Liberty Media Consolidates Stake in DirecTV

In the restructuring, Liberty Entertainment will split into two units. One will own three regional sports networks -- Fox Sports Pittsburgh, Fox Sports Rocky Mountain and Fox Sports Northwest -- plus the Game Show Network, $80 million in cash, $2 billion in debt and Liberty Media’s 57 percent interest in DirecTV. That company will merge with DirecTV and carry its name. The other will become Liberty Starz, consisting of Starz, PicksPal, Fanball, Fun Technologies and $650 million in cash.

Liberty Media will keep a 24 percent voting share in DirecTV and a 3 percent financial interest. Liberty gained control of DirecTV -- along with the three regional sports networks - by buying News Corp.’s 42 percent ownership in 2008.

Merging DirecTV into Liberty Entertainment could set it up for a possible sale, analysts said. With the spin-off complete, there’s a “reasonable likelihood of a potential sale” of DirecTV to a telco, Hudson Square Research analyst Jeff Wlodarczak said. Hedge-fund manager John Paulson also seems to believe that a sale of DirecTV is possible. His fund has more than doubled its stake in Liberty Media to 44.7 million shares, from 20 million in late September.

Verizon and AT&T have spent billions setting up their FiOS and U-verse pay-TV services, but have signed up only 2.7 million and 1.8 million subscribers. Those numbers give Verizon and AT&T little leverage in negotiating carriage agreements, analysts said, and adding DirecTV’s 18.4 million subscribers would instantly make the new owner a major player.

DirecTV has a “warm and close relationship” with AT&T, Qwest and Verizon, which all resell its satellite service, Liberty Media Chairman John Malone said. And DirecTV wants to add wireless broadband to its services, which would require “a deepening of their relationship with one or more” of the telcos, he said. “Clearly a close relationship with the telcos is an important ingredient for DirecTV in the future, but whether that goes beyond a contractual relationship remains to be seen,” Malone told us. “Clearly they are very compatible with each other.” A DirecTV spokesman declined to comment.

In hiring Pepsico executive Michael White as DirecTV’s new CEO, the satellite company reached outside the industry, Malone said. He said he was skeptical at first of White as a candidate for the job but changed his mind after the first interview.

Liberty Starz, too, should benefit from the new structure, by getting a higher profile, analysts said. The Starz Channel has more than 17.5 million subscribers but has languished in the shadow of HBO and Showtime Networks because it doesn’t offer original programming. That’s expected to change with the airing in January of Spartacus: Blood and Sand, analysts said. Liberty Starz also will have more than $800 million in cash and no debt, making the tracking stock appealing to investors.

The DirecTV deal continues Liberty’s track record of acquiring companies, expanding them and spinning them off, said Malone. He said that has been the strategy since the company was formed in 2001 from AT&T assets. Ascent Media, Discovery Communications and Liberty Global have been spun off from Liberty Media, Malone said. Liberty Interactive consists of QVC, the Home Shopping Network and investments in TicketMaster and Expedia. And Liberty Capital has minority investments in Time Warner and Viacom and full ownership of the Atlanta Braves baseball team.

“This is all about growth and disaggregation,” Malone said. “The feeling is that conglomerates don’t work well, but pure plays do work well. Going forward the question is what are the next businesses that can stand on their own and have their own management team.”

Liberty probably will oppose any Comcast acquisition of NBC Universal from GE, Malone said. Concentrating ownership of regional sports channels and a broadcast network in the hands of Comcast will “put a lot of pressure on” program distributors and “could be an indirect tax on the public,” he said. “It all comes down to what the FCC will permit. Given Comcast’s distribution base, they can make it really tough on competitors.” Comcast officials weren’t available to comment.