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Why Liberty Halted Its 'Forward’ Pass

9/23/2005 8:00 PM Eastern

Liberty Media Corp. said last Monday that it had terminated a forward sale of about 19 million voting shares of News Corp., a deal that one analyst believes is an effort to further simplify the programming giant’s complicated structure.

Liberty said in a securities filing Sept. 19 that it was subject to a variable forward contract with an unnamed financial institution to deliver 19 million News Corp. voting shares for $303.6 million. On Sept. 16, that contract was terminated and the financial institution agreed to pay Liberty $11.6 million.

HOW IT HELPS MALONE

While Liberty did not say who initiated the termination, Lehman Bros. cable and satellite analyst Vijay Jayant wrote in a report that he believes chairman John Malone’s Liberty ended the agreement for several reasons: to reduce its overall complexity by removing hedge positions; to reflect its bullish position on News Corp. shares and its willingness to accept downside risk; and to free up the shares in the event it can reach a deal to sell its voting stake to News Corp.

Liberty and News Corp. have been at loggerheads since last December, when Liberty revealed that it had acquired an 18% voting stake in News Corp. That position was second only to News Corp. chairman Rupert Murdoch and his family (which own a 30% voting stake) and started speculation that Malone was contemplating a takeover of the media giant.

News Corp. quashed that speculation later in December, initiating a shareholder’s rights plan (also called a “poison pill”) that would make it extremely difficult for an individual to acquire more than a 15% voting stake in News Corp. That shareholder’s rights plan was renewed for two years earlier this year.

In the meantime, News Corp. and Liberty were in discussions to sell Liberty’s voting stake, but those talks broke down in August. It is not clear whether the two companies have restarted discussions since then.

At the Goldman Sachs & Co. Communacopia conference last Wednesday, Murdoch said that there was nothing new to report.

“It’s up to John,” Murdoch said at the conference. “He’s got various plans, and if he executes, the poison pill goes away.”

Murdoch added that Malone had wanted News Corp.’s interest in National Geographic Channel, partly in exchange for the voting shares, but the two moguls were far apart on price.

“That was not a possible deal,” Murdoch said, adding that the National Geographic Society (which also owns a stake in the network and must approve any deal) was not interested in the Liberty offer.

Liberty has made several moves to simplify its structure in the past two years, spinning off its international assets in June 2004 into a separately publicly traded company Liberty International Inc. In June 2005, Liberty Media contributed its controlling stake in European MSO UnitedGlobalCom Inc. to LMI, which then changed its name to Liberty Global Inc.

In July, Liberty Media spun off its 50% interest in Discovery Communications Inc. and its 100% stake in Ascent Media Corp., forming the separately publicly traded Discovery Holdings Inc.

TRIMMING HEDGES

In his report, Jayant said that Liberty has also significantly reduced its hedge positions regarding its News Corp. stake — in December, Liberty said it had reduced the size of two equity collars from hedging 80 million News shares to hedging just 13.6 million News shares. Jayant added that Liberty now has hedges on just 7% of its News voting shares (compared to 95% when it originally bought the stake) and 19% of its News Class A nonvoting shares. That willingness to eliminate the downside protection on its News stake is a sign of its “long-term bullish sentiment” on News stock, Jayant wrote.

Removing the hedges on about 174 million News Corp. shares also gives Liberty ready access to that stock if a deal with News Corp. can be reached, Jayant added.

Asked after the Goldman Sachs conference if he was encouraged by those Liberty moves, Murdoch said he was unaware of them.

September