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Malone’s Back to Tracking

11/11/2005 7:00 PM Eastern

Liberty Media Corp. chairman John Malone wants to create another tracking stock. Malone — who pioneered the concept of equity that tracks a company’s performance but isn’t backed by hard assets — got the go-ahead from Liberty’s board of directors to pursue one related to Liberty’s interactive television assets.

To be included in the tracker are home-shopping giant QVC Inc., Liberty’s interest in online companies IAC/InterActiveCorp and Expedia Inc. and “a few smaller business ventures,” Malone told analysts during a Nov. 9 conference call to discuss third-quarter results.

Malone would not say when the Liberty Interactive tracker would be issued. “We’ll be coming back to the shareholders with the specifics on that in the not-very-distant future,” he said.

HISTORY WITH TRACKERS

Liberty Media itself was a tracking stock in 1999, after Malone completed the sale of Tele-Communications Inc. to AT&T Corp. In 1999 Liberty spun off its interactive television assets into a separate company — Liberty Digital — headed by former E! Entertainment Television head Lee Masters (now Jarl Mohn). Liberty Digital, which included TCI Music, DMX/AEI Music and GSN, had a successful run amid the Internet bubble — hitting $75 per share in 2000 — but fell precipitously after that bubble burst. Liberty decided to absorb Liberty Digital in 2001, after it dipped to about $2 per share.

In 2000, Liberty spun out Liberty Satellite and Technology, including OnCommand Corp. and stakes in WildBlue Communications, Astrolink International and Sky Latin America. The assets were reclaimed in 2003.

Recently, Liberty has moved to simplify a complicated corporate structure. Last year, it spun off international cable assets to form Liberty Media International (now Liberty Global Inc.). Earlier this year, it put a 50% interest in Discovery Communications Inc. and a 100% interest in Ascent Media Group into a newly publicly traded company, called Discovery Holding Co.

Malone said his goal is to separate Liberty Interactive fully from Liberty Media in two to three years.

An interactive tracker would simplify Liberty Media, which would change its name to Liberty Capital and include its 100% interest in Starz Encore Group and public and private stock holdings, including an 18% voting interest in News Corp.

It could provide a deal currency to acquire other companies in the interactive arena.

The buying power would depend what value is placed on the tracking stock.

According to several analysts, while QVC will contribute its potent cash flow — the shopping channel reported revenue of $1.48 billion (up 14%) and operating cash flow of $306 million (up 13%) in the third quarter — it is unclear what value the other assets will command.

“It all depends on how much debt is moved over,” Janco Partners cable analyst Matt Harrigan said. He said QVC alone should warrant about $5 per share in value. He also said he believes the tracker is a good idea for Liberty, in that it shows what direction Malone wants to take the company.

On the call, Malone said Liberty has several options for Liberty Capital — turning it into a venture capital fund, using it as a vehicle to acquire interactive content or liquidating it.

Harrigan said it’s likely, at least at this point, Malone is leaning toward liquidation.

“It certainly has always been an orphan business,” Harrigan said of Starz Encore. “Ultimately, what makes sense is some kind of transforming transaction — pairing it with a studio or even with Rainbow,” meaning Cablevision Systems Corp.’s Rainbow Media Holdings programming stable.

Harrigan estimated Starz Encore could be worth about $1.3 billion.

One hurdle to a full spinoff of Starz: the movie channel is tied to the Discovery Holding spinoff.

Lehman Bros. analyst Vijay Jayant said when Liberty spun its half-interest in Discovery into DHC, in order for the transaction to occur on a tax-free basis, Liberty had to pair the asset against an existing operational business that would remain within the organization. Starz Encore was that business. As such, there is a one-to-two year minimum time window with which Liberty Media must continue to hold Starz Encore as it relates to the Discovery transaction.

Fulcrum Global Partners’ Richard Greenfield panned the tracker idea. “We believe a tracking stock is a poor method of financial engineering (meaning L is not actually separating the businesses financially), and one that has not excited media investors over the past decade,” he wrote in a research note.

Malone said the ultimate structure of the two companies hasn’t been worked out yet, but the opportunities are many.

“I’m not sure what Liberty Capital is going to be,” Malone said. “It could well be that we want to get aggressive in interactive content. There is one model that our internal corporate development guys are looking at where we get very active in delivering content to wireless devices, for instance. The issue of portability for Starz Encore. There are a number of possibilities.”

MAFFEI IN AS CEO

He said the focus will be on “solving the easy questions first.” One reason for bringing in former Oracle Corp. and Microsoft Corp. chief financial officer Greg Maffei as Liberty’s new president and CEO is to “solve the hard ones,” he added.

Maffei, who’ll replace CEO Robert Bennett, is well known for his financial engineering skills at Microsoft and was in charge of the software giant’s investments in smaller companies. He joined Oracle about four months ago, announcing earlier this week that he would resign to take a CEO position at another company. That company turned out to be Liberty.

Liberty said Maffei will assume the president and CEO titles in the second quarter of 2006, after a brief transition. Malone will continue as chairman and Bennett will remain on Liberty’s board of directors.

September