By Yinka Adegoke
NEW YORK, March 25 (Reuters) - U.S. satellite TV provider DirecTV Group has outperformed its pay-TV peers by every measure in the last year, but its shares have been the subject of short selling by arbitrageurs who see a profit opportunity.
Short interest in DirecTV jumped 39.1 percent in the two weeks to March 13, the fifth-largest increase on the Nasdaq over that period. Short sellers make a bet that a company's stock is overvalued and profit when the share price falls.
The weak economy and slowing subscriber sales may provide one reason to sell DirecTV, but analysts say the stock is also being sold short as one half of an arbitrage trade.
The other side of the trade then goes long on the Liberty Media Entertainment tracking stock, which owns around 54 percent of DirecTV. Liberty Media Entertainment also owns movie pay channel Starz Entertainment, cable sports networks and other assets.
The arbitrage opportunity is created because the 54 percent stake in DirecTV is worth around $12.7 billion, while Liberty Media's market capitalization is currently around $10.4 billion, excluding debt of approximately $1.2 billion.
'By our estimates, investors purchasing Liberty Entertainment today 'create' DirecTV for about $16 a share compared with its market price of $23,' said Chris Marangi, a portfolio manager for Gabelli & Co, which is a long-term holder of DirecTV.
That 30 percent valuation discount narrowed from highs of 50 percent late last year after Liberty Media, owned by cable pioneer John Malone, said in December it will split off most of Liberty Entertainment into a new publicly traded unit.
Liberty Chief Executive Greg Maffei said last month he expects the split-off to close by May or June.
BEST IS OVER?
Some investors are also selling short based on a belief that DirecTV and its stock will have less room to grow in 2009, analysts said on Wednesday.
'Investors are shorting DirecTV against LMDIA (Liberty Entertainment) to arbitrage the spread while others are shorting it against Dish Network to play the valuation discrepancy,' said John Hodulik, analyst at UBS.
DirecTV shares are down just 7 percent in the year to date compared with shares of its closest rival Dish Network Corp which is down 45 percent. Shares of cable companies Comcast Corp and Time Warner Cable Inc are down 32 percent and 66 percent, respectively.
DirecTV added subscribers last year when all its major cable and satellite rivals lost video subscribers.
Collins Stewart analyst Thomas Eagan said DirecTV is trading at around 4.8 times his 2009 EBITDA (earnings before interest, taxes, depreciation and amortization) forecast, which is a similar multiple to cable companies.
'Typically, DirecTV has traded below cable because they have just one revenue stream of video compared with cable operators who also have broadband and phone,' said Eagan.
DirecTV was the only major publicly traded U.S. pay-TV provider to add video customers in 2008 and has indicated it will have a strong 2009. This week the company extended its exclusive NFL Sunday Ticket deal and last month it kickstarted its lucrative distribution partnership with AT&T Inc.
'The question investors are asking is how can DirecTV get any better?' said Eagan.
LMDIA closed up 25 cents at $20.10, while DirecTV shares gained 24 cents to end at $23.14 on Wednesday.
(Reporting by Yinka Adegoke, editing by Matthew Lewis)
((yinka.adegoke@thomsonreuters.com; + 1 646 223 6081; Reuters Messaging: Yinka.adegoke.reuters.com@thomsonreuters.net; )) Keywords: DIRECTV/ (Click on http://blogs.reuters.com/category/themes/mediafile/ to see Reuters MediaFile blog) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.
NEW YORK, March 25 (Reuters) - U.S. satellite TV provider DirecTV Group has outperformed its pay-TV peers by every measure in the last year, but its shares have been the subject of short selling by arbitrageurs who see a profit opportunity.
Short interest in DirecTV jumped 39.1 percent in the two weeks to March 13, the fifth-largest increase on the Nasdaq over that period. Short sellers make a bet that a company's stock is overvalued and profit when the share price falls.
The weak economy and slowing subscriber sales may provide one reason to sell DirecTV, but analysts say the stock is also being sold short as one half of an arbitrage trade.
The other side of the trade then goes long on the Liberty Media Entertainment tracking stock, which owns around 54 percent of DirecTV. Liberty Media Entertainment also owns movie pay channel Starz Entertainment, cable sports networks and other assets.
The arbitrage opportunity is created because the 54 percent stake in DirecTV is worth around $12.7 billion, while Liberty Media's market capitalization is currently around $10.4 billion, excluding debt of approximately $1.2 billion.
'By our estimates, investors purchasing Liberty Entertainment today 'create' DirecTV for about $16 a share compared with its market price of $23,' said Chris Marangi, a portfolio manager for Gabelli & Co, which is a long-term holder of DirecTV.
That 30 percent valuation discount narrowed from highs of 50 percent late last year after Liberty Media, owned by cable pioneer John Malone, said in December it will split off most of Liberty Entertainment into a new publicly traded unit.
Liberty Chief Executive Greg Maffei said last month he expects the split-off to close by May or June.
BEST IS OVER?
Some investors are also selling short based on a belief that DirecTV and its stock will have less room to grow in 2009, analysts said on Wednesday.
'Investors are shorting DirecTV against LMDIA (Liberty Entertainment) to arbitrage the spread while others are shorting it against Dish Network to play the valuation discrepancy,' said John Hodulik, analyst at UBS.
DirecTV shares are down just 7 percent in the year to date compared with shares of its closest rival Dish Network Corp which is down 45 percent. Shares of cable companies Comcast Corp and Time Warner Cable Inc are down 32 percent and 66 percent, respectively.
DirecTV added subscribers last year when all its major cable and satellite rivals lost video subscribers.
Collins Stewart analyst Thomas Eagan said DirecTV is trading at around 4.8 times his 2009 EBITDA (earnings before interest, taxes, depreciation and amortization) forecast, which is a similar multiple to cable companies.
'Typically, DirecTV has traded below cable because they have just one revenue stream of video compared with cable operators who also have broadband and phone,' said Eagan.
DirecTV was the only major publicly traded U.S. pay-TV provider to add video customers in 2008 and has indicated it will have a strong 2009. This week the company extended its exclusive NFL Sunday Ticket deal and last month it kickstarted its lucrative distribution partnership with AT&T Inc.
'The question investors are asking is how can DirecTV get any better?' said Eagan.
LMDIA closed up 25 cents at $20.10, while DirecTV shares gained 24 cents to end at $23.14 on Wednesday.
(Reporting by Yinka Adegoke, editing by Matthew Lewis)
((yinka.adegoke@thomsonreuters.com; + 1 646 223 6081; Reuters Messaging: Yinka.adegoke.reuters.com@thomsonreuters.net; )) Keywords: DIRECTV/ (Click on http://blogs.reuters.com/category/themes/mediafile/ to see Reuters MediaFile blog) COPYRIGHT Copyright Thomson Reuters 2009. All rights reserved. The copying, republication or redistribution of Reuters News Content, including by framing or similar means, is expressly prohibited without the prior written consent of Thomson Reuters.