LIBERTY MEDIA:Lesson in Value Creation - Part 2
ML++ML++ML Merrill Lynch Global Securities Research ML++ML++ML
LIBERTY MEDIA GROUP (LMGA/OTC)
Lesson in Value Creation - Part 2
Jessica Reif Cohen (1) 212 449-3334
BUY
Long Term
BUY
Reason for Report: Q4 Review & Analyst Meeting Update
Price: $51 7/8
Estimates (Dec) 1999A 2000E 2001E
EPS: NA NA NA
P/E: NM NM NM
EPS Change (YoY): NM NM
Cash Flow/Share: $0.32 $0.38 NA
Price/Cash Flow: NM NM NM
Dividend Rate: Nil Nil Nil
Dividend Yield: Nil Nil Nil
Opinion & Financial Data
Investment Opinion: C-1-1-9
Mkt. Value / Shares Outstanding (mn): $70,212.4 / 1,347
LT Liability % of Capital: 8.0%
Stock Data
52-Week Range: $61 7/16-$28 7/8
Symbol / Exchange: LMGA / OTC
Options: Pacific
Institutional Ownership-Spectrum: 73.2%
ML Industry Weightings & Ratings**
Strategy; Weighting Rel. to Mkt.:
Income: In Line (07-Mar-1995)
Growth: Overweight (07-Mar-1995)
Income & Growth: Overweight (07-Mar-1995)
Capital Appreciation: Overweight (27-Jun-1995)
Market Analysis; Technical Rating: Above Average (27-Jul-1999)
**The views expressed are those of the macro department and do not necessarily
coincide with those of the Fundamental analyst.
For full investment opinion definitions, see footnotes.
Investment Highlights:
o Liberty held a very upbeat analyst meeting in New York on April 13th,
reported Q4 results that were in line to better than expected and also
announced a 2 for 1 stock split.
o We strongly reiterate our Buy rating and price objective of $80-$85, based
on a sum-of-parts valuation, an increase of 54% above current levels.
o Recent transactions continue to reaffirm our view that investors are wise
to be invested in Liberty given management's ability to create significant
shareholder value.
o Despite recent market turbulence, Liberty's portfolio is still posting
significant returns on its investments.
o We believe the recent market volatility is a huge opportunity for Liberty
to inexpensively scoop up strategic assets.
o Liberty's core businesses continue to generate very solid results and have
very robust growth prospects ahead with the accelerating digital video rollout
and imminent rollout of new interactive services.
o Management has been very active, as always, in consolidating and
leveraging existing assets. New areas of interests include post-production,
wireless and IP phone technology.
Very Upbeat Analyst Meeting
Liberty Digital
Over the past 15 months, Liberty Digital has built a phenomenal portfolio of
assets and has also proven to be an astute investor. Liberty Digital's
portfolio of public investments is valued at $733 million, up 200% from its
investment of $244 million. Liberty Digital's strategy focuses on building
"mega-verticals" by creating a single brand and merging commerce across all
electronic platforms. Lee Masters, President and CEO, demonstrated prototype
channels, a travel channel where one could very easily book a vacation and
activities on the TV as well as see the hotel room by using 3-D technology and
an automobile channel where one can compare features and options and of course,
purchase a car via interactive television. Based on trends in the UK, where
interactive TV is a reality, we are very bullish on the prospects of Liberty
Digital.
Q4 Review
Liberty reported another solid quarter and a terrific year. Total developed
assets operating cash flow grew 13% to $218 million in the fourth quarter and
28% to $812 million for the year. Total developing assets operating cash flow
declined to d$113 million vs. d$70 million in the prior fourth quarter as
Liberty invested heavily to develop start-up businesses. Higher launch,
marketing and programming expenses for the developing assets including Animal
Planet and Travel Channel negatively impacted fourth quarter results and are
expected to continue to slow results in 2000, although the long term
implications are positive. While many of Liberty's core businesses are rapidly
growing, there is a tremendous amount of start-up business investment spending
that at least partially offset the core growth.
Liberty reported total fourth quarter proforma attributable operating cash flow
of $105 million vs. $123 million, in line with our projections. Operating cash
flow declined due to Liberty's significant increase in investment in many of
Discovery's developing businesses. We note that 1998 numbers were restated to
present the proforma effect of the acquisition of the remaining 30% interest in
Travel Channel in February 1999 and the discontinuance of Your Choice TV at the
end of 1998.
Discovery Communications (49.3% stake)
In the fourth quarter, Liberty reported total Discovery operating cash flow of
$1 million vs. $60 million last year. The swing is due to developing assets,
which generated operating cash flow losses of d$131 million vs. d$50 million in
the prior fourth quarter.
Discovery's domestic networks, The Discovery Channel and The Learning Channel
(TLC), continued their strong growth with operating cash flow growth of 13% to
$120 million, slightly above our estimate of 10% growth. Revenue growth was
very robust at 25% to $249 million, boosted by growth in affiliate and
advertising revenue. Driven by increases in distribution and CPMs, advertising
revenue grew 28% in the quarter. Affiliate revenue was up 14% due to increases
in the number of subscribers combined with a rise in average per subscriber
affiliate fees. The Learning Channel increased subscribers 7% year over year
in the fourth quarter.
Developed international assets, Discovery Europe and Latin America, reported
$12 million in operating cash flow, slightly above our estimate and up from $4
million in the prior year. The solid growth was due to decreased in marketing
and transponder expenses. Total developed international revenue grew 21% to $41
million, well above our $35 million estimate.
Developing assets losses widened to d$131 million vs. d$50 million last year
due to continued spending on newer networks. However, revenue growth continues
to be phenomenal, up 61% to $190 million. The Travel Channel, Animal Planet
and BBC continue to generate very robust revenue growth due to increased
subscribers and subscriber fees and strong advertising revenue.
Animal Planet, which was launched in October 1996, now has 54 million
subscribers, up 20% from YE98. Animal Planet revenue grew 51% in the fourth
quarter to $25 million, primarily due to a 73% jump in advertising revenue
resulting from increases in advertising spot rates, ratings, prime-time ratings
ad inventory sellout and audience delivery. Affiliate fees grew 14% due to
increases in the number of paying subscribers. Animal Planet's operating cash
flow losses widened to d$3 million due to increased programming and marketing
costs. Animal Planet could have had a break-even cash flow performance in the
quarter but management decided to increase program spending to further improve
the channel. |
