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We downgrade our recommendation on Liberty Media Corp. (LMCA - Analyst Report) to Underperform based on its disappointing third quarter of 2013 financial results. Both the top and the bottom line fell below the respective Zacks Consensus Estimate. We do not find any near-term growth catalyst for the company. Currently, Liberty Media carries a Zacks Rank #5 (Strong Sell).

Why the Downgrade?

Liberty Media is steadily restructuring its business model, targeting to control several subscription-based businesses. We believe that the strategic investment in several subscription-based companies will make the company’s overall financials volatile. Liberty Media currently controls a 27.3% stake in Charter Communications Inc. (CHTR - Analyst Report), the fourth largest pay-TV operator in the U.S.

Liberty Media is aggressively pursuing an idea so that Charter Communications can acquire Time Warner Cable Inc. (TWC - Analyst Report), the second largest cable MSO (multi service operator) in the U.S. However, Charter needs to raise at least $25 billion for this takeover, which will significantly leverage the company’s balance sheet.

Even if Charter succeeds to raise that amount from the market, other competitors such as Comcast Corp. (CMCSA - Analyst Report), Cox Communications and several private equity firms may offer more attractive bids for Time Warner Cable.

Liberty Media’s businesses are susceptible to rapid technological changes. Large cable TV operators are increasingly deploying digital TV networks, which are gradually gaining huge market traction. Increasing deployment of personal video recorders, video-on-demand technology and IPTV network are systematically changing the distribution and viewing habits of the common people.

The multi-channel video market in the U.S. is almost saturated.  Roughly, 87% of the TV households in the U.S. are multi-channel TV subscribers. It is not easy to lure customers from competitors since every operator is offering innovative packages.

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