Competition Fears Led to DirecTV Deal

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News Corp.’s decision to include its controlling interest in DirecTV in its pending deal with Liberty Media was spurred in part by concerns that the direct-broadcast satellite giant would not be able to compete effectively against satellite and telephone companies, according to a Securities and Exchange Commission filing Feb. 5.

News Corp. filed a preliminary proxy statement with the SEC Monday, part of a requirement under Australian Stock Exchange rules. The company did not release the date or location of the shareholders’ meeting to vote on the deal. That should come in later filings.

Approval of the deal would require that a majority of the shareholders -- other than the family of chairman and largest individual shareholder Rupert Murdoch and Liberty Media -- vote in favor of the transaction.

In the filing, News Corp. detailed its negotiations with Liberty, stating that it began talks with the Denver-based media giant in the winter of 2004, shortly after Liberty announced that it had acquired the News Corp. voting stake. But those negotiations made little progress in nearly two years until News Corp. decided to put its 38% interest in DirecTV on the table.

What appears to be most striking about that decision is how quickly DirecTV fell out of favor with News Corp.

News Corp. acquired the controlling interest in DirecTV from Hughes Electronics in 2003 for about $6.6 billion -- a deal that struck fear into the hearts of cable operators worrying that News Corp. would use its satellite distribution arm to crush the competition.

But less than three years after making the sale -- and as DirecTV’s subscriber growth started to decline and cable’s triple-play package of voice, video and data began to gain steam -- News Corp. had a change of heart.

According to the proxy filing, News Corp. management began to explore strategic alternatives for the satellite giant in early 2006, “in light of company management’s belief that the DirecTV business faced several strategic, competitive and technological challenges.”

The biggest obstacle appeared to be the satellite giant’s inability to develop a broadband product.

That was evident in News Corp.’s later explanation in the SEC filing as to why the board decided to unload DirecTV; two of five benefits the board saw to a DirecTV deal involved the significant investment required to keep DirecTV competitive and management’s belief that DirecTV and the U.S. satellite industry “are not able to, through their existing infrastructure, provide high-speed broadband-Internet access at a reasonable price.”

Discussions with Liberty concerning the DirecTV stake started in June 2006, according to the filing, and in August, the two companies entered into a confidentiality agreement that would allow Liberty to conduct due diligence on DirecTV.

While the negotiations appeared to move smoothly -- News Corp. presented Liberty with a term sheet in September outlining the assets and cash that could be included in the deal -- they were apparently held up in October when Liberty insisted that it receive a $1 billion breakup fee should the deal not be consummated.

It took nearly two months for that portion of the deal to be worked out, with Liberty agreeing Dec. 20 to lower the termination-fee requirement to $300 million.

On Dec. 22, both News Corp. and Liberty announced the transaction, where Liberty would receive the DirecTV interest, $550 million in cash and three regional sports networks in exchange for its News Corp. voting stock. The deal was valued at $11 billion.

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