Making Sense of the Liberty Empire, Part 3: Discovery Holding

While we realize regular readers are keen to get to the end of this series and find out all about News Corp (NWS), DirecTV (DTV) and the great tax swap saga, we prefer to take things in order. Thusly, you have read "Making Sense of the Liberty Empire", part one: an overview; part two: Liberty Global (LBTYA); and now, part 3: Discovery Holding (DISCA).

This glob of Liberty was spun off in July 2005, although Malone owns 5.5% of the outstanding shares [regrettably controlling 31% of the votes], and the two elements have wide-ranging service and tax sharing agreements.

Discovery wholly owns two business that make no money and $203m cash. It is also in the fortunate position of controlling 50% of Discovery Communications. This media titan runs the Discovery Channel, TLC, Animal Planet, BBC America and many other properties around the world, although three quarters of revenues are earned in the US. The Discovery channels earn over three quarter of a billion dollars a year in operating cash flow. Hurray! Boo! There is the pesky nuisance of depreciation [with capital expenditures more than keeping pace], interest payments [on $2.6 billion indebtedness at the associate level] and tax. Figuring all this out, and dividing by two since Discovery Holding owns only half, leaves at best $128m attributable to this slice.

Since the market cap is $4.47 billion and enterprise value $4.27 billion, this implies a weighty p/e of 33 for the TV businesses. Too weighty, you might think. We do hold, at the moment, but rather weakly.

DISCA 1-yr chart

Disclaimer: Author has position in DISCA