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Liberty Media intends to establish a new company

Move could lead to acquiring satellite TV giant DirecTV

By Jeff Smith, Rocky Mountain News (Contact)

Published September 3, 2008 at 9:05 p.m.

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Douglas County-based Liberty Media Corp. plans to create a new company out of its Liberty Entertainment tracking stock, a move analysts say could lead to acquiring more or all of satellite TV giant DirecTV.

If the transaction is completed, Liberty Entertainment Inc. would include Liberty's nearly 50 percent stake in DirecTV, as well as its 100 percent holding in Starz Entertainment, a minority stake in Internet provider WildBlue Communications, and other assets. Colorado billionaire John Malone controls Liberty Media.

Morgan Stanley analyst Benjamin Swinburne said in a research note he sees the spinoff as a "likely precursor to (a) further DirecTV transaction." Liberty officials declined comment.

There's also been speculation of a possible DirecTV-Dish Network merger, though that move has been discounted by Malone and Liberty Media CEO Greg Maffei as unlikely given the antitrust environment.

Other analysts have speculated that DirecTV eventually could be sold to a telco like AT&T.

Maffei said in a statement the move to convert Liberty Entertainment from a tracking stock to a public company "will create a stronger currency and allow greater flexibility to pursue our strategic objectives."

Holders of Liberty Entertainment tracking stock don't have legal claim to assets that the stock represents. The move announced Wednesday would give the investors shares in a new company that actually holds the assets.

The conversion, which is expected to take three to six months, also is regarded as the next step of a plan to transform Liberty Media from a holding company to a series of operating companies.

The credit rating agency Fitch, however, greeted the news by placing Liberty Media and QVC ratings on "negative" watch, indicating a possible downgrade in the next six months.

Swinburne said he has been bullish on the entertainment tracking stock primarily because of the DirecTV holding, which he said represents roughly 80 percent of the tracking stock's asset value.

The new Liberty Entertainment company will take on its books the $2 billion in debt incurred when Liberty acquired a controlling stake in DirecTV this year in a stock swap with Rupert Murdoch's News Corp. Some debt currently attributed to Liberty Entertainment will go to Liberty Capital.

Liberty Media said tracking stock shares will be exchanged for shares of the new public company in what is intended to be a tax-free transaction for shareholders.

Liberty Media executives are expected to serve as the executive officers of Liberty Entertainment.

Liberty holdings

* Nearly 50 percent of DirecTV, the country's largest satellite TV company

* 100 percent of Starz Entertainment - movie and other video programming (Starz, Encore) over cable, satellite and the Internet

* 100 percent of Liberty Sports Holdings, regional sports programming in Denver, Pittsburgh and Seattle

* 100 percent of FUN Technologies Inc., online and interactive games provider

* 50 percent of Game Show Network, a cable TV channel featuring interactive games

* 32 percent of WildBlue Communications, a rural Internet provider