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Malone Buyout In Works?

12/05/2004 7:00 PM Eastern

News Corp.’s $1.75 billion debt offering last week could be the first in a series of moves to get Liberty Media Corp. chairman John Malone off the media giant’s back.

Liberty raised eyebrows last month when it dealt with Merrill Lynch International to swap some nonvoting News Corp. shares for voting shares. The deal could enable Liberty to increase its voting stake in News to 17% from 9%, second only to chairman Rupert Murdoch’s 30% voting interest.

Murdoch was apparently surprised about the Liberty purchase — the Denver-based company did not notify News Corp. of its intentions until after the deal was announced. While Murdoch has publicly played down the significance of the Liberty transactions, News Corp. did initiate a “poison pill” just days after Liberty announced its deal that would be triggered if any party attempted to acquire more than a 15% voting stake in News Corp.

NO MEETING YET

Late last month, Murdoch said that he intended to meet with Malone in about 30-to-60 days to discuss alternatives.

Sources said that meeting hasn’t taken place yet, but the announcement of the debt deal has some analysts believing that the News Corp. is setting the stage for an eventual transaction with Liberty.

Fueling the speculation: News Corp. doesn’t appear to need the cash it will get from the bond offering.

According to a report by Fulcrum Global Partners media analyst Richard Greenfield, News Corp. currently has about $4.15 billion in cash on hand and net debt of $4.55 billion.

Greenfield wrote in a report that unless News Corp. has decided to make a major interest rate bet (interest on the bonds is attractive at about 5.9% weighted average), “we believe yesterday’s [Nov. 30] transaction signals they are contemplating a transaction that requires significant cash.”

News Corp. declined to comment on the bond offering.

Liberty also declined comment.

Greenfield wrote that Liberty would be loath to part with its voting interest in News Corp. just yet — the voting stake is the only real leverage Liberty has for a larger content transaction with News — but could be seeking a way to unload at least a portion of nonvoting News Corp. stock.

News Corp. nonvoting shares are no longer convertible into voting shares as a result of the poison pill.

Instead, Greenfield envisions Liberty exchanging its 327 million nonvoting News Corp. shares for cash and a small operating business.

Such an arrangement — a “cash-rich split-off” — has been made before by several companies (including Liberty). It is a tax-efficient means of unwinding a stock interest in a company.

SPLIT-OFF WITH COMCAST

Back in July, Liberty initiated a cash-rich split-off with Comcast Corp. In exchange for the 120.3 million Liberty shares Comcast acquired when it sold Liberty its interest in cable-shopping channel QVC Inc., Comcast received $545 million in cash and Liberty’s interest in two cable networks (10% of E! Networks and 100% of International Channel Networks).

If it sells the nonvoting News Corp. shares on the open market, Liberty’s tax obligation could be significant. According to Greenfield, Liberty’s cost basis on the shares ranges from $7 to $10 each, implying the tax hit could be as high as $1.2 billion.

If Liberty were able to engineer a cash-rich split-off, it would likely divide the difference of that tax savings — $600 million — with News Corp.

Greenfield estimated that Liberty’s nonvoting stake in News Corp. is worth about $5.8 billion. In return, News Corp. would split off a subsidiary with a value of about $5.2 billion (85% in cash and 15% in assets).

WOULD AID BOTH

The deal would be beneficial for both parties, in that it would allow News Corp. to leverage its strong balance sheet to buy back its own stock at a significant discount, and it would allow Liberty to remove a sizable public investment at a 10% discount — or about half the 20% discount it would have to bear if it sold the stock on the open market and had to pay taxes.

Greenfield estimates that Liberty’s ultimate goal is to eventually unwind the 17% voting stake and its interests in Discovery Communications Inc. and Starz Entertainment Group. But he thinks News Corp. is unlikely to be interested in paying a premium for Starz, and won’t want Discovery until Liberty gains a larger portion of the networks beyond its current 50%.

“Unfortunately for Liberty, we do not see an easy way to unwind their entire Networks division (a tax-free solution would likely take two to three years),” Greenfield wrote.

September