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Fox Done: Liberty Next?

3/27/2005 7:00 PM Eastern

With its $6.6 billion buy-in of the remaining interest in Fox Entertainment Group Inc. out of the way, News Corp. can hunker down to the real business at hand — figuring out a way to buy Liberty Media Corp.’s 17% voting interest in the media giant.

Last Monday, News Corp. said it completed the tender offer for the remaining 18% of Fox it did not own, exchanging 2.04 shares of News Corp. stock for every share of Fox.

Fox, which began trading on the New York Stock Exchange in 1998, was removed from the NYSE last Tuesday.

JANUARY OFFER

The deal had been in the works for months: In January, News Corp. offered to exchange 1.9 shares of News for every Fox share, but increased that offer in March when Fox shareholders turned down the proposal.

According to a press release, News Corp. said a total of 414.9 million Fox Entertainment shares have been tendered. News Corp. had already owed about 82% of Fox equity and 97% of its vote prior to the tender.

News Corp. sold 18% of Fox Entertainment to the public in 1998, mainly as a way to drive value into the News Corp. stock by giving the media giant a U.S.-based security that institutional investors could purchase. But since News Corp. shifted its base from Australia to Delaware in December, there was no longer a need for the Fox Entertainment stock.

Fox Entertainment includes the Fox broadcast-television network, its television stations, the 20th Century Fox movie studio, cable networks such as FX, Speed Channel and Fox News Channel and a 34% equity interest in DirecTV Group Inc.

News Corp. has wanted to work out a deal to buy out Liberty’s voting interest — which nearly doubled from 9% to 17% in December when Liberty exchanged nonvoting shares of News Corp. stock with Merrill Lynch International for voting shares — but had been distracted by the Fox tender offer.

News Corp. chairman Rupert Murdoch was said to be surprised by the Liberty move, and days later initiated a “poison pill” that would prevent any other individual shareholder from acquiring more than a 15% voting interest. Murdoch and his family own a 30% voting interest in News Corp.

News Corp. declined to comment.

Murdoch was said to be traveling in India last week, so it’s likely that any talks with Liberty about its voting stake would not occur until the next few weeks.

Liberty Media also declined comment.

Earlier this month, on a conference call with analysts, Liberty president and CEO Dob Bennett said the company has not had discussions with News Corp. about its stake, mainly because of the Fox buy-in.

“I would not expect negotiations with News Corp. to proceed until that [Fox] transaction is closed and everybody on that side is happy with it,” Bennett said on the March 15 conference call. “At which point, I would guess that discussions between Liberty and News Corp. will proceed.”

Most analysts expect Liberty to try to work out an exchange for the stake — possibly a large block of cash and an operating asset. Liberty’s voting shares in News Corp. are estimated to be worth between $5 billion and $7 billion.

According to several analysts that follow both companies, the most efficient means to do that is through a cash-rich split-off, which allows a company to avoid a big tax hit.

In that type of scenario, News Corp. would spin off a subsidiary with about $4 billion in cash and a small asset. According to tax regulations, the asset in a cash-rich split-off cannot be worth more than 5% of the total value of the separated unit.

FOX MOVIE MOVE?

However, changes in the federal tax laws which would eliminate the cash-rich split-off loophole are expected to take effect on Oct. 1. So if Liberty and News Corp. are serious about cutting a deal, they would have to do so well before then.

According to a report by Fulcrum Global Partners media analyst Richard Greenfield, the most logical asset for News Corp. to include in a split is its movie network, Fox Movie Channel.

FMC, in about 25 million households, is valued at about $364 million, or $15 per subscriber. That would work out to be about 10% of a $4 billion cash-rich split off at an 8% discount, according to Greenfield.

An FMC deal would make sense to Liberty because it could be combined with its existing premium movie programmer, Starz Entertainment Group LLC. While FMC generally shows older movies that Starz, it could be packaged with the Encore thematic multiplex service.

In New York City, Greenfield noted, Time Warner Cable already packages it with Encore — customers that purchase the Encore suite of digital movie channels receive FMC at no extra charge.

September