Murdoch-Malone deal is glimpse at the future

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CHICAGO -- Rupert Murdoch's willingness to relinquish News Corp.'s hard-won controlling interest in DirecTV in order to fend off a potential threat from John Malone's Liberty Media is indicative of a new industry dealmaking mind-set that will result in the restructuring and even dismantling of media companies in the coming years.

The trading of major assets and the restructuring of major media conglomerates will run deep and long during the next 18 months as players reposition themselves in a digital marketplace governed by new rules.

If Murdoch has cooled on DirecTV's distribution magic since acquiring its controlling interest less than three years ago, it is because of his impatience with how long and how much money it will take to make the satellite platform more competitive with cable and telephone companies by giving it broadband interactivity through a partnership with a wireless provider.

Murdoch said in a June interview that he expected DirecTV to be on its way to making at least a handful of markets interactive by year's end (HR 7/25). Now it appears he is more interested in using News Corp.'s 38% interest in DirecTV to recapture Liberty's 19% voting interest in News Corp., which could threaten Murdoch's dominance of his global media empire.

While there have been some disagreements between Murdoch and Chase Carey, his longtime lieutenant and CEO at DirecTV, on how to pull off a wireless broadband partnership deal, the focus is shifting to how much News Corp. wants Liberty and its founding chairman, Malone, out of its business. At the same time, it is clear that Murdoch does not believe DirecTV holds the same domestic distribution promise that News Corp. has been mining at its other increasingly lucrative international satellite operations including British Sky Broadcasting in the U.K., SkyItalia in Italy and StarTV in Asia.

Murdoch and Carey declined comment for this report. Insiders who know both men well say that in the event of a DirecTV trade, Carey would return to the News Corp. fold, where he has held a number of high-level roles during the past two decades.

DirecTV's strategy under Murdoch and Carey of placing a DVR-equipped set-top box in subscribers' homes has turned out to be only a half-right strategy at a time when consumers are enamored with interactivity -- something that domestic satellite players are far from competing with on their own. The speed with which digital broadband technology has been adopted by media companies and consumers alike has raised the bar on the kind of bundled, interactive voice, data and video competition in which cable excels.

Malone is a technician with long-standing rapport with wireless players like Craig McCaw, with whom DirecTV has been negotiating a prospective WiMax pact. But it is unclear whether he can do much more to advance DirecTV's wireless interactive escapade in an effort to achieve more than its short-term distribution dependence on the telephone companies. Liberty already reaps the benefits of interactivity in its QVC TV and online shopping operation.

While Malone might help expedite a critical broadband WiMax alliance for a national wireless footprint for DirecTV, or a union with its only domestic rival, EchoStar Communications and its Dish Network, he might have his sights set on a bigger play down the road.

Sources who understand Malone's strategy speculate that he could eventually flip DirecTV and Liberty's nearly $3 billion stake in Time Warner to raise more than $10 billion in cash to use as a down payment on a $50 billion-plus media acquisition. At that point, Malone -- a consummate dealmaker who has recently been written off as a power player -- could bid for the likes of Viacom, Time Warner (after the public spinoff of its cable systems) or other content-rich media companies.

It's not all that far-fetched if you accept the notion that even the biggest of media companies face major restructuring in the wake of stagnant stock prices, shifting technology, generational ownership turnover and radically changing economics and business models. Malone and Liberty officials declined comment on this issue.

Although swapping Liberty's 19% stake in News Corp. for News Corp.'s 38% stake in DirecTV would restore Murdoch's majority control of his media empire, it also would provide the kinds of huge tax benefits that have been the trademark of Malone's biggest media deals. Sources say the tax-free swap would involve News Corp. transferring its DirecTV stake, valued at about $9 billion on the current market, along with about $2 billion in cash, to a new corporation created specifically for the deal. It would then swap that corporation to Liberty in exchange for Liberty's roughly $11 billion stake in shares of News Corp.

"We want to resolve this issue, and this is the asset we are willing to part with that Malone wants," says a high-level executive close to the situation. "If we have to get rid of this one asset to satisfy his demands to swap, then we are willing to do this. We can part with this one asset and still be a powerful media company. News Corp. will still have plenty of viable leverage in the global satellite arena."

Pali Capital's Richard Greenfield was a little more direct.

"We believe News Corp. has grown increasingly concerned with the long-term growth prospects of the satellite business in the U.S.," he wrote in a note Friday. "Given the current regulatory environment, it is increasingly difficult to see how DirecTV can re-create BSkyB's recently announced broadband strategy in the U.S. without a high-quality IP pipe into the home, (DirecTV) is at an increasingly disadvantage to competitors (like cable and telephone) that already can provide broadband into the home."

In other words, why sink billions into DirecTV to achieve gains in an already highly competitive domestic interactive market when News Corp. is well on its way to creating billions of dollars of new value with more reasonably priced interactive Web startups like MySpace?

For Malone, acquiring DirecTV would get him and Liberty back into domestic distribution in a major way, years after selling off his Tele-Communications Inc. when it was the country's dominant cable provider. It also would allow him to transform Liberty into more of an operating company and less of a holding company -- something he expressed a strong desire to do in his remarks during Liberty's annual investors day meeting in May.

"The best would be things that are synergistic immediately with our other businesses," Malone says in response to an analyst's questions about trading for and acquiring new assets. "Whether or not we can end up with enough leverage to extract businesses of that nature or we are fortunate enough to do so ... is a function of what you can find."

Even without the interactive long-term path, DirecTV would provide assured access to distribution for Liberty's core programming operations, from QVC to Discovery Communications. And Malone has long had an interest in satellite TV. Liberty considered bidding against News Corp. for control of DirecTV when it was being sold by its former controlling shareholder, General Motors Corp., in 2003. Liberty backed off, worried that News Corp. would simply outbid it, and instead Liberty increased its stake in News Corp. Liberty also considered buying EchoStar several years ago.

To be sure, News Corp. will engage only in a conditional swap of DirecTV, with provisions that guarantee satellite distribution access for the company's channels without the burden of control and ownership of the service.

"A deal is weeks and weeks away," says an executive familiar with the talks. The timing of the talks seems to be dictated by the approach of the Oct. 20 News Corp. shareholders meeting, where one of the items on the agenda is a vote to renew poison pill provisions adopted last year to block Liberty and Malone from making a run at the company. "There are a lot of complicated terms that have to be worked out," the executive says.

Even at this early, fluid stage, the swapping and trading of assets being contemplated by these media giants speaks as much to the future transformation of the industry as it does to this one fascinating power play.
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