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Liberty Entertainment Spin-off Could Lead To DirecTV Deal

Liberty Entertainment Spin-off Could Lead To DirecTV Deal

September 03, 2008: 01:43 PM EST



Liberty Media Corp.'s spin-off of its entertainment tracking stock (LMDIA), which the company announced Wednesday, could pave the way for the company to acquire all of DirecTV Group Inc. (DTV).

Liberty Media Entertainment, the tracking stock that Liberty plans to convert tax-free into equity shares of a new Liberty subsidiary, will own a stake in the satellite television giant of nearly 50%, along with the Starz Entertainment movie networks and other assets.

Liberty Media and DirecTV have both acknowledged publicly that the convoluted ownership structure of DirectTV limits its strategic options. By giving owners of Liberty's entertainment tracking stock a direct stake in the underlying assets, Liberty is opening the door to a tax-friendly deal that would combine ownership of the satellite TV company into one stock.

"Once Liberty Entertainment becomes an asset-backed stock, we expect it will seek to merge with DirecTV into a single common stock," said Tom Eagan, senior media analyst with Collins Stewart. "The transformation into an asset-based stock is important. We believe DirecTV's board and shareholders are more amenable to accepting Liberty Entertainment shares as a currency if LMDIA is an asset-backed stock."

Eagan predicts Liberty Chairman John Malone, known for his ability to avoid paying large tax bills, will look to acquire DirecTV and perhaps sell it to a phone company seeking a high-end television service, like AT&T Inc. (T).

LMDIA shares were recently trading up 0.3% to $27.15, while DirecTV shares were down 1.7% to $27.16.

A spokesman for DirecTV declined to comment, but on a recent conference call, DirecTV Chief Executive Chase Carey said "clearly there would be opportunities to create a more rational" ownership structure of the company.

Liberty Media Chief Executive Greg Maffei said "converting the Liberty Entertainment tracking stock to an asset-backed security will create a stronger currency and allow greater flexibility to pursue our strategic objectives."

Liberty said Wednesday it plans to exchange all shares of Liberty Entertainment tracking stock for shares of the subsidiary, and Liberty Media officers would continue to run the separate company. Liberty expects the spinoff, which requires shareholder approval, to be completed in three to six months.

Liberty Media trades as three separate tracking shares, each with two classes of stock that give Malone voting control over the company. Liberty Interactive ( LINTA) tracks home shopping network QVC and other assets, and Liberty Capital ( LCAPA) holds other investments.

Earlier this year, Liberty swapped its stake in News Corp. (NWS) to become the largest holder of DirecTV. News Corp. owns Dow Jones & Co., publisher of this newswire.

Since that deal, Liberty's stake in DirecTV has grown as Malone has bought more shares and DirecTV has embarked on a $3 billion share buyback.

Liberty's voting control over DirecTV maxed out at 48% under a standstill agreement, but that could be waived as Malone and DirecTV take steps to simplify and consolidate the company's capital structure.

"The benefits of a merged company are clear," said Eagan. "It would attract more investment capital to the single stock, while reducing the arbitrage that currently translates to short-selling of DirecTV."

-By Nat Worden, Dow Jones Newswires;

(David Benoit contributed to this story)

(END) Dow Jones Newswires
09-03-08 1343ET
Copyright (c) 2008 Dow Jones & Company, Inc.



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