Liberty to Spin Off Discovery Stake

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Liberty Media Corp. chairman John Malone told analysts Tuesday that the odds were good that Cox Communications Inc. and Advance/Newhouse Programming Partners would contribute their respective 25% interests in Discovery Communications Inc. into a planned public spinoff of the networks.

And if they don’t, Malone hinted that the spinoff, to be called Discovery Holdings Co., could be a vehicle for Liberty to sell off its 50% interest.

“Are you asserting that there aren’t people out there that would like to own half of Discovery if it were separated from Liberty?” Malone asked in response to an analyst’s question on a conference call discussing fourth-quarter results. “I can think of a few people who would love to own the Liberty half and perhaps ultimately try and take out the other half. And these are assets that might be of great interest to the owners of the other half.”

He continued, “There are lots of ways this can evolve. I would put a fair amount of money on the table that Cox and Newhouse will want to merge into this vehicle. But I would say the downside isn’t so bad.”

Earlier Tuesday, Liberty announced a plan to spin off its interest in DCI -- valued at about $6.5 billion -- along with its 100% stake in Ascent Media Group Inc. As part of the tax-free spinoff, Liberty shareholders would receive 0.05 shares of DHC for every Liberty share they own.

On the conference call, Malone said he envisioned the new DHC entity as a vehicle to acquire other nonfiction-programming assets and likened it to Liberty’s move last year to spin off its international cable assets into Liberty Media International Inc.

“The international piece, which was a miscellaneous investment position, we turned that into the dominant international player with a very strong balance sheet and a strong growth position,” Malone said.

“We hope to do the same with this spinoff of Discovery in what I would call the nonfiction-entertainment-video space globally,” he added. “There is no reason why Discovery can’t accelerate its growth through careful acquisitions, as well as the new channel launching that it’s doing, and really become the dominant player in that space on a global basis.”

In a research report, Citigroup Smith Barney cable analyst Niraj Gupta wrote that the structure of the spinoff“appears to be designed to facilitate the sale of Discovery.”

DCI includes 21 network brands, including Discovery Channel, TLC, Animal Planet, Discovery Health Channel and Discovery Kids. In addition to several digital channels, DCI also distributes BBC America in the United States.

DCI networks are available in 160 countries and have roughly 1 billion viewers. Domestically, DCI channels are available in more than 80 million households.

Ascent Media provides creative, management and distribution services to the media and entertainment industries.

In a research report, Lehman Bros. Inc. analyst Vijay Jayant estimated that the Discovery spinoff is valued at about $6.4 billion, or $2.20 per Liberty share.

Jayant wrote that the structure of the Discovery spin is similar to Liberty’s spinoff of its international assets last year into LMI, and it represents Liberty’s desire to create shareholder value.

“Moreover, it appears that a liquidation of Liberty as we know it today is being executed over a protracted period, which will continue to enhance shareholder returns,” Jayant wrote. “In addition, DHC will be poised to explore other strategic opportunities, which include purchasing the minority interests in Discovery owned by Cox Enterprises and Advance/Newhouse, as well as other opportunities with other cable-network operators like News Corp.”

DCI has been one of Liberty’s top performers -- it reported revenue of $693 million (up 15%) and operating cash flow of $182 million (up 21%) in the fourth quarter. Domestically, revenue increased 11% to $414 million and operating cash flow rose 20% to $140 million.

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