FREEDOM FOR LIBERTY

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Liberty Media Group Inc. chairman John Malone might finally shed his AT&T albatross. Less than two years after Malone sold MSO Tele-Communications Inc. to AT&T Corp. for $48 billion, Ma Bell has agreed to spin off Liberty Media as an independent company by the second quarter of next year.

First, AT&T needs an Internal Revenue Service declaration that the spin-off would not hit AT&T, Liberty Media and their shareholders with a tax bill.

Malone, who has chafed at the paper loss of more than $1 billion from his AT&T stock holdings, has maneuvered a divestiture that, on its face, appears to be beneficial for all parties involved.

Malone receives the autonomy to do deals that might get snagged in regulatory conflicts with AT&T, while AT&T could partly satisfy a Federal Communications Commission condition of its $50 billion acquisition of MediaOne Group Inc.

Malone will keep his AT&T stock: he is one of the company's largest individual shareholders. His status as an AT&T board member also is expected to remain unchanged, although that was not part of the board's most recent discussions.

The announcement of the Liberty spin-off comes shortly after AT&T said it would split itself into separate companies-wireless, broadband, consumer long-distance and business-services units-by 2002.

AT&T called the spin-off consistent with those restructuring plans. Shares in the new asset-based Liberty stock would be distributed to current holders of the tracking stock. Most analysts believed the deal was good for both.

"I don't see much downside for Liberty," said Goldman Sachs & Co. analyst Barry Kaplan. "It gives them a fair bit of flexibility going forward to do things without worrying about regulatory issues related to AT&T. It also allows them to do things with the stock, because it's not a tracker.

"In terms of doing transactions, people would be typically more willing to take an asset-based stock, as opposed to a tracker."

UBS Warburg LLC analyst Christopher Dixon added in a research note that the spin-off would ease regulatory scrutiny on Liberty and may remove the need for it to divest its interests in Sprint PCS Group. Liberty owns about 24 percent of Sprint PCS stock.

Malone had been hinting at a Liberty divestiture in several published reports over the past few months. In the latest, a Nov. 10 interview with the
Wall Street Journal
, Malone said: "There have always been pluses and minuses to being part of AT&T. But it seems like the minuses are growing faster than the pluses lately."

In last Wednesday's
Financial Times
, Malone said, "It probably makes sense to separate somewhere down the road."

Being part of the largest cable operator in the country has kept Liberty from buying certain companies because of federal cross-ownership rules.

Malone and Liberty could more easily get involved in News Corp.'s anticipated attempt to purchase direct-broadcast satellite provider DirecTV Inc. Liberty already owns 8 percent of News Corp. Speculation is that Liberty could become further involved if News Corp. makes a play for DirecTV.

The FCC could block such a role because of Liberty's involvement with both AT&T and News. Currently, FCC cross-ownership rules prohibit a cable operator from owning substantial interests in competing technologies.

"The FCC wouldn't allow cable operators to own wireless-cable companies, and they forced the operators out of PrimeStar [the DBS consortium that was purchased by DirecTV last year]," said one source who asked not to be named. "If Malone were a tracker of AT&T and Liberty had a big stake in News Corp., which owned DirecTV, I think the [FCC] would have trouble with it."

For AT&T, ownership of a strong content company like Liberty has been a problem in its pursuit of cable distribution, most recently via the MediaOne deal.

What AT&T will lose are the tax breaks it received from including Liberty's losses on its balance sheet. In the past, AT&T had paid Liberty for those tax breaks.

Liberty currently has $2 billion in net operating losses on its books.

During a conference call with analysts on its latest quarterly report, Liberty president Dob Bennett said the company would likely receive about $700 million in cash from AT&T. Bennett also talked about the benefits of a divorce.

"For starters, there is some administrative simplicity in not having to work through a separate board of directors," he said. "There is a reduced regulatory overhang.

"We currently fall under the AT&T regulatory umbrella, with respect to FCC and antitrust matters, and that occasionally has caused us to not pursue opportunities or to structure things that would have been simpler otherwise."

According to the FCC and AT&T, the Liberty spin-off would not totally satisfy the FCC's June order approving AT&T's acquisition of MediaOne. At the time, the FCC ordered AT&T to divest either some cable systems or programming interests by May 19, 2001, to comply with its cable-system ownership rules.

The FCC's rules bar a cable operator from serving more than 30 percent of subscribers to cable, satellite and other multichannel-video providers. The FCC pegs AT&T's subscriber total at about 42 percent of the market.

After spinning off Liberty, AT&T would still be in violation of the rules, because it would still have an ownership interest in cable programming networks that sell their services to Time Warner Entertainment.

The FCC said it would not count TWE's 9.7 million cable subscribers toward AT&T's total if the telco did not sell programming to TWE.

AT&T has a 30 percent interest in Cablevision Systems Corp., parent of Rainbow Media Holdings Inc., which sells Bravo and American Movie Classics to TWE. AT&T officials have reportedly said the company is considering selling its Cablevision interest to reduce debt.

When it bought MediaOne's 5 million subscribers, AT&T also inherited stakes in nearly a dozen cable networks, including Outdoor Life Network, Speedvision and New England Cable News. All or nearly all of those networks sell to TWE.

AT&T and Time Warner Inc. have been negotiating the sale of the TWE stake, but those talks are at a standstill.

AT&T sent a letter to FCC chief of staff Kathryn Brown on Nov. 8, seeking the commission's help in the TWE negotiations. In that letter, it said Time Warner has decided not "to take even the most basic steps to facilitate AT&T's timely withdrawal from TWE."

AT&T asked the commission to require Time Warner, as part of its merger with America Online Inc., to submit the disposal of the TWE stake to a binding arbitration process.

Time Warner has never commented on the negotiations other than to say they were ongoing. But according to some people familiar with the situation, the main roadblock was price.

Some analysts had valued AT&T's stake in TWE-which includes Home Box Office Inc. and the Warner Bros. studio-at between $12 billion and $18 billion. AT&T, according to sources, was leaning more toward a $15 billion price, while Time Warner valued the stake at closer to $6 billion.

With Liberty divested, AT&T would not feel so pressed to sell TWE. It could wait for its price and presumably offer its stake to the public in an IPO. That might prod Time Warner to further open its pocketbook.

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