Analyst Sees Discovery Consolidating Soon
Pali Capital’s Greenfield: Discovery Holding Will Acquire Advance/Newhouse Stake
By Multi Channel News Staff -- Multichannel News, 6/11/2007 11:20:00 AM
Media analyst
thinks
could soon acquire Advance/Newhouse Communications’ one-third stake in programmer
, boosting the holding company’s stock price. Greenfield, of Pali Capital, said in a research note Monday, “While the timing of a consolidation of Newhouse’s stake in DCI is uncertain, we sense that the timing could be in the near future.” One factor: The two-year anniversary of Discovery Holdings being spun out of Liberty Media as a separate company -- owning Liberty’s 50% interest in DCI -- comes July 21. Two years is the “generally accepted time frame” under tax rules for altering a spin-out structure, Greenfield wrote. Cox Communications and Advance/Newhouse had held their DCI stakes out of the Liberty-created holding company, for tax purposes. But in March,
. Pali initiated Discovery Holding coverage in April with a buy rating and a 12-month price target of $25.50 per share, saying at the time that it expected Discovery Holding to eventually absorb the Newhouse stake in DCI. In Monday’s note, Greenfield raised the price target to $28.50, based on the possibility of a Newhouse transaction occurring soon. Of the possible ways Discovery Holding could acquire the Newhouse stake, Greenfield said the most likely was for Newhouse to trade its stake in privately held Discovery for Discovery Holding stock at a 15%-20% premium valuation. That would be $27-$28.20 per share, based on last Friday’s closing price. Newhouse would get a premium because its one-third stake gives it blocking power over major decisions, Pali wrote. If Discovery Holding fully owned DCI and its networks -- including Discovery Channel and TLC -- it could tap the programmer’s free cash flow, which Pali estimated would be $118 million this year. Discovery Holding opened Monday at $23.50 on NASDAQ and was at $23.57 at 2:25 p.m. (EST).
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