Shares of Liberty Media Corp.'s entertainment-tracking stock
(LMDIA) rose 25% in early trading Monday after the company,
controlled by media mogul John Malone, said it reauthorized a
spinout of the majority of its underlying assets into a new
asset-backed stock.
The move, announced late Friday, is seen as a step toward
simplifying the ownership structure of satellite television giant
DirecTV Group Inc. (DTV), which is 52%-owned by Liberty
Entertainment. Even after Monday's gain in the stock, Liberty's
DirecTV holdings continue to trade at over a 35% discount to
DirecTV's market value.
"Given the last start and stop of the Liberty Entertainment
spin, we do not expect this announcement to close the discount
completely," said Morgan Stanley analyst Benjamin Swinburne. "The
transaction is subject to IRS and shareholder approvals."
Liberty Media first announced plans for spinning off the
tracking stock in September, but it had to backpedal on that in
early November after the global financial crisis sparked a historic
stock market sell-off that brought Liberty Entertainment shares
down by 34% in October. The company's other tracking stocks,
Liberty Capital (LCAPA) and Liberty Interactive (LINTA), were also
pummeled in the sell-off amid concerns about liquidity and the
prospects for U.S. consumer spending.
In a sign of the stress that the financial crisis was putting on
John Malone's media empire, the company announced on Nov. 3 it
would shift some bonds and cash from Liberty Entertainment to
Liberty Interactive in order to shore up its balance sheet.
Shortly before that, the company disclosed that Malone had been
forced to sell $49.5 million worth of Liberty Capital tracking
shares in October to placate lenders about his family's debt, which
includes covenants tied to the value of Liberty Media. Malone
continues to be Liberty's largest shareholder, controlling more
than 90% of each class of super-voting Class B shares in the
company's three tracking stocks.
By completing a so-called "hard spin" of its Liberty
Entertainment assets, Liberty Media hopes to create a vehicle that
it can use to complete a transaction with DirecTV and bring the
satellite company under one roof. That would make it easier for
DirecTV to explore strategic opportunities, such as a sale or
merger with a telecommunications giant, like Verizon Inc. (VZ) or
AT&T Inc. (T).
At an investor conference in New York City last week, Liberty
Media Chief Executive Greg Maffei raised the possibility that his
company could eventually take voting control of DirecTV and merge
it with Liberty Entertainment. Currently, Liberty Media's voting
rights at DirecTV are capped at 48% due to a standstill agreement
between the two companies.
Maffei said telecommunications companies could be interested in
a deal with DirecTV as they lag in competition for television,
Internet and phone-service subscribers with cable giants, like
Comcast Corp. (CMCSA), Cablevision Systems Corp. (CVC) and Time
Warner Cable Inc. (TWC).
"If you look at the scale over the long term, the most natural
partners are probably the telcos because I believe their video
offerings are unlikely to be competitive with what satellite or
cable can offer on a ubiquitous basis across the nation to match
their national footprints," said Maffei. "I can't tell you that
they are going to buy [DirecTV]. I can just tell you it seems very
logical to me, and there certainly has been enough rumors that
they've been interested in things like that."
A spokesman for DirecTV couldn't be reached for comment.
Spokesmen from Verizon and AT&T declined to comment. Verizon
already offers DirecTV in a service bundle to customers who don't
have access to its television offering, Fios, through a partnership
with the satellite company. AT&T has a similar partnership
through its 2006 acquisition of Bellsouth with DirecTV's satellite
rival, Dish Network Corp. (DISH), but that contract expires in late
January, and AT&T has said it will partner with DirecTV
thereafter.
Craig Moffett, analyst with Sanford C. Bernstein & Co., said
telecom companies have little incentive to buy DirecTV because such
a move would do little to improve their cost structure.
"The reason cable is gaining share on the telcos is because they
have a cost advantage," says Moffett. "Unless you can match the
cost structure of a cable operator by offering voice, data and
phone service on one network, then an acquisition won't do you any
good."
Other possibilities include a deal in which DirecTV swaps
DirecTV Latin America with Liberty Media in return for its DirecTV
stake, along with some cash. That would allow Liberty Media to
liquidate some of its DirecTV holdings on a tax-friendly basis and
gain a business in an overseas market with attractive growth
prospects.
Liberty Entertainment could also continue to trade separately
from DirecTV as an asset-backed stock, but that scenario is viewed
as less desirable since it would complicate the satellite company's
ability to maneuver.
Under Liberty Media's latest plan, the owners of its
entertainment-tracking stock would receive shares in a subsidiary
that will hold many of the assets and liabilities currently
represented by the tracking stock. The new entity, which would be a
public company called Liberty Entertainment, would hold the DirecTV
stake, as well as other holdings, including three regional sports
networks. It would also assume $2 billion in debt used to acquire
part of the DirecTV stake.
Pay-television network Starz Entertainment would remain under
the tracking stock, along with WildBlue Communications and some
cash. It's unclear how long the Liberty Entertainment tracker would
continue to exist once the split occurs.
Tom Eagan, analyst with Collins Stewart, said the tracking stock
could be combined with Liberty Interactive shares, which track QVC,
the company's home shopping network.
"This combination would enable Liberty Interactive to raise $1
billion of cash off the $250 million of Starz's cash flow, which
could be used to pay down the QVC debt," said Eagan. "This would
alleviate much the liquidity concern surrounding the QVC debt
covenants."
Shares of Liberty Interactive were recently trading up 4% to
$2.51, while Liberty Capital shares were down a penny at $3.01.
Shares of DirecTV, meanwhile, were down 0.5% to $22.82.
-By Nat Worden, Dow Jones Newswires; 201-938-5216;
nat.worden@dowjones.com
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