Satellite

Liberty to Acquire DirecTV

12/22/2006 2:20 AM Eastern

Liberty Media cut a deal Friday with News Corp. that will see the former acquire the latter's majority stake in DirecTV Group in exchange for Liberty’s 16.3% stake in News Corp., $550 million in cash and three regional sports networks: FSN Northwest, FSN Pittsburgh and FSN Rocky Mountain.

The deal, which has been rumored for several weeks, will put cable pioneer John Malone in control of DirecTV, the nation’s largest direct-broadcast satellite provider, with 15.6 million subscribers.

Liberty will acquire News Corp.’s 38.5% stake in DirecTV as part of the deal.

“We are extremely pleased with the successful, tax-efficient conversion of our News holding. Our investment in DirecTV will create financial, operating, and strategic flexibility," Malone said in a prepared statement. “Liberty's ownership of News has created tremendous value for our shareholders, and we are grateful to Rupert Murdoch and News management.”

Liberty and News Corp. said Chase Carey is expected to continue to serve as DirecTV CEO. Liberty will also appoint directors to fill board seats on the satellite company currently held by News Corp. representatives.

The deal is expected to close by mid-2007.

For Malone, who sold behemoth cable multiple system operator Tele-Communications Inc. to AT&T in 1999, the DirecTV makes him once again a major player in the U.S. pay TV industry.

With DirecTV’s broad 15.6 million subscriber base, Malone can secure broad distribution for Liberty’s Discovery Communications, Starz Entertainment and QVC programming assets and use the satellite provider’s broad reach to launch new networks.

With DirecTV moving to Liberty’s stable, the spotlight now moves to DirecTV rival EchoStar Communications and its Dish Network subsidiary, controlled by satellite pioneer Charlie Ergen.

While Ergen first attempted to merge EchoStar and DirecTV in 2001 -- a deal that was later rejected by the Department of Justice -- some analysts  believe a merger of the two top U.S. DBS players could occur now.

With Comcast, Time Warner Cable, Cox Communications and other cable providers marketing triple-play packages of video, voice and high-speed-Internet access -- and Verizon Communications, AT&T and other telcos expanding into video -- regulators may look more favorably on a DirecTV-EchoStar combination.

“I see regulators and legal people in Washington, D.C., being faced with this [DirecTV-EchoStar] merger in the next three to four years and approving it,” said Carmel Group analyst Jimmy Schaeffler, who has advised EchoStar previously.

A combined DirecTV-EchoStar would result in a DBS powerhouse with 15-20 geostationary satellites capable of offering consumers nationwide about 2,000 channels, Schaeffler said. Such a deal could make a combined DirecTV-EchoStar the powerhouse U.S. provider in pay TV, while cable and telephone companies would be positioned to compete best in offering triple-play packages of video, voice and data.

The deal could also likely result in a shakeup of DirecTV management. While Liberty noted in Friday’s announcement that DirecTV CEO Chase Carey is expected to remain CEO, Schaeffler said he expects a new management team to be in place at DirecTV by the second half of 2007.

Not everyone expects there will be a management upheaval. UBS Warburg analyst Aryeh Bourkoff said in a research note on Friday that UBS expects Carey will remain DirecTV CEO.

UBS said it believed the deal would be positive for News Corp., which it expects will use cash from the deal to acquire more News Corp. shares.

“We would look for News Corp. To get a new authorization for a buyback program (as the exchange will use the balance of the existing program, estimated at the $3.38 billion pre-transaction), which could be further accretive to our [earnings per share] estimates for news Corp. during fiscal 2008 and beyond,” Bourkoff wrote.

Merrill Lynch analyst Jessica Reif Cohen said estimated Friday that News Corp. saved an estimated $1 billion in taxes that it would have paid if it hadn’t structured the tax efficient deal.

The Wall Street firm reiterated its $27 price objective for News Corp., noting that its price target doesn’t include any value for the media giant’s growing Internet presence.

The deal, which had been anticipated for several weeks, had little impact on Liberty or News Corp. stock. By 2 p.m. on Friday, News Corp. stock was trading at $22.45, down 7 cents per share, while Liberty stock was trading at $21.70, down 17 cents per share.

See Also:
Cable Cowboy Turns Satellite Slinger

Ken Auletta Interviews John Malone, 2002

Liberty Media's Holdings

Liberty Media History

Liberty Media Financial Snapshot

Calculating Murdoch's Wealth

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