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May 15, 2013

Focus on M&A At Liberties

Liberty Media (LMCA) and Liberty Global (LBTYK) reported earnings last week, finishing off the latest quarterly reports for Northlake's portfolio of individual stocks. Both stocks reacted favorably to their results although the real focus of investor attention at both companies is on recent merger and acquisition activity.

LMCA recently announced it was taking a 25% stake in Charter Communications (CHTR), one of the largest cable companies in the US. CHTR previously was a successful investment for Northlake's clients. Clearly, I should have held on although the proceeds were put into Disney (DIS), which has also performed very well. LMCA is essentially a holding company for John Malone's domestic media investments. CHTR now represents about 17% of LMCA's net asset value. Sirius XM (SIRI) remains by far LMCA's biggest investment at 65% of net asset value. The major point of discussion related to LMCA's earnings was how the company would finance its purchase of CHTR. For now, the company plans to borrow but eventually some monetization of the SIRI stake could occur. Presently, LMCA does not want to sell any SIRI even as SIRI aggressively buys back its own shares. LMCA has some tax issues that prevent tax-effective liquidation of SIRI share prior to this summer. LMCA remains an investment in John Malone's expertise and deal-making capabilities. By using LMCA's balance sheet capacity, the CHTR investment makes the future path a bit more clear which I see as a positive for LMCA. Ultimately, the upside in SIRI and CHTR will drive LMCA shares. I am especially optimistic on SIRI and see upside ahead for LMCA to $150 or more.

LBTYK shares have lagged a bit recently as the company nears closing of its acquisition of Virgin Media (VMED). I think it is mostly arbitrage pressure that should clear up after the deal close in late June. In the meantime, both LBTYK and VMED continue to grow nicely. LBTYK reported 6% revenue growth and 4% EBITDA growth on an adjusted basis for the first quarter. Growth in Northern Europe, in particular, Germany, is driving the company, despite the troubles in Europe. Cable and broadband remain underpenetrated in Germany. In England, VMED faces competitive pressure but continues to produce low single digit organic growth that is leveraged to double digit free cash flow growth. This fits the LBTYK profile perfectly and explains the acquisition. LBYTK is also benefiting by refinancing its balance sheet at cheap interest rates and pushing the maturity profile out to the end of this decade and beyond. With the tailwind from cable's leading competitive position in Northern Europe likely to remain in place for many years, LBYTK is on track for rapid free cash flow growth. That is music to shareholders ears as the company aggressively buys its own stock. I think LBTYK shares can reach $100 by the end of 2014 when the company could be looking ahead to over $10 per share in free cash flow.

LMCA and LBTYK and DIS are widely held by clients of Northlake Capital Management, including in Steve Birenberg's personal accounts. Steve is sole proprietor of Northlake, a registered investment advisor. Filings can be found at www.sec.gov. LMCA and LBTYK and DIS are net long positions in the Entermedia Funds. Steve is the portfolio manager of the Entermedia Funds, owns a majority stake in the Funds investment management company, and has personal monies invested in the Funds.

Posted by Steve Birenberg at May 15, 2013 09:11 AM in LCAPA