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Liberty Spins Discovery Unit

7/22/2005 8:00 PM Eastern

Liberty Media Corp. completed the long-awaited spinoff of its Discovery Holding Co. unit last Thursday, but at least one analyst urged shareholders to dump their stock as soon as possible.

Discovery Holding began trading July 21 under the symbol “DISCA” and opened at $14.85 per share. The stock fluctuated between a high of $15.10 and a low of $14.20 July 21 before closing at $15.

Liberty shareholders received 0.10 shares of Discovery Holding for each Liberty share they own. Based on that distribution, Discovery Holding has about 288 million shares outstanding.

Fulcrum Global Partners analyst Richard Greenfield expects the price to fall, setting a 12-month price target of $11.50 on Discovery Holding July 21. He also slapped a “sell” rating on the stock.

Liberty announced the Discovery spin in March. The new entity includes Liberty's 50% stake in cable networks Discovery Communications Inc. and 100% of Ascent Media Group Inc., which provides production services to the film and television industries.

Liberty had expected Discovery's other equity holders — Cox Communications Inc. and Advance/Newhouse Communications Inc. each own 25% — to participate in the spinoff, but that didn't happen.

Writing in a research report that Discovery looked more “like a tracking stock,” Greenfield pointed to the lack of participation by Cox and Advance/Newhouse, declining ratings at some Discovery networks and the new entity's inability to access DCI's free cash flow.

At Discovery Communications, revenue and cash flow have been rising. But declining ratings at two of its most popular networks — Discovery Channel and TLC — are expected to drag financial results.

Liberty has said it expects DCI's revenue to increase in the mid-teens and cash flow in the low double digits for 2005. Greenfield believes it will be even lower.

Greenfield said he was lowering his 2005 revenue estimate for the networks to $2.6 billion (a 12% increase) and his 2005 cash-flow estimate to $723 million (up 9%). He also lowered his 2005 estimates for DCI: revenue of $2.9 billion (up 10%) and cash flow to $793 million (up 10%).

Greenfield questioned the prospect that DHC could be used as an acquisition vehicle. With no access to Discovery's cash flow — although DHC does have $215 million in cash — Greenfield estimated that DHC would have to initiate an equity offering for an acquisition, which would further dilute the stock.

September