DirecTV Within Malone’s Grasp

Washington— John Malone is close to again being a major force in the U.S. pay TV distribution market.

At press time Friday, Malone’s Liberty Media appeared to be hours away from getting federal approval to take control of satellite-TV giant DirecTV Group, which serves 16.8 million subscribers and generates $17 billion in annual revenue.

The Federal Communications Commission was expected to grant approval late Friday (Feb. 22) to an $11 billion deal in which Liberty would acquire News Corp.’s 38.4% interest in DirecTV in exchange for Liberty’s equity interest in News, regional sports networks in Denver, Pittsburgh and Seattle and $550 million in cash, according to parties familiar with the situation.

Justice Department clearance was also expected to come as early as Friday.

Malone led Tele-Communications Inc. of Denver through a series of expansion deals to become the largest cable multiple-system operator in the country. He made his cable exit when he sold TCI to AT&T in early 1999.

FCC approval is expected to include a number of conditions, which would require Liberty Media to:

• Comply with the FCC’s cable program-access rules. This would mean that Liberty and DirecTV could not withhold satellite-delivered channels they own from Dish Network, Comcast, Time Warner Cable or any other pay TV distributor. The “NFL Sunday Ticket” package of out-of-market pro football games would not be affected because it’s owned by the National Football League, not Liberty or DirecTV.
• Submit to commercial arbitration to resolve any disputes on access to its regional sports networks.
• Agree to arbitration with local cable operators and Dish Network over retransmission rights for WFRV-TV, its CBS affiliate in Green Bay, Wis.

The FCC used up 366 days (as of Feb. 22) to review Malone’s deal, even though the agency aspires to complete merger reviews within 180 days.

Holding up the deal at both the FCC and the Justice Department was concern about Liberty Media’s control of DirecTV Latin America and Liberty Global’s ownership of Liberty Cablevision, a cable company with 119,000 subscribers in Puerto Rico.

Malone is chairman and holds a 24.1% voting interest in Liberty Global, a publicly traded company that is separate from Liberty Media, where Malone also serves as chairman and is able to direct approximately 30% of its aggregate shareholder voting power, according to a filing this summer with the Securities and Exchange Commission.

The FCC and Justice Department will give Malone time to resolve the conflicts, according to parties familiar with the discussions. His options include: divesting DirecTV’s Puerto Rico interests; selling Liberty Cablevision; or reducing his stake in Liberty Global and yielding his board seat.

The biggest surprise is that Malone is expected to escape regulatory review as the winner of a major fight with the National Association of Broadcasters over satellite-delivery of local TV signals in dozens of rural markets.

Although DirecTV offers local TV signals in 144 markets, it has no immediate plans to serve more than 150 markets, leaving 60 markets unserved.

The NAB, along with state associations in North Dakota, Kansas and Texas, sought a condition from the FCC that would compel DirecTV to initiate local service in all unserved markets by the end of the year.

FCC chairman Kevin Martin indicated his opposition to NAB’s proposal in a recent letter sent to Capitol Hill.

“Unlike the cable 'must-carry’ statute that requires all cable systems to carry all local stations [sic], Congress chose not to require satellite operators to carry local broadcast signals in every market,” Martin’s letter said.

Martin explained that in markets not served via satellite, DirecTV would deploy a set-top box that would receive digital local TV signals and integrate them seamlessly into tiers that included satellite-delivered channels.

“DirecTV has represented … it is fully committed to offering local broadcast signals in all 210 [local markets] by 2008, either via satellite or via the integration of digital tuners into set-top boxes,” Martin wrote.