DirecTV dialogue

Weighing prospects after News Corp. deal

The prospect of News Corp. giving its share of DirecTV to Liberty Media had shares of DirecTV running up for several weeks in anticipation of the event that was finally announced Friday. Wall Street's immediate reaction, of course, was to sell the news, so DirecTV shares shed 1.8% to $24.55.

Going forward, analysts are decidedly split on the prospects for DirecTV stock. Two Wall Street firms downgraded the stock this month and two upgraded it.

Prudential Equity Group analyst Katherine Styponias reiterated her "underweight" recommendation on DirecTV shares Friday, even though when News Corp. gives its stake in the company to Liberty some time next year, the DirecTV "Murdoch Discount" could disappear.

The Murdoch Discount, Styponias said, is typically a 15%-20% discount that investors apply to News Corp. assets because Rupert Murdoch has a history of making decisions that benefit the large, long-term shareholder even if those decisions are out of sync with the best interests of minority shareholders.

"We too have applied a 15% discount to our price target for DirecTV shares," Styponias said, reiterating her $17 price target. Shares closed at $24.59 on Tuesday.

Styponias argues that DirecTV will face stepped-up competition from Adelphia Communications now that it is managed by Time Warner Cable. She also said that the willingness of News Corp. to sell DirecTV is an indication that News Corp. executives are bearish on the satellite TV business.

The Liberty-News Corp. deal announced Friday has News Corp. giving Liberty its 38.5% interest in DirecTV as well as $550 million in cash and three regional sports TV stations. In return, Liberty will give News Corp. its 16.3% stake in News Corp.

"We do not expect any operational changes because of the new ownership," Styponias said. "That said, Liberty may choose to alter DirecTV's financial position vis a vis its balance sheet, willingness to make investments in areas such as broadband, etc."

Moody's Investors Service also weighed in, cutting its rating on DirecTV from "stable" to "negative," while Fitch Ratings went to "stable" from "positive."

"We are concerned that Liberty Media will influence DirecTV to repurchase its shares more aggressively, using debt and leverage in addition to its cash and cash flow to reduce outstanding shares and boost equity returns at the expense of credit quality," Moody's said.
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