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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