Liberty eyes center stage

Stock swap could put cable firm in spotlight

Joyzelle Davis, Rocky Mountain News

Published September 16, 2006 at midnight

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Liberty Media's apparent attempt to swap stock in News Corp. for DirecTV would be a big step toward returning cable pioneer John Malone's company to the spotlight.

Liberty's assets include premium movie network Starz Entertainment and home-shopping network QVC, as well as stakes in Time Warner, Sprint and Barry Diller's IAC/InterActiveCorp. But Malone's prominence in the media sector dimmed when he sold Tele-Communications Inc., which at the time was one of the nation's biggest cable operators, to AT&T in 1999.

"When you lose 11 million subscribers, your place on the board shifts dramatically," said Jimmy Schaeffler, senior research analyst at The Carmel Group. "When you gain back those 11 million plus another 4.5 million, you once again become an instant kingpin."

Rupert Murdoch's News Corp. is in talks with Douglas County-based Liberty to trade its controlling stake in DirecTV to Liberty in exchange for Liberty's contentious stake in News Corp., according to published reports this week.

Since late 2004, the two companies have periodically discussed ways News Corp. could buy back Liberty's stake, which is the second-biggest voting block after the chunk owned by Murdoch's family. News Corp.'s 38 percent stake in DirecTV is valued at about $9 billion, a little less than Liberty's 19 percent stake in News Corp., which is valued at about $11 billion.

Whether the DirecTV deal would further Liberty's recent efforts to become more palatable to investors remains open to debate. Liberty has said it wants to unwind its investments, where the majority of the company's value resides, and transform itself into an operating company.

"Liberty has been pushing the same message loud and clear for years now: The company's plan is to divest its passive, noncash-generating stakes for cash or cash flow-generating assets," wrote Andrew Baker, an analyst with Cathay Financial, in a note to investors. "Liberty's acquisition of News Corp.'s stake would represent a divergence from that plan" because Liberty would control only 38 percent.

Earlier this year, Liberty swapped its stake in IDT Telecom in order to acquire IDT's entertainment businesses. The Time Warner swap has been slower going. Liberty sold its 50 percent stake in Court TV in May to Time Warner, but the long-speculated exchange of the Atlanta Braves baseball team has yet to happen.

During a presentation Thursday at Merrill Lynch's annual media conference, Liberty Chief Executive Greg Maffei said talks to exchange Liberty's shares in Time Warner are continuing.

Calling the deal "complicated," he said the Braves alone aren't worth enough to compensate Liberty for its stake. The fact that New York-based Time Warner has put up some of its magazines for sale is good, Maffei said, because it means "other bites to the apple might come along."

Time Warner's publishing unit said this week it plans to sell 18 titles, including Boulder-based Ski and Skiing.

As for the talks with News Corp., Maffei said they were ongoing, but nothing has been decided.

Analysts were similarly skeptical about how well DirecTV would fit in Liberty's disparate empire.

News Corp.'s satellite systems reach every corner of the globe, and it also owns valuable programming assets like Fox and regional sports networks.

"There are a lot of strong synergies for DirecTV to be affiliated with News," said Todd Mitchell, an analyst with Kaufman Bros., who on Friday changed his rating on DirecTV to "hold" from "buy" on the news. "I don't see what Liberty brings to the table.

"Liberty is for a large part not an operating company," he said. "It's a super mutual fund with a media focus."

But Steve Mather, a Los Angeles-based analyst with Sanders Morris, disagreed. The two companies that Liberty owns outright, Starz and QVC, are both programmers, and it also owns a large stake in Discovery Communications.

"It makes sense for Liberty because it's involved in aspects of multichannel video distribution," Mather told Bloomberg News.

News of the potential swap comes as both DirecTV and rival EchoStar's Dish Network face increasing competition from cable operators, who are winning customers with their so-called triple play bundles of Internet, phone and video services. Several analysts noted that the fact News Corp., the biggest global satellite operator, is considering selling DirecTV doesn't bode well for the outlook for Douglas County-based EchoStar, either.

"DirecTV isn't the asset it was two or three or four years ago," Schaeffler said. "Unless and until they get a triple play they control, DirecTV will remain at the mercy of the cable companies and the telcos."

The DirecTV swap is reportedly one of several options being considered. Other assets that reportedly have also been on the table at various times include the National Geographic network and some of News Corp.'s U.S. television stations and print insert business.

Liberty's goal is to keep tax repercussions low for transactions involving stakes in News Corp. and other firms. Under law, Liberty could do that by exchanging its stake for a combination of News Corp. assets and as much as 75 percent in cash, according to Maffei.

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