Liberty to shuffle its cards

DirecTV merging with assets of Entertainment arm in split-off

DirecTV Group is winning more freedom, flexibility and some entertainment assets under a plan unveiled Monday to merge the satellite TV giant with parts of Liberty Entertainment, which is splitting off of parent Liberty Media.

John Malone's Liberty Media controls a large stake in DirecTV, and a merger of some sort with Liberty Entertainment had been expected.

The deal combines DirecTV with a 65% stake in Game Show Network, game provider FUN Technologies and three regional sports networks; all are part of Liberty Entertainment.

Not included in the Liberty Entertainment split-off is Starz Entertainment, sports-betting service PicksPal, FUN subsidy Fanball and 37% of broadband service provider WildBlue. Those assets will be renamed Liberty Starz, an entity whose common stock is expected to be listed on Nasdaq under the symbols LSTZA and LSTZB.

DirecTV president and CEO Chase Carey will remain in his role, and Malone will stay on board as chairman. DirecTV shares closed down 2.6% on Monday at $23.93.

Among the trickiest questions of the long-expected DirecTV-Liberty Entertainment combination have been governance issues such as what stake and type of stock Malone would hold.

Malone, his wife and associated trusts will hold shares entitling them to about 24% of DirecTV's voting power, but their economic stake amounts to only 3%. The Malones, who mainly will hold special Class B stock in the new entity, have entered into an agreement that requires them to vote their shares in support of the transaction and agree to limitations on their rights to sell or acquire shares. DirecTV has the right of first refusal should the Malones decide to sell their stock.

Carey said Monday that DirecTV would have preferred a single class of stock but noted that the dual-class structure aligns the interests of Malone and other shareholders. He also described Malone as "a positive force" and highlighted that his voting stake is only half of the 48% voting power Liberty holds in DirecTV.

"The transaction will improve our ability to pursue strategic initiatives that can enhance value for all DirecTV shareholders," Carey said. Some Wall Street observers have long suggested that a telecom giant such as AT&T or Verizon could buy DirecTV.

Carey said DirecTV is paying a low-single-digit premium in the deal and will take a charge of $300 million-$400 million for it. He said the premium was appropriate and promised that the deal would start being "marginally accretive" next year.

The companies expect the split-off before the merger, which is eyed for completion in the fourth quarter.

Credit Suisse analyst Spencer Wang said the only surprise for him in the deal announcement was the size of Malone's voting power after the merger. "We would have expected his voting stake in the new entity to be in the range of 15%-17%," he said.

Sanford C. Bernstein analyst Craig Moffett said the deal "simplifies, and thereby improves, what was an overly complex structure." But he also said investor reaction was "relatively tepid" because it limits DirecTV's flexibility to buy back stock and makes an acquisition by a telecom giant less likely over the near term. Moffett argued that "the logic of a deal between a telco and satellite operator remains weak at best." (partialdiff)