News

Liberty to Split Up a Tracker

8/10/2007 8:00 PM Eastern

With the closing of its acquisition of a 38.5% interest in DirecTV Group on the horizon, Liberty Media said it will split its Liberty Capital tracking stock into two separate entities, a move that was widely expected on Wall Street and one that management said would further reduce the complexity of the company.

Once the DirecTV transaction closes later this year, that asset, as well as three Fox Sports Net-affiliated regional sports networks (FSN Northwest, FSN Rocky Mountain and FSN Pittsburgh) and $585 million in cash, will be housed within a new tracking stock called Liberty Entertainment.

Liberty Entertainment will also include Liberty Media's 100% interest in premium movie channel Starz Entertainment, Starz Media, its 50% stake in cable channel GSN, its 53% interest in interactive-gaming company FUN Technologies, its 32% stake in wireless Internet-service provider WildBlue Communications and $550 million in exchangeable debt.

Liberty Capital would continue as a tracking stock and would include Liberty's minority interests in several media companies, its 89% stake in wireless location technology provider True Position, 11% stake in Hallmark Entertainment Investments and several other smaller media-company stakes.

Liberty Interactive, the tracker that includes its 100% interests in cable-shopping channel QVC and Provide Commerce, a 20% interest in Expedia and 24% stake in IAC/InterActiveCorp, will remain unchanged.

The splitting off of the DirecTV stake and the sports networks — acquired in December from News Corp. in exchange for Liberty's 19% voting interest in the media giant — had been anticipated by Citigroup analyst Jason Bazinet for months. In a July research report, Bazinet estimated that by separating out the DirecTV interest, Liberty may be more free to invest in the direct-broadcast satellite giant, including spending money to develop a high-speed Internet play to compete against cable operators or to pile on additional debt to acquire 100% of DirecTV.

Liberty CEO Greg Maffei seemed to downplay any speculation that his company would boost spending to create its own broadband product, noting on a conference call last Wednesday that high-speed data subscriber growth appears to be on a downward slide, at least for cable operators.

Earlier this month, both Comcast and Time Warner Cable reported slowing broadband-subscriber growth, attributing the sluggishness to normal second-quarter seasonality — when college students disconnect their service after the school year ends — and to a falloff in new housing starts.

Maffei said that could be a sign that the broadband market is moving closer to a saturation point.

“If you were to come with a product in three or four years, the market could be quite saturated. It may turn out that the rate of saturation is occurring much earlier, if you look at those slowing rates. Coming with something that was me-too and didn't offer incrementally differentiated features would not be of high value for our customers and ultimately for DirecTV and/or Liberty, in terms of what the economic opportunity was.”

Maffei added that a differentiated high-speed product, like mobile video, could be attractive to DirecTV, and added that Sprint Nextel's decision to back out of a wireless spectrum consortium with the cable operators — dubbed SpectrumCo — could be an opportunity for Liberty. Liberty owns about 3% of Sprint Nextel stock, and speculation has been that Liberty could swap that stake as part of a broadband joint venture with Sprint.

“Some broadband mobile, particularly where it provided the potential for mobile video, is something we look at very closely and if something arose out of Sprint, given our position, all the better,” Maffei said. “The breaking up of that partnership with the cable companies is perhaps a good first step in allowing us to reexamine that or look at that more closely.”

Maffei was a little more sanguine when speaking about the possibility of adding more debt to Liberty Entertainment. The new tracker will have little leverage — basically, only the $1 billion in debt carried by DirecTV, offset by the satellite giant's $4 billion in cash flow. But with the current state of the credit markets, rocked by a major downturn in the sub-prime lending sector — Maffei said that it may not be the best time to borrow additional funds.

“Whether it's the right time to go out and get that leverage and how you might want to use that leverage — are you using it for share repurchase, are you using it for combination, are you using it to buy other content assets – all of those are opportunities we think are interesting,” Maffei said. “But this might not be the optimal time in the next month to think about trying to go out and try to get a big yield out of an offering. But clearly most entities are considered underleveraged from what we would consider optimal.”

Liberty's Triple Play
Liberty Media said it would issue its third tracking stock — Liberty Entertainment — to house its 38.5% interest in DirecTV and other holdings once the deal closes in the next few months. Below is a snapshot of the assets (and Liberty's stake) that will be included in Liberty Entertainment and Liberty's two other tracking stocks, Liberty Capital and Liberty Interactive.
SOURCE: Liberty Media
LIBERTY ENTERTAINMENT:
DirecTV Group (38.5%)
FSN Northwest (100%)
FSN Rocky Mountain (100%)
FSN Pittsburgh (100%)
Starz Entertainment (100%)
Starz Media (100%)
GSN (50%)
FUN Technologies (53%)
WilBblue Communications (32%)
$585 million in cash
$550 million in exchangeable debt
LIBERTY CAPITAL:
True Position (89%)
Hallmark Entertainment Investments (11%)
MacNeil/Lehrer Productions (67%)
Current Communications Group (16%)
GoPets (25%)
Sling Media (6%)
Embarq (3%)
Motorola (3%)
Time Warner Inc. (2.8%)
Priceline.com (1%)
Sprint Nextel (3%)
Viacom (1%)
LIBERTY INTERACTIVE:
QVC (100%)
Provide Commerce (100%)
BuySeasons (100%)
Expedia (20%)
IAC/InterActiveCorp (24%)

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