Investors reacted rather tepidly to the market debut of GCI Liberty, the asset-based stock created after John Malone’s Liberty Interactive completed its $1.1 billion purchase of Alaska cable operator General Communication Inc. Analysts who follow GCI Liberty were decidedly more excited, though, seeing the new issue as a cheaper, easier path to owning shares in the second-largest cable operator in the country, Charter Communications.
GCI-Liberty, trading under the symbol “GLIBA,” opened on the NASDAQ Exchange on March 12 at $54.29 per share, rising as high as $55.47 before closing at $54.73. The stock slid later in the week, closing at $52.23.
Investors who bailed on the shares might have been missing the point. GCI-Liberty is Malone’s second cable stock after Liberty Broadband, the tracker that holds Liberty Media’s 27% stake in Charter Communications. Most analysts believe it is only a matter of time before Malone, never one to back off from an opportunity, will combine both companies to consolidate his cable holdings. Liberty Broadband closed at $87.24 per share on March 15, while Charter closed at $339.55 each.
Reverse Morris Trust Ahead
There are regulatory restrictions — GCI-Liberty couldn’t combine with Liberty Broadband for at least a year after becoming its own public company. But most analysts are marking their calendars.
Pivotal Research Group CEO and senior media & communications analyst Jeff Wlodarczak said in a note to clients that he expects GCI-Liberty to enter into a Reverse Morris Trust transaction with Charter as soon as March 12, 2019.
A Reverse Morris Trust is a common tax-efficient vehicle for Liberty, used in the 2009 merger between DirecTV and Liberty Entertainment.
Wlodarczak said such a deal would drive GCI-Liberty’s current 19% discount to net asset value (NAV) — when its share price is below the value of its assets — to near 0%.
Investors could reap even bigger rewards if Charter attempted a transaction with GCI-Liberty and Liberty Broadband at the same time, Wlodarczak said. That, he added, would allow GCI-Liberty shareholders to reap the current 19% discount to NAV for GLIBA stock, which would equal a 24% return to owning Charter stock outright, plus the 11% discount to NAV for Liberty Broadband, which would give investors a 33% return to owning Charter outright.
“This return could be enhanced further if GCI-Liberty is able to drive enough improvements at GCI to secure a premium valuation for GCI from Charter for the GCI asset,” Wlodarczak wrote.
Wlodarczak has a 12-month price target of $79 per share on GCI-Liberty, a $134-per-share target on Liberty Broadband and a $500-per-share target on Charter.
Evercore ISI media analyst James Ratcliffe, who estimated GCI-Liberty’s discount to NAV is about 12.5%, thinks an RMT transaction is in the cards for GCI-Liberty. “Fundamentally, there is no rationale for both [Liberty Broadband] and [GCI-Liberty] to exist, splitting Liberty’s Charter exposure,” Ratcliffe wrote in a research note.
GCI LIBERTY AT A GLANCE
Formed after Liberty Interactive completed its $1.1 billion purchase of Alaskan cable operator GCI, GCI Liberty’s assets include:
GCI: Largest Alaska-based communications provider (by revenue). Ownership: 100%
Charter Communications: The second-largest U.S. cable operator. Ownership: 2%
Liberty Broadband: Tracking stock holding Liberty Media’s 27% interest in Charter. Ownership: 24%
Evite: Online invitation and social event planning service. Ownership: 100%
Lending Tree: Online lending and real estate business which matches consumers with lenders and loan brokers. Ownership: 27%
SOURCE: GCI Liberty
