What hedge fund whiz John Paulson sees in Liberty Media: DirecTV
byNov 18th 2009 4:50PM
But while Paulson's recent purchase of Citibank (C) and sale of Goldman Sachs (GS) have caused a buzz, investors should also take a look at another trade that has so far remained largely under the radar: Paulson's funds have more than doubled their stake in Liberty Media (LMDIA) to 44.75 million shares from 20 million as of Sept. 30.
Part of media magnate John Malone's far-flung empire, the Liberty Media stock Paulson is snapping up tracks a variety of assets like the Starz cable channel. But the most important by far is Liberty's controlling 54% stake in DirecTV (DTV), the country's largest satellite-TV operator.
Liberty's stake in DirecTV lags its market value, and buying Liberty is seen as a cheap way to play DirecTV. But Paulson also seems to be on betting on Malone -- another brilliant speculator who was once compared to Darth Vader for his brutal negotiating skills by Vice President Al Gore. And Malone may have an exceptional hand to play, given trends in the TV market.
Malone is in the process of spinning out Liberty's DirecTV's stake -- housed in the Liberty Entertainment tracking stock -- and merging it with the rest of DirecTV. The merger would set up DirecTV for a possible sale to telecom giants Verizon (VZ) and AT&T (T), which are steaming into the market.
But despite spending billions, both Verizon and AT&T -- with 2.7 million and 1.8 million subscribers, respectively -- remain bit players in TV so far. That leaves the telecoms with little negotiating leverage against programmers like NBC (GE) or Disney (DIS), which charge distributors hefty and ever-mounting fees for carrying their content.
With 18.4 million subscribers, DirecTV would instantly make either Verizon or AT&T a major player and provide the leverage to negotiate down programming costs. That's a key concern for distributors, and Liberty CEO Greg Maffei recently applauded Comcast's (CMCSA) bid for control of NBC as "a good hedge against rising programming costs for Comcast."
Of course, speculation that a phone company would step up to buy a satellite operator has come up in the past. But a number of factors tilt the odds in DirecTV's favor this time around.
After putting a massive amount of marketing muscle behind its $23 billion FiOS TV project, Verizon saw a rapid slowdown in growth of the service last quarter when it withdrew some of the juicy carrots it had dangled in front of customers to sign up. As growth stumbles, the phone company may decide it's finally time to make a purchase rather than go it alone.
DirecTV's smaller rival Dish Networks (DISH), meanwhile, has fallen apart over the last year. Dish failed to take advantage of the HD boom to the extent DirecTV did, and it courted lower-end customers who were disproportionately hit by the economic downturn.
On the other hand, DirecTV -- which focused on the lucrative sports market and upped its credit standard to prevent costly customer turnover -- continues to perform remarkably well. It reported 136,000 net additions during the third quarter and saw a healthy rise in the key metric of average revenue per user.
That leaves DirecTV as an attractive prize for either Verizon or AT&T, which has seen many shortcomings in its own TV offering. And a bidding war between the phone giants would play entirely into Malone's dealmaking skills.
Investors would be wise to follow Paulson's cue and consider betting on Malone.