IN THIS MARKET YOU can be right and still be wrong. In two Alerts last summer I flagged the val- uation gap between John Malone's holding com- pany Liberty Entertain- ment (ticker: LMDIA) and its principal asset, a 49.5% stake in satellite TV operator DirecTV (DTV). A merger between the two, we noted, could close the gap, with the benefit accruing to Liberty Entertainment shareholders.
So far things have unfolded about the way I expected -except for the 20%-plus gain I predicted for Liberty shares.
In September, Malone and Liberty CEO Greg Maffei announced they would spin off Liberty Entertainment, then a tracking stock, from the parent company, Liberty Media. In May, a merger with DirecTV was announced. The deal likely will close in September.
At the time of our first Alert, in August 2008, Liberty Entertainment was trading at a 25% discount to the value of its assets, which also include Starz Entertainment and the Atlanta Braves. That discount has narrowed to 6%, though not the way I thought it would. DirecTV's shares are down 13%, and Liberty's shares are up 4%. Still and all, it's not so bad considering the overall market is down 30% in the same period.
At $25.14, Liberty Entertainment'
Barclays Capital has a price target of $30 on LMDIA and $32 on DTV, which is running rings around rival Echostar (SATS). But while the upside is potentially greater for DirecTV, I'd put my money on Malone and Maffei.
These, after all, are the guys who swapped Liberty's 19% stake in News Corp. (NWS, parent of Dow Jones, which publishes Barron's) for News Corp.'s 41% stake in DirecTV in February 2008. Since then, News Corp.'s shares have fallen 49%, while DirecTV has slipped just 5%.
If there's a way to get a leg up in this deal, Malone and Maffei will find it.
This article appeared July 10 in Barron's Daily Stock Alert, our subscription newsletter. For more information or to arrange for a trial subscription, visit barrons.com/
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