All on DirecTV watch after deal

Dish merger, new TiVo relationship are possibilities

Now that Rupert Murdoch and his News Corp. and John Malone and his Liberty Media have made it official that they are splitting up, the wave of speculation about what happens next has begun.

Tops on the list is whether DirecTV Group finally will merge with EchoStar Communications Corp.

The long-expected News Corp.-Liberty deal, announced Friday, has Liberty giving up its 16.3% stake in News Corp. in exchange for News Corp's. 38.5% stake in DirecTV Group. News Corp. also will pay Liberty $550 million in cash and give it regional sports networks FSN Northwest, FSN Pittsburgh and FSN Rocky Mountain.

In effect, News Corp. is buying back $11 billion in its own stock that was held by Liberty Media, which had been the conglomerate's second-largest investor behind the Murdoch family.

The swap, which should happen by the middle of next year following regulatory and shareholder approval, is poised to move Liberty into the U.S. media big leagues by adding distribution muscle to its content assets with its control of satellite TV giant DirecTV, which boasts 15.6 million subscribers. (DirecTV rival EchoStar said Friday that its Dish Network surpassed 13 million subscribers.)

The companies said Friday that "it is expected" that DirecTV president and CEO Chase Carey will remain in that role, though Liberty will appoint new directors to fill board seats to be vacated by News Corp. representatives.

The Liberty-News Corp. agreement comes after more than two years of on-again, off-again talks and didn't surprise Wall Street, though some see more advantage for Liberty than News Corp. or DirecTV. After the deal was announced Friday morning, shares of Liberty Capital rose 4.5%, while Liberty Media shares fell 1.4%. DirecTV shares were off 1.8%, and News Corp. shares dropped fractionally.

Moody's Investors Service has since lowered its rating outlook on DirecTV to negative from stable, saying Liberty Media is a speculative-grade company that employs more aggressive financial policies than does News Corp.

Some observers pegged the value of the News Corp. shares that Liberty is giving up at $11.2 billion, while News Corp. was giving Liberty roughly $12.6 billion in cash and other assets.

News Corp. shareholders, though, will benefit from reduction of outstanding shares, and analysts expect that News Corp. will buy back up to $3.4 billion more of its stock in the coming years.

The deal also eliminates the risk that News Corp. assumed when it bought DirecTV, a one-product business, said Goldman Sachs analyst Anthony Noto.

Noto told clients that News Corp. was selling its DirecTV shares for a fair price of $21, despite the fact that the stock closed Friday at $24.55, because it represents a slight premium to the stock's six-month average price. He also noted that the sale price is well above the $14 per share that News Corp. paid for its DirecTV stock.

Some analysts suspect that Malone will pursue the merger of DirecTV with EchoStar, an arrangement that might receive regulatory approval since Murdoch will be out of the picture.

"Politically, Malone is less of a lightning rod for criticism," said Phillip Swann, an analyst with TVPredictions.com.

Swann also sees the potential for Malone to simply sell DirecTV to a telecommunications company, particularly AT&T, which has been bundling its service with DirecTV's for years.

"We're all going to wait for the other shoe to drop," Swann said. "I don't see Liberty buying DirecTV just to hold it in its current form."

Other changes to look for could include stepped-up efforts at video-on-demand, which DirecTV will offer via high-speed Internet connections by about the middle of next year, and perhaps a shift in DVR strategy. DirecTV stopped marketing DVRs made by TiVo in favor of ones from NDS Group, in which News Corp. has a stake. When News Corp. no longer controls DirecTV, things could change.

"TiVo hopes Liberty is sitting back saying, 'Gee, it would be wonderful to welcome TiVo back into the fold,' " Swann said.

Murdoch and Malone were business allies once, though their relationship cooled in recent years. In late 2004, Liberty converted its nonvoting stock in News Corp. to a large voting stake without telling News Corp. ahead of time. Murdoch, who has controlled about 30% of News Corp., put in place an anti-takeover provision, or "poison pill," to prevent a hostile takeover.

Liberty executives, including chairman Malone and president and CEO Greg Maffei, repeatedly had said that they were supportive of News Corp. management and had no hidden agenda.

The two parties in their discussions focused mainly on producing the most tax-efficient transaction as Malone especially is known for abhorring tax bills. Observers estimated that Liberty could save about $2 billion in capital gains taxes in the final deal, with News Corp. saving more than $1 billion.

The stepped-up tax basis for Liberty adds about $15 per share in value, Bear Stearns analyst Spencer Wang said.

Paul Bond reported from Los Angeles; Georg Szalai reported from New York.
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