Content

Liberating TV Stations

8/25/2006 8:00 PM Eastern

John Malone’s Liberty Media Corp. could have a deal in place to become a television-station owner by New Year’s Eve.

Talks between Liberty and Rupert Murdoch’s News Corp. regarding Liberty-owned News Corp. voting shares could be resolved by the end of the year, according to a research report by Merrill Lynch & Co. media analyst Jessica Reif Cohen.

Liberty and News have acknowledged talking about possible deals involving Liberty’s 16% equity and 19% voting interest in News, valued at about $10 billion and second only to News chairman Murdoch and his family’s holdings. The companies have said little else about the talks.

'CASH-RICH’ TALKS

Most analysts, Reif Cohen included, believe Liberty and News are negotiating a “cash-rich split-off” deal for the stock, so that News Corp. can swap an operating asset and cash for the shares in a tax-efficient manner.

In a cash-rich split-off, up to 75% of the purchase price can be in cash.

While News could offer up assets such as its Free Standing Inserts business (valued at about $2.8 billion), or its Publishing division (valued at $1.5 billion), it’s more likely a deal would include a portfolio of News-owned small-market television stations outside of National Football Conference cities and cash, Reif Cohen said. News’s Fox broadcast network has a contract with the National Football League to televise games involving the NFC through 2011.

As many as 12 Fox stations — Boston; Cleveland; Denver; Baltimore; Kansas City; Milwaukee; Salt Lake City; Birmingham, Ala.; Memphis, Tenn.; Greensboro, N.C.; Austin, Texas; and Gainesville, Fla. — are in non-NFC markets and could end up in the deal.

One potential holdup: the TV stations are owned by Murdoch, a U.S. citizen, mainly because News was formerly based in Australia and federal rules prohibit foreign television-station ownership.

But after News switched its corporate home to New York last year, Murdoch asked the FCC to transfer the station licenses to the corporation. The agency hasn’t acted on that request yet.

Reif Cohen said News could assemble a portfolio of TV stations for an asset-contribution value ranging from $1.3 billion to $2.6 billion. Using private-market values of 13 times cash flow, at 25% of a total cash-rich split, the stations could be part of a deal worth $5 billion to $10 billion.

COULD LEVER UP

Liberty hasn’t been in the broadcast-media business before, but Reif Cohen said the stations are appealing anyway, because they generate cash and can absorb more debt.

She estimated that under Liberty, the stations could raise its indebtedness level to the equivalent of five to seven times the $100 million to $200 million in annual cash flow they generate, providing Liberty an additional $500 million to $1.4 billion in financial capacity.

The money could be used to buy back Liberty shares, she said.

October
November