Murdoch, Malone Make Nice

The heads of News Corp. and Liberty Media are nearing a deal that gives Liberty a satellite stake and Murdoch's family a tighter hold on News Corp.

If you're John Malone, your whole life is one big episode of Deal or No Deal. And this week, it appears, the wily billionaire and chairman of Liberty Media (LINTA) has struck what amounts to his biggest deal in years—swapping Liberty's 19% stake in News Corp. (NWS) for News' 39% stake in its DirecTV Group (DTV) satellite service, $500 million in cash, and three regional sports networks. The transaction, if completed, would eliminate a big headache for News Corp. Chief Executive Rupert Murdoch. Murdoch is likely to retire Liberty's shares, which would raise his nearly one-third stake in News Corp. significantly and bolster his family's control of the company (see, 9/18/06, "Murdoch to Bid Satellite Goodbye").

But what about Malone, the ever-plotting onetime King of Cable? Malone, who never met a tax loophole he didn't like, has struck a fabulously tax-efficient deal with News Corp., essentially swapping News Corp. shares that Liberty values at $1.7 billion for assets valued north of $11 billion. How do you essentially increase your assets by $10 billion and pay no taxes on the gain? Just ask Dr. Malone and the Internal Revenue Service.

O.K., but with John Malone on the loose and holding an asset that generates strong cash flow from more than 15 million (and counting) subscribers, you know that there's another deal swirling around in that fertile gray matter. For starters, there is the possibility that Malone would seek a merger with EchoStar (DISH), DirecTV's largest competitor, with more than 10 million subscribers. Easy to do? Nope. Federal regulators nixed an earlier bid by EchoStar CEO Charlie Ergen to buy DirecTV before Murdoch got his hands on it.

Changed Regulatory Climate

But things have changed: Large cable operators such as Comcast are now beating satellite operators by offering a "bundle" of telephone and data services along with TV. Telephone companies are soon to begin offering video as well. All that has cut into satellite's once-robust subscriber growth levels. And if Malone can get Washington to agree, he could turn DirecTV over to Ergen, one of the media world's shrewdest businessmen.

Malone could increase the 39% DirecTV stake to perhaps 50% or more. That would allow him to use what Liberty Media CEO Greg Maffei told an investor conference on Dec. 6 was "distribution muscle" to help promote Liberty's TV channels, which include stakes in shopping channel QVC, the Discovery Network, and others. By owning more than half of DirecTV, he could theoretically get a better deal than if both companies were separate and publicly traded entities. Or he could issue a special dividend, which Sanford C. Bernstein & Co. analyst Craig E. Moffett estimates could be as much as $7 a share if the company piled debt onto what he sees as an underleveraged balance sheet. That, Moffett also says, "could create a more shareholder-friendly capital structure, and boost returns to equity." In short: Malone could make the stock hot once more.

All of that sounds great, but Malone loves flashy deals. So try this one on: With DirecTV in his pocket, Malone approaches AT&T (T), the former SBC, about joining forces. AT&T, which is rolling out video service over the Internet, gets a far more robust way to ship TV signals to consumers. Satellite would give customers more channels and more high-definition programming than would so-called IPTV (Internet protocol TV), experts say. And AT&T would give DirecTV broadband data service, which satellite currently doesn't offer widely and desperately needs to compete with cable TV (see, 9/22/06, "Why Malone Desires DirecTV"). Whatever Malone decides to do, he ought to think of doing it quickly after the deal closes. Citing DirecTV's "daunting challenges," Bernstein's Moffett expects DirecTV's stock to underperform the market.