C. Malone.

As a leading cable TV mogul, the cunning and charismatic Malone can usually be expected to do something daring - and profitable.

But for the past four years, Liberty Media's chairman, chief executive and all-around guru has been unable to move his stock much above the low double-digits. It touched $25 before the Internet bubble burst in March 2000.

So today, Malone will try to do what many media owners are trying to do these days: "unlock" value from his holdings, by spinning off Liberty's 50 percent stake in Discovery Communications Inc., the Silver Spring, Md. company that is one of the world's most treasured cable-TV properties.

The company's networks include the Learning Channel, Animal Planet, Travel Channel and the Discovery Channel, which has been much in the spotlight in the days leading up to the spinoff as the sponsor of Lance Armstrong's team in the Tour de France.

Today, shareholders are set to receive 0.10 shares of the new Discovery Holding Co. for each share they own of Liberty Media. Also in the new holding company is Liberty's Ascent Media Group, a production and management company that produces about $600 million in annual revenue.

As with most things Malone, this isn't your typical spinoff.

Liberty Media owns 50 percent of Discovery, which means shareholders own only Liberty's financial interest, not the company itself. Any free cash that flows from Discovery's operations stays with it, rather than going to the holding company.

To make the spinoff attractive, analysts said the 64-year-old Malone must convince Discovery's other stakeholders - Cox Communications Inc. and Advance/Newhouse Communications, owner of the Conde Nast magazine empire - to swap their roughly 25 percent positions for shares in the new publicly traded holding company.

For the near term, that appears unlikely, in part because Cox and Newhouse would be hit with a hefty tax bill.

With such complications muddying the spinoff, it's no surprise that more than a few on Wall Street are unmoved.

"There's no visibility, and without visibility you don't know when or if the whole company will ever come under the stock," said Richard Greenfield, a media analyst at Fulcrum Global Partners LLC. "That's fine if investors want to wait a very long time."

Matthew Harrigan, a Janco Partners analyst, counters that waiting isn't necessarily a bad thing. Discovery, he said, is a terrific business, and Malone's abilities of persuasion shouldn't be underestimated.

"I certainly think the spinoff is a positive over time, but this is not the equivalent of a hot [initial public offering]," Harrigan said.

"Don't forget, Discovery is one of the world's great media brands."

In 2004, Discovery's 16 cable TV networks produced an operating profit of $660 million on $2.4 billion in revenue. Discovery's upside rests on the coming proliferation of high-definition TV and the company's international reach (it has channels available in 160 countries).

Discovery's chairman and founder, John S. Hendricks, is also known as one of the most competent executives in the television business.

But like much of the media industry, ads have slowed at Discovery's networks, particularly at the Learning Channel.

Merrill Lynch media analyst Jessica Reif Cohen forecasts Discovery's sales to be flat for the second half of this year and for 2006.

With much of the industry in a similar standstill, Malone has few options besides a Discovery spinoff to try to lift Liberty's stock price. And Discovery is one of the few media properties that investors find genuinely attractive.

Liberty's other large properties include the QVC shopping channel and the pay-movie network Starz Group, but Malone has made clear he would unload either one.

In fact, Liberty's mishmash of holdings - many, including an 18 percent stake in the News Corp., are minority positions - is the main reason the stock trades at a discount to the combined value of its many assets, analysts said.

Ever the financial engineer, Malone spun off Liberty's international cable TV holdings a year ago in a maneuver also geared to unlock value.

Though initially not well received - Liberty Media International lost 24 percent of its value in the two months after its June 2004 offering - the stock is up 62 percent since August.

But don't expect Discovery Holding to take a similar trajectory, warns Al Cardilli, an analyst at Spin-Off Advisors, a Chicago investment firm.

This is not a situation, he said, in which a spinoff will afford a particular group of executives newfound freedom to run an under performing operation, or give them better access to capital.

"The Liberty spinoff is a nonevent," Cardilli said. "It just doesn't have what you want in a spinoff for it to be effective."

Ultimately, owning the Discovery Holding spinoff is seen as a long-term investment for those with long-term faith in John Malone.

Lawrence J. Haverty Jr., a portfolio manager at Gabelli Global Multimedia Trust, owner of 37 million Liberty shares, a roughly 1.4 percent stake, said he isn't worried about the current dip in television's ad numbers. He likes the Discovery name, Malone's management and the chances that Cox and Newhouse will eventually come around.

"The whole media environment is unexciting from an ad dollar standpoint," he said. "But if things improve, you'll get paid for it."

The Chicago Tribune is a Tribune Publishing newspaper.

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