IACI: Malone Selling His Shares. Should You?

In a filing late Friday, John Malone’s Liberty Media indicted that it sold 2.3 million shares of Barry Diller’s IAC/InterActiveCorp between September 25 and October 1, bringing its ownership stake to approximately 19%. Is that a bearish signal?

Fundamentally, I do not think so. Management of Liberty Media have stated their willingness to part ways with IAC’s shares either because there is no strategic reason to own the shares or due to the nasty spat with Diller over the spin-offs. Could be that Liberty needs to sell equity holdings to avoid being regulated as an investment company, which would increase their cost structure and reduce their ability to conduct tax efficient asset sales and swaps – investors in Liberty Media’s tracking stocks should keep an eye on that. Whatever the reason, the presence of an active seller is likely to keep a lid on the shares for sometime.

In a previous write-up, Stocks to Buy in a Cyclical Advertising Recovery, I listed IACI as one of my picks. The company has $1.8 billion in cash or $13 per share, about 70% of the stock’s value, and is an active share repurchaser, having repurchased 16 million shares in the first half of 2009, and has a new authorization for 20 million shares (cost of ~$400 million today). It appears that share buybacks are the primary use of cash at the moment and the 20 million shares represent about 15% of the outstanding shares. Thus, Diller can more than partially offset the selling pressure from Malone’s 19% stake with buybacks and thus keep the shares stable.

IAC has a nice mix of assets that are growing nicely. Plus it is a derivative play on Google given Ask.com’s search relationship with the search giant. My work and checks have shown a rebound in Google’s CPCs in the past month, which should have a positive effect on Ask.com’s financials. Match.com should improve both its top-line growth and margins in 3Q, excluding the U.K. operations, which was sold to Meetic.

The shares are trading at 5x 2010 EBITDA, below Yahoo at 6x 2010 EBITDA, but largely free of Yahoo’s secular issues. My sum-of-the-parts valuation, values the company at $25, about 30% upside from current trading levels.

3Q09 consensus revenues, EBITDA, and GAAP EPS are $336 million, $43 million (13% margin), and $0.13, respectively. I am calling for an in-line quarter so nothing spectacular. However, I would continue to nibble at the shares as Malone exits his position.