Can You Invest Like John Malone?

Robert is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Like him or hate him, John Malone has built a multimedia empire by taking controlling interests in growing companies, eliminating competition through acquisitions, and taking full advantage of the federal tax code.  In the process, he has built a multibillion dollar fortune, although he has annoyed a few competitors and regulators along the way.  While investors could try to emulate his strategy, duplicating his returns would be difficult for a variety of reasons.

Malone’s holding companies, Liberty Media (NASDAQ: LMCA) and Liberty Interactive (NASDAQ: LINTA), generally hold positions for extended periods of time until the investments realize their true value.  Liberty Media’s current long-term holdings include the Atlanta Braves baseball team, bought in 2007, and Sirius XM Radio (NASDAQ: SIRI), in which it made an additional significant investment in 2009.  Liberty Interactive has a similar long-term time horizon for investments, including stakes in AOL and Expedia that it has held for at least a decade.  If investors want to watch tickers, this strategy probably will not work for them.

Liberty has significant resources through its billion-dollar cash balances and throngs of talented employees at both the parent and subsidiary company levels.  Liberty is run day-to-day by Greg Maffei, who previously sat in the executive suite at Microsoft and Oracle. Most investors probably can't afford his scale of compensation.

Liberty builds controlling interests in its investments, so that it can influence the capital allocation and corporate strategy at the companies.  In late 2012, Liberty Interactive bought a controlling interest in online travel services provider TripAdvisor from Chairman Barry Diller, which complements its large, long-term stake in the company’s former parent Expedia.  The trend continued in January, as Liberty Interactive received FTC approval to purchase a majority stake in Sirius, a company in which it already had de-facto control through its preferred and equity holdings.

What to Do?
If you want to invest like John Malone, I would advocate buying directly into the Liberty Media empire, to take advantage of its capital allocation opportunities, non-public affiliates, and potential tax-advantaged spin-offs.  A case in point is Starz (NASDAQ: STRZA), the former Liberty subsidiary and video programming giant, with 55 million subscribers across its two major networks.

In its latest fiscal year, Starz’s revenue was roughly flat with the prior year, while adjusted operating income rose 30.9% to $449 million.  The company’s profitability benefited from a 6% growth in total subscribers and a decision to shut down its theatrical production segment.  Like its major competitors, HBO and Showtime, Starz has been moving into the production of higher-margin, original programming, which includes its highly-regarded Spartacus and Boss series. 

In fiscal 2012, though, Starz’s profitability has slipped slightly, due to less profitable distribution contracts and higher marketing costs for its programming.  Over half of its total revenues come from the two major satellite networks, DirecTV and Dish, who have been using their large market share and power to negotiate lower prices with programming providers.  Like any good investor, Liberty is making a timely exit of a portion of its investment in Starz to fund better opportunities elsewhere.

Anything on the Radio
Liberty Media’s focus in 2012 was on Sirius; Liberty's share of its profits provided the strong rise in Liberty's net income.  Due to its 2008 merger with XM Radio, Sirius is the only major satellite radio provider, and it benefits from its relationships with every major automaker.  The company has been a primary beneficiary of rising new car sales, which were expected to reach 14 million in 2012, according to the North American Dealers Association (NADA). 

In the first nine months of FY2012, Sirius reported increases in revenues and adjusted EBITDA of $2.5 billion and $689.8 million, increases of 12.5% and 22.4%, respectively, versus the prior-year period. 

Its subscriber base jumped 9.4% to reach 23 million as of September 2012, and its operating margin benefited from an ability to spread its fixed costs across a larger user base. 

While Sirius generally provides three to 12 months of free service on qualifying new vehicles, it turns roughly 45% of the free-riders into paying customers.  Despite likely increases in future programming and subscriber acquisition costs, Sirius should benefit from an expect rises in new car sales and a greater conversion rate in the used car segment.

The Bottom Line

Investors could directly purchase Sirius or any of Liberty’s other publicly traded investments, which also include LiveNation and Barnes & Noble.  However, Liberty’s investment rationale, holding period, and risk tolerance might not match those of an individual investor.  A better approach would be to buy into Liberty Media, thereby benefiting from its diversification and any potential future acquisitions or divestitures.  Investors might not be able to invest like Mr. Malone, but they can ride his coattails.

rghanley owns shares of Liberty Media and Starz. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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