Street's all aboard Liberty-News

DirecTV, parent company hit highs; deal could come next week

Wall Street observers Thursday largely gave a thumbs up to the expected terms of a deal between Rupert Murdoch's News Corp. and John Malone's Liberty Media, with many suggesting that the transaction could boost both companies' shares.

DirecTV Group and News Corp. shares set 52-week highs Thursday, while Liberty Media's Liberty Capital tracking stock finished close to its year-high.

After sources suggested late Wednesday that the long-discussed transaction could be announced by year's end, at least one source Thursday said the deal could be unveiled as early as next week.

Liberty is expected to swap its stake in News Corp., valued at about $11 billion, for News Corp.'s 39% stake in satellite TV giant DirecTV Group, about $550 million in cash and three regional sports networks valued at about the same amount, according to the New York Times and several Wall Street people.

Analysts said this should be good news for News Corp. shares. "We believe the net impact will be positive for News Corp.," Goldman Sachs analyst Anthony Noto wrote Thursday in a research note. "Our first-take analysis yields 8%-9% accretion to estimated 2008 and 2009 earnings per share, effectively a $11 billion (stock) buyback at no premium for News Corp. stock."

Overall, he said, "This will be a positive for the stock, and we reiterate our 'buy' rating."

Similarly, Pali Research analyst Richard Greenfield estimated 8 cents per share of earnings accretion for fiscal 2008, or about 7%.

Reiterating his "buy" rating on News Corp.'s stock and boosting his target price $2 to $24, he said: "The modest increase in our target multiple accounts for the tax-free removal of what we considered to be a weak asset from News Corp.'s portfolio."

Merrill Lynch analyst Jessica Reif Cohen estimated that the deal could be 7% accretive to News Corp.'s earnings in the current fiscal year, which ends June 30.

"The completion of this deal would also leave News with over $5 billion in cash, which we believe would be used for additional repurchases," she said, reiterating her $27 price target on the company's stock. "With Mr. Malone out of News Corp.'s picture, we anticipate the company will drop its poison pill provision, which should also be welcomed by investors."

Bear Stearns analyst Spencer Wang added that the transaction "also removes an overhang and reduces News Corp.'s (satellite) exposure, although we believe these benefits may already be priced into News' stock."

Originally, most observers expected News Corp. to also include one or more TV stations in the swap. However, Greenfield suggested that "shifting the asset used to cable networks should accelerate the regulatory review process."

Reif Cohen echoed some on Wall Street, saying that the discount attributed by the expected deal to DirecTV's value is "somewhat larger than anticipated," but that a discount was expected "given the recent run-up in DirecTV shares."

Greenfield pointed out that News Corp.'s investment in DirecTV is "up 48% since it announced the acquisition on April 9, 2003, and up 24% above DirecTV's stock price for the 20 days prior to this transaction leaking out in mid-September."

Wang said the reported terms of the proposed deal would suggest "News is buying back its stock at a 12.6% premium to market prices or alternatively that Liberty is receiving a 12.4% discount on DirecTV shares."

For Liberty Capital shares, Wang said he sees about $15 per share of upside from the deal, saying this is "largely the effect of a stepped-up tax basis."

Longer-term, "controlling distribution in the U.S. could provide Liberty much-needed market power, potentially moving it closer toward becoming a vertically integrated media conglomerate," he added.

For DirecTV, analysts expect few major changes after Liberty CEO Greg Maffei at an investor conference Wednesday commended management on its performance.

Nonetheless, some are bearish on the outlook for satellite TV firms, even though they admit DirecTV shares could remain strong for now.

"Our basic thesis on DirecTV is that a stand-alone satellite business in the U.S. is not a good business, given the increasingly competitive environment that DirecTV (and EchoStar) will face from bundled competitors that can provide broadband into the home," Greenfield said. Despite this, "investors in DirecTV are likely to be excited by the fact that Liberty may want to increase its ownership above the level acquired from News Corp."
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