Liberty Media chairman John Malone, after nearly two years of waiting, has tightened his grip on Discovery Communications. Now the question becomes: How long does he have to wait to get full control?
Liberty's Discovery Holding Co., which owns 50% of Discovery Communications, is about to boost that stake to 66% after the Liberty-controlled entity signed a letter of intent to acquire Cox Communications' 25% interest in DCI for $1.275 billion in cash and Travel Channel.
That leaves just one other company with a stake in Discovery: Advance/Newhouse Communications, whose ownership in the collection of networks that includes Discovery Channel, Animal Planet, The Science Channel and TLC will grow to 33% from 25%.
The wait could go on. Advance said it is happy with the deal. “Cox is going to be missed as a partner,” said Advance/Newhouse president Steve Miron. However, he said, “we've been a Discovery shareholder for many years and our feelings about Discovery continue to remain the same: That it's a great company with a promising future.”
“This proposed transaction will simplify Discovery's ownership structure, further streamline our operations and give the company more strategic flexibility,” DCI CEO David Zaslav said in a statement. “With the structural changes we are putting in place, Discovery is creating a more efficient decision-making process and building a strong, aggressive organization poised for continued growth.”
On paper, it appears that Discovery Holding — which also contains Liberty's 100% interest in TV and film production arm Ascent Media Group — will exert more influence over DCI, a process Malone has been working toward for about two years.
Malone has previously tried to consolidate ownership of DCI, but tax complications held up any deal. Then, in July 2005, Liberty placed its 50% stake in Discovery in the newly created Discovery Holding Co. Malone now serves as chairman of both Liberty and Discovery Holding.
DCI had been criticized in the past because of its complicated ownership structure — although Liberty owned 50% of the network, it could not make major business decisions without the consent of 80% of its shareholders. That requirement, minus the Cox participation, is expected to remain intact. This means Advance/Newhouse must agree to any major decision.
Still, some analysts believe that the deal puts Liberty in charge to a greater extent and that the next step is buying out Newhouse's stake.
“It gives Liberty effective control, even if Newhouse does have blocking rights on some major things like acquisitions,” said Wm. Smith & Co. media analyst Matt Harrigan. “You've got to believe that something could happen with Newhouse too, although the issue becomes what's the next asset you'd strip out. That could be tough.”
Merrill Lynch media analyst Jessica Reif Cohen, in a research report, also anticipated a future Newhouse deal.
“The Cox transaction may also increase the likelihood that A/N contributes its post closing 33% interest in DCI into publicly traded DHC or alternatively exits DCI in a similar fashion as Cox,” she wrote.
Harrigan added a Newhouse deal would almost certainly include the transfer of an operating asset to ease the tax burden. The problem is finding one within DCI's more than 100 international and domestic channels that both could agree on.
NEW NICHE FOR COX
While Travel will be the first niche entertainment network that Cox will totally control — it owns regional sports networks in San Diego and Louisiana and has interests in eight local cable channels with broadcasters — the network was likely included to ease Cox's tax burden. Since the operator was one of DCI's original investors, its cost basis was virtually nil, Harrigan said.
Harrigan valued Travel Channel at about $770 million, or 14 times 2007 estimated cash flow of $55 million. Couple that with the $1.275 billion in cash included in the transaction, and Cox's 25% stake was valued at about $2.1 billion.
Reif Cohen went a bit higher, estimating the value of the assets involved in the transaction at between $1 billion and $1.2 billion, with Travel Channel accounting for $880 million to $1.1 billion. Reif Cohen's estimate would put the value of the total deal at between $2.3 billion and $2.5 billion.
Investors appeared pleased with the deal. Discovery Holding stock reached a new 52-week high last Thursday of $19.47 per share, besting its old high of $18.38 each by $1.09. The stock closed March 29 at $19.45 per share, up $1.14 each.
The Discovery deal is just the latest in what has been a stream of recent activity at Liberty. In December it agreed to exchange its 19% voting stake in News Corp. for controlling interest in DirecTV Group and some regional sports assets and has a deal pending with Time Warner to swap its 4% non-voting stake in the media giant for the Atlanta Braves Major League Baseball team. In February, it agreed to swap 4.7 million shares of CBS stock to the broadcaster in exchange for Green Bay, Wisc., television station WFRV-TV and $170 million in cash.
“The level of activity has been absolutely frenetic over the last 18 to 24 months,” Harrigan said.
At Cox, CEO Patrick Esser said the deal gives the cable company a strong operating asset and cash to help it pay down some of the $8 billion in debt it took on to go private in 2004.
While Esser said that tax implications played some role in including Travel Channel in the deal, he sees the network providing interactive, on demand, mobile and Internet opportunities for Cox.
“There's some things we want to do with this asset and we think that [Travel Channel president and general manager] Pat Younge and his team are positioned to do that,” he said.
Esser added that Travel Channel just had its best quarter ever in ratings.
In 2006, Travel Channel ratings were flat versus 2005 in total day and primetime with respective household ratings averages of 0.2 and 0.4, according to a Disney ABC Cable Networks analysis of Nielsen Media Research data. Travel, presumably because it was in more homes, registered an 8% rise in average total-day viewership to 184,000 from 170,000. In primetime, it was up 5% to 417,000 from 399,000.