Analyst Report Boosts DirecTV, Liberty Capital Stock

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Shares of DirecTV Group and Liberty Capital were on the upswing Tuesday after Citigroup analyst Jason Bazinet issued a report speculating that Liberty could launch a $22 billion tender offer for the remaining shares of the direct-broadcast satellite giant it does not acquire through a separate deal with News Corp.

Liberty reached an agreement in December to swap its 19% voting stake in News Corp. for cash and News Corp.’s 38.5% interest in DirecTV. That deal, valued at about $11 billion, is expected to close this year.

But Bazinet, in his research report, said Liberty’s aspirations to own 100% of DirecTV -- and enable it to consolidate all of the satellite company’s cash flow -- are high. He estimated that Liberty could launch a $30-per-share tender offer for the remaining 61.5% of DirecTV, perhaps by creating yet another tracking stock for the deal. And he believes that $30-per-share tender offer (a 23% premium to DirecTV’s July 9 close of $24.39 per share) could happen within the next 12 months.

Shares of both stocks responded in kind in early Tuesday trading. DirecTV shares were up as much as 2.5% (61 cents per share) to $25 and Liberty Capital shares rose 2.6% ($3.10 each) to $123.40 per share.

Liberty Capital, which trades under the symbol LCAPA, was formed last year after Liberty Media decided to split itself into two tracking stocks: Liberty Capital, which houses Starz Entertainment Group and its passive interests in several media companies; and Liberty Interactive, which includes home shopping giant QVC and several new-media assets.

According to Bazinet, Liberty Capital could split itself into two separate trackers -- which the analyst called “Son of LCAPA” and “OpCo” -- to do the deal. Bazinet believes the OpCo entity would be used to acquire the rest of DirecTV, offering a mix of cash and OpCo stock.

The benefit of the OpCo structure is twofold: It removes the holding-company discount from LCAPA shares (which Bazinet estimated to be about 15%) by separating out its hard assets from its minority stock interests. And it lets Liberty do a deal without parting with much of its value -- Liberty can primarily use DirecTV’s balance sheet and OpCo stock (which would be made up mostly of DirecTV) to fund the deal, according to Bazinet.

While Bazinet admitted that the OpCo structure would appear to have little upside for DirecTV shareholders, he said the opposite is true.

“At first blush, DirecTV shareholders may scoff at receiving ‘OpCo’ currency,” Bazinet wrote. “However, we believe there is a strong possibility that ‘OpCo’ shares are rerated once the holding company discount is removed. As such, we think DirecTV shareholders should embrace a mix of cash and ‘OpCo’ stock.”

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