Striking a Blow for Liberty

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Give them

Liberty

or give them . . . heck, who knows?

Wednesday's gigantic merger of

AT&T

(T) - Get Report

and

TCI

(TCOMA)

leaves

Liberty Media

(LBTYA) - Get Report

, the TCI company that controls big pieces of cable programmers like the

Discovery Channel

, as the fifth wheel on what will be a $150 billion communications behemoth.

But even as TCI Chairman

John Malone

and AT&T's

C. Michael Armstrong

try to decide if Liberty fits into AT&T's long-term plans, analysts and some of Liberty's biggest investors say the company's future looks bright.

That confidence was reflected in Liberty's stock price, which rose 2 1/16, or almost 6%, to 38 3/16, yesterday on extremely heavy volume. With investors suddenly hot for entertainment companies, Liberty has now soared almost 60% since the beginning of the year, adding some $5 billion to its market cap.

"Lots of things can go right for this company," says Bill Nygren, portfolio manager for the $1.5 billion

Oakmark Select

(OAKLX) - Get Report

fund, which has a position in the stock. Select and other Oakmark funds owned more than $400 million in Liberty shares as of March 31, making Oakmark the company's third-largest institutional shareholder, according to

Technimetrics

.

Liberty is technically a subsidiary of TCI, but it trades as a separate "tracking stock," with a separate board and separate shareholders who have a claim on the economic value produced by its assets.

With just 13 full-time employees, according to TCI's 1997 annual report, Liberty isn't really an operating company. Instead, it holds a portfolio of stakes in programming channels. In addition to Discovery, those include the

QVC

home shopping network, the

Fox/Liberty

sports network and Barry Diller's

USA Networks

(USAI) - Get Report

.

The idea of the Liberty tracking stock: to let investors who are interested in entertainment programming channels like Discovery buy into them without having to invest in TCI's debt-heavy cable assets. At the same time, because Liberty remains connected to TCI, the structure guarantees that TCI will always look out for Liberty's interests, and vice-versa.

PaineWebber

entertainment analyst Christopher Dixon says TCI created the structure because it wanted to give investors a way to value Liberty's programming while ensuring that the Liberty channels would always have a place on TCI's cable systems. Tracking stocks are important "to the degree that you need to have access to the

cable network," Dixon says. "What the tracking stock does is it allows you to have your cake and eat it too."

The tracking stock structure will be maintained as TCI merges with AT&T, the companies said Wednesday. Liberty will technically be a subsidiary of the new

Ma Bell

, but it will have its own shareholders and be run by Malone with little oversight by AT&T. As part of the deal, Liberty will be merged with

TCI Ventures

(TCIVA)

, another TCI tracking stock, which holds most of TCI's noncable and nonprogramming assets, including a 30% stake in the wireless communications provider

Sprint PCS

.

The new structure is a winner for Liberty, says Ann Miletti, a senior analyst at the $2.2 billion

(SOPFX)

Strong Opportunity fund, which owns 1.5 million shares of Liberty: "Malone's got control -- he's got access to AT&T's balance sheet now without being an official part of AT&T." That will enable Malone to borrow at lower rates.

Indeed, the recent run-up in the stock prices of Liberty and TCI has put the luster back on Malone, whose reputation was tarnished in the mid-'90s after a proposed merger between TCI and

Bell Atlantic

(BEL)

fell through and TCI suffered from service troubles and heavy competition from satellite television. But that was then. Today, Malone's a visionary again, and shareholders are salivating at the idea that he'll run Liberty full-time.

"Malone is probably gonna end up running

Liberty, so whatever they end up doing with it is probably a good thing," says one hedge fund manager with a big stake in the company.

One mutual fund manager who asked not to be named says Malone told institutional investors and analysts on a conference call yesterday that the tracking stock structure was not a long-term solution for Liberty and that he and Armstrong would eventually decide whether Liberty belonged inside AT&T or as a separate company. But Miletti says the call didn't give her the impression that things would change. "I think it makes sense to keep it as a tracking stock now," she says. Malone could not be reached for comment.

Nygren says he thinks the combined Liberty/TCI Ventures could be worth as much as $27 billion, or $45 for each of the new company's roughly 600 million shares outstanding. In addition to Liberty's share in Discovery, which he values at $3 billion, and its stake in Fox Sports, worth about $2 billion, the company's most valuable assets include a 57 million-share stake in

Time Warner

(TWX)

now worth around $5 billion -- and a $5.5 billion cash hoard, as well as a $1.7 billion net operating-loss tax carryforward.

"They're going to have a lot of flexibility with a lot of cash. They're going to have some great assets," says Arden Armstrong, manager of the $600 million

(MPEGX) - Get Report

MAS Mid-Cap Growth fund, which owns almost 400,000 Liberty shares. "If Malone doesn't have anything to do but focus on Liberty, a lot of things will happen."