News

One Year In: No DirecTV Deal

12/14/2007 7:00 PM Eastern

Cable pioneer John Malone is famous for his dim view of red tape-loving government bureaucrats. How many companies and yachts has he named Liberty?

But Malone apparently finds himself in a test of wills today with Justice Department lawyers over a relatively small matter in an unincorporated part of the United States. Malone’s refusal to satisfy Justice’s Antitrust Division lawyers on a cable holding in Puerto Rico appears to be thwarting clearance of Liberty Media’s effective takeover of DirecTV — and Malone’s return as a major force in the pay TV distribution market, according to communications lawyers and one executive close to the deal.

As explained by these individuals, Malone and Justice lawyers are at odds over the impact of the DirecTV transaction on pay TV competition in central Puerto Rico, a self-governing commonwealth under U.S. law about 1,300 miles from south Florida.

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.

Liberty Global owns Liberty Cablevision of Puerto Rico, which serves 119,000 subscribers, and competes with DirecTV Latin America, which is 86% owned by DirecTV.

But with Malone at the helm of both Liberty Global and DirecTV LA, Justice Department lawyers are concerned about the effect on competition in this U.S. territory where 4 million people live. Liberty Cablevision’s customers could experience constant rate hikes to benefit DirecTV, the argument goes.

Malone’s legal team has raised a number of counterpoints to Justice’s analysis of the market, including the small number of cable subscribers involved, the ability of Puerto Rico consumers to get Dish Network in place of DirecTV, and the fact that Liberty Global is a separate company not a party to the transaction.

There are other issues: Liberty Cablevision has about 27% penetration of households in the commonwealth, about half the industry norm; and its subscriber base has a median income of $13,000, which is 30% below the national median. Not exactly data that supports a rate-hike strategy by Liberty Global.

Malone’s lawyers, according to parties contacted for this story by Multichannel News, have been insisting on the legal principle that the Justice Department shouldn’t be allowed to force Liberty Global to divest the cable company in Puerto Rico when Liberty Global is not a party to the Liberty Media-DirecTV-News Corp. transaction.

Malone’s legal team has been stressing the separation of Liberty Global from Liberty Media, even though Malone sits atop both companies, has equity in both, has large voting stakes in both, and can name three directors to DirecTV’s board.

At some point, Liberty could close the transaction if it gained FCC approval before action by the Justice Department, one communications lawyer said. But the FCC probably wouldn’t do that and then learn the Justice Department has filed suit to block the deal.

A year ago, Malone’s Liberty Media announced an $11 billion deal in which Liberty would swap its equity interest in News Corp. for News Corp.’s 38.5% ownership stake in DirecTV, three regional sports networks and $500 million in cash.

For a media merger in Washington, D.C., the Liberty-News Corp. transaction — even with the controversial Malone in a central role — has not kicked up a lot of dust. But 12 months after its announcement, the deal remains stuck at the Justice Department and the Federal Communications Commission. Liberty Media CEO Greg Maffei recently said the delay is disappointing.

A spokesman for Liberty Media was not immediately available for comment at press time.

Informally, the FCC has an 180-day deadline to complete a merger review. On Dec. 14, the Liberty Media-DirecTV-News Corp. transaction had been under FCC review for 296 days.

November