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Discovery Holding on the Board

7/21/2005 6:08 AM Eastern

Liberty Media Corp. completed the long-awaited spinoff of its Discovery Holding Co. unit Thursday, but at least one analyst urged shareholders to dump their stock as soon as possible.

Discovery Holding began trading Thursday under the symbol “DISCA,” opening at $14.85 per share. The stock fluctuated between a high of $15.10 and a low of $14.20 in trading Thursday before closing at $15 per share.

Liberty shareholders received 0.10 shares of Discovery Holding for each Liberty share they own. Based on that distribution, Discovery Holding has about 288 million shares outstanding.

But Fulcrum Global Partners LLC analyst Richard Greenfield expects the stock to drop -- he set a 12-month price target of $11.50 per share on Discovery Holding July 21. Greenfield also slapped a “sell” rating on the stock.

Liberty announced the Discovery spinoff in March. The new entity includes Liberty’s 50% stake in Discovery Communications Inc. and its 100% interest in Ascent Media Group Inc., which provides production services to the film and television industries.

Liberty had expected Discovery’s other equity holders -- Cox Communications Inc. and Advance/Newhouse Communications Inc. each own 25% -- to participate in the spinoff, but that never materialized.

Writing in a research report that Discovery looked more “like a tracking stock,” Greenfield pointed to the lack of participation by Cox and Advance/Newhouse, declining ratings at some Discovery networks and the new entity’s inability to access DCI’s free cash flow.

The spinoff comes at a difficult time for DCI. While revenue and cash flow have been growing, declining ratings at two of its most popular networks -- Discovery Channel and TLC -- are expected to be a drag on financial results.

Liberty has said in the past that it expects DCI’s revenue to increase in the mid-teens and cash flow in the low double-digits for 2005. Greenfield believes it will be even lower.

In his report, Greenfield said he was lowering his 2005 revenue estimate for the networks to $2.6 billion (a 12% increase) and his 2005 cash-flow estimate to $723 million (up 9%). Greenfield also lowered his 2005 estimates for DCI: revenue of $2.9 billion (up 10%) and cash flow to $793 million (up 10%).

And he questioned the prospect that DHC could be used as an acquisition vehicle. With no access to Discovery’s cash flow -- although DHC does have $215 million in cash -- Greenfield estimated that DHC would have to initiate an equity offering for an acquisition, which would further dilute the stock.