News Corp. swaps DirecTV stake with Liberty

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Rupert Murdoch and his News Corp. and John Malone and his Liberty Media made it official Friday: they're splitting up.

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

News Corp. in effect 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 ought to happen by the middle of next year after regulatory approval, should move Liberty into the U.S. media big leagues by adding some distribution muscle to its content assets from its taking control of satellite TV giant DirecTV, which boasts 15.6 million subscribers. DirecTV rival EchoStar Communications said Friday its Dish Network surpassed 13 million subscribers.

The companies said "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 that will 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 on Friday saw more advantage for Liberty than News Corp. or DirecTV. Shares of Liberty Capital rose 4.5% Friday while Liberty Media shares fell 1.4%. DirecTV shares were off 1.8% and News Corp. shares dropped fractionally.

After the deal was announced Friday morning, Moody's Investors Service lowered its rating outlook on DirecTV to negative from stable due to Liberty Media being 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 was 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 Friday that News Corp. was selling its DirecTV shares for a fair price of $21, despite the fact that they closed Friday at $24.55, because it represented a slight premium to the stock's six-month average price. He also noted that the sales price is well above the $14 per share that News Corp. paid its DirecTV stock.

Mudoch and Malone were once business allies, though their relationship cooled in recent years. In late 2004, Liberty converted its non-voting 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, have repeatedly said they are supportive of News Corp. management and had no hidden agenda.

The two parties in their discussions focused mainly on the most tax-efficient transaction as Malone especially is known for abhorring tax bills. Observers have 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, said Bear Stearns analyst Spencer Wang, would add about $15 per share in value.
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