WILL LIBERTY RING TRUE ON WALL ST.?

Cable tv giant Tele-Communications Inc. is offering its shareholders the chance to exchange shares of its stock for shares of its newly formed Liberty Media Corp. – a spinoff of minority holdings in an array of both cable tv systems and programming services.

But some on Wall Street are advising shareholders not to take TCI up on its offer.

“Liberty Media is not an attractive investment vehicle,” writes Shearson Lehman Bros, analyst Christy Phillips in a recent report. “After evaluating these assets… we believe that TCI can offer the cable tv investor better longterm rewards with substantially less risk than Liberty stock.”

Phillips cites unnecessary financial risk – leverage, negative operating cash flow, substantial loss in net income, the possibility of future dilution and the difficulty of measuring potential share appreciation – as reason for avoiding Liberty.

Other analysts, while not specifically warning investors away, point out problems that may limit the offering’s appeal, especially to institutional investors.

“There are clearly some technical problems with this offering,” says Mark Riely, partner in the consulting firm MacDonald Grippo Riely.

Of particular concern are the size (market capitalization) of the newly created company and the number of shares available for trading (float).

Liberty is structured such that TCI shareholders as of the Feb. 6,1991, record date will receive one exchange right for every 200 TCI shares they hold (TCI began distributing rights Feb. 15). Each exchange right entitles the shareholder to exchange 16 shares of TCI for one Liberty share.

“The market capitalization is not going to be that large,” Riely notes. “Assuming you’ve got full participation and 2 million shares, it’s still only a $500 million market cap company, which isn’t tiny. But a lot of portfolio managers need a stock larger than that in their portfolio and are simply not going to play the game because of that.”

The company’s float is also considered thin by Wall Street standards. A total of only 2 million shares will be available for trading even if everyone who is eligible to exchange shares does so. Some analysts say they are expecting fewer than 50% of eligible shareholders to make the trade.

Pricing will also add to trading illiquidity. Liberty shares will have to trade at about $240 a share for TCI shareholders to break even on the exchange. That’s expensive considering most cable tv stocks (including TCI) currently trade at about $15 a share.

“It’s an interesting company, but it looks like it is going to be very illiquid as a trading vehicle,” says analyst Mary Kukowski of Bear, Stearns & Co. “And that’s a real problem for a lot of big institutions.”

For these reasons analysts report there is not a high level of enthusiasm among institutional investors for using the exchange rights to acquire Liberty Media.

Apart from technical constraints, it is Liberty’s debt load which may give most investors pause. “The leverage is going to cause some people to say ‘Gee, if I want to invest in a company that is involved in regional sports networks, has a half interest in American Movie Classics and is a major cable holder, maybe the way to do it is Cablevision Systems, rather than Liberty,'” per Riely. “Liberty looks to some people like a poor man’s version of Cablevision.”

The spinoff, first announced more than a year ago, was designed to quell Congress’ fears about TCI exerting excessive control over the cable industry.

For its part, TCI is transferring 12% of itself – $298 million worth of non-managed cable systems and $307 million of mostly minority interests in programming services – to the new company which will be run by former TCI power broker Peter Barton. Liberty will also be majority owner of the new TCI-backed Encore pay network launched last week (see related story, p. 68). Not included in the spinoff are TCI’s much coveted stakes in programming powerhouses Turner Broadcasting System and Discovery Channel.

In a meeting with shareholders, TCI President and CEO John Malone acknowledged that the new entity “was a potpourri of assets TCI acquired to enhance its cable assets, not to form a new company.”

Correspondingly, he admitted it will be difficult to shape the hodgepodge of assets into an operating entity. He noted that while Liberty will see subscriber growth in its cable systems, it may “need a hammer and saw” to make the properties mesh.

Even so, industry sources note that if anyone can make that happen, it is TCI and Malone. TCI has grown more than tenfold since Malone joined on as CEO in 1973 and today is the country’s largest cable operator, serving more than 8.8 million basic subscribers.

For that reason, some industry watchers are confident that Liberty’s current problems can be overcome and the company will succeed as a longterm investment vehicle. “The way the company looks now no means resembles the way it will look in two or three years,” says analyst Ken Goldman of Denver-based Hanifen, Imhoff. “That’s the thing to remember. People try to analyze the current balance sheet and pro forma income statement in the prospectus, but they are almost irrelevant, because there are certain to be a number of transactions that will change the face of this company.”

Adds Riely: “When the smoke clears, this will probably turn out to be a fine investment. Investors who are flexible and don’t already own a lot of TCI, may just want to hold their TCI and buy Liberty in the aftermarket and see how it goes. I think the tale will be told over the next year – we’ll see how good TCI is at rejiggling the portfolio.”

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