Tax Issues Hold Up Liberty Tracker

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Citigroup cable and satellite analyst Jason Bazinet initiated coverage of Liberty Capital last week with a “hold” rating and an $89 price target, but he wrote in a research report that the main reason for creating the tracking stock — closing the gap between Liberty’s asset value and its stock price — isn’t likely to happen anytime soon.

Liberty Capital began trading on May 10 and includes Liberty Media Corp.’s more stable assets, including Starz Entertainment Group and its holdings of News Corp., Time Warner Inc. and Motorola Corp. stock. A separate tracker — Liberty Interactive, housing growth assets like QVC Inc. — was issued the same day.

In his report, Bazinet said that although Liberty Capital trades at a 33% ($40) discount to its net asset value of $120 per share, two factors will cause that valuation gap to remain — uncertainty regarding its liability stemming from $6 billion in potential tax payments and a holding company discount.

The price target assumes that Liberty Capital will be able to exchange its News Corp., Time Warner and Motorola stakes for operating assets tax efficiently, Bazinet added. But he wrote that even after such exchanges, a 10% discount is still appropriate, which reduces its value by about $9 per share.

“Although our $89 price target offers 11% return, we expect the current NAV discount to take several years to close leading to modest returns for [Liberty Capital] shareholders,” Bazinet wrote.