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Liberty-News Swap Triggers Speculation

11/05/2004 6:33 AM Eastern

Just what is John Malone up to?

Malone, chairman of Liberty Media Corp., struck a deal that could nearly double his company’s voting stake in News Corp. -- a move that some analysts believe could lay the groundwork for an eventual asset swap with the media giant.

Liberty announced Nov. 3 after market close that it had agreed to a total-return-swap agreement that would allow it to buy 84.7 million News Corp. voting shares from Merrill Lynch International worth about $1.5 billion by April. The complicated transaction would eventually boost Liberty’s ownership stake in News Corp. to 17% from its current level of 9%.

The total-return-swap structure allows Liberty to gain control of a large block of News Corp. stock without having to immediately pony up the cash.

According to a Liberty press release, the swap is scheduled to terminate in April 2005. At that time, Liberty would have to pay Merrill -- in marketable securities or cash -- the difference between the value of the shares (about $17.50 each) and its April trading price if the trading price of the News Corp. shares goes down. If it goes up, Merrill would have to pay Liberty the difference. Liberty also agreed to pay Merrill interest on the value of the shares.

The deal was a one-time window of opportunity for Liberty, as News Corp. received Australian judicial approval for its reincorporation as a U.S.-based company the same day.

Because of the impending domicile shift -- expected to be completed by Nov. 12 -- several Australian index funds had to divest their News Corp. shares.

“There was a unique opportunity to get our hands on a very large block in one transaction,” Liberty spokesman Mike Erickson said.

Erickson added that the deal still needs antitrust approval in the United States and Australian foreign-ownership approval.

While the swap further aligns Liberty’s economic interest with its voting interest in News Corp. -- it currently has 410 million nonvoting shares and 96 million voting shares -- analysts were split as to Liberty’s motives.

Stifel Nicolaus & Co. cable analyst Ted Henderson saw the moves as a way for Liberty to swap its voting shares for operating assets from News Corp., mainly because voting shares are most important to the media giant’s controlling shareholder, chairman Rupert Murdoch. Murdoch and his family own about 30% of News Corp.’s voting stock.

“To us, this gives Liberty a position in a more valuable currency to possibly transact with News Corp. specifically, or as currency to acquire another operating business,” Henderson wrote in a research report.

Citigroup Smith Barney cable analyst Niraj Gupta saw the moves as potential first steps in the breakup of Liberty, writing in a report that the deal “makes Liberty an increasingly attractive long-term acquisition target for News Corp.”

Erickson would not comment on speculation. He added that Liberty has long said that it would be interested in swapping stock it owns in public companies for operating assets, but it has never mentioned News Corp. specifically.

In a conference call with analysts to discuss News Corp.’s quarterly results, Murdoch said he didn’t know what Liberty’s motives were, but he was “not losing sleep over it.”

“John [Malone] is buying more shares,” Murdoch said on the conference call. “It confirms that he has an eye for value.”

But Murdoch was unaware of the Liberty move until it was completed -- the second time since January that Malone did not inform him prior to purchasing a big block of News Corp. shares. And that started some tongues wagging.

“We do not believe Mr. Murdoch is pleased with Liberty’s maneuvers and, in turn, Mr. Murdoch and News Corp. are likely to respond over the next several months,” Fulcrum Global Partners LLC media analyst Richard Greenfield wrote. “We sense that relations between News Corp. and Liberty are not what they once were.”

Erickson said Liberty’s relationship with News Corp. hasn’t changed.

“If you were buying a huge chunk of stock of a company, would you talk to anybody on the chance that it would get leaked and run the price up?” Erickson asked. “Both times, we’ve called [Murdoch] as soon after the transaction was done as possible. There wasn’t anything nefarious. We didn’t talk to anybody.”

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