Malone, Murdoch Quiet, for Now

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The chess match between News Corp. chairman Rupert Murdoch and Liberty Media Corp. chairman John Malone reached a stalemate earlier this week after News Corp. initiated a shareholder’s-rights plan aimed at thwarting any attempt by Malone to take over the company.

But although the plan, also called a poison pill, would stop Malone from acquiring a larger voting share than Murdoch, it may have played into Malone’s next possible move -- forcing News Corp. to either acquire his stock in the media company or some of Liberty’s content assets.

Just what cards Malone has up his sleeve is anyone’s guess. Earlier this month, he reached a deal with Merrill Lynch International to swap about $1.5 billion of nonvoting News Corp. shares for voting stock in the company -- a deal that would nearly double Liberty’s voting stake in News Corp. from 9% to 17%.

The deal, which will be completed in April, would make Liberty the next-largest holder of News Corp. voting stock behind Murdoch’s 29.5% interest.

While early speculation was that Malone was gearing up for a hostile takeover of News Corp. -- Liberty’s 410 million shares of nonvoting News Corp. stock could technically be swapped for a nearly 50% voting stake in the media giant -- the poison pill quashed any possibility of that.

Although Liberty would be allowed to acquire its 17% voting interest, any subsequent moves to increase that stake by another 1% would trigger the shareholder’s-rights plan, which would allow current stockholders to buy News Corp. shares at a 50% discount, severely diluting any takeover attempt.

In a conference call with analysts to discuss its third-quarter results, Liberty denied that it ever considered a hostile takeover, adding that the swap was merely a financial move to bring its voting stake in line with its economic stake in News Corp.

“We view ourselves as allies of News Corp. and the Murdoch family, and we have no hostile intentions,” Liberty CEO Dob Bennett said on the conference call. “We are a large, happy, friendly shareholder.”

Later on the call, Bennett added that News Corp.’s board of directors is scheduled to meet concerning the rights plan in about 30 days, hinting that the two companies could work out a deal to swap assets.

When asked what those transactions could be, Bennett said he did not want to fuel speculation.

Some analysts see Malone combining content assets like Liberty’s 50% interest in Discovery Communications Inc., or its 100% of premium-movie-channel group Starz Encore Group LLC, with News Corp. content and spinning them off into a separate company.

While practically every content provider would like to own Discovery, News Corp.’s appetite for a one-half interest in the group of networks is likely low, especially when its other partners -- Cox Communications Inc. and Advance/Newhouse Communications -- have expressed no desire to sell their interests.

Starz Encore had a good third quarter -- revenue increased about 12% and subscribers rose by more than 400,000 -- but many analysts were skeptical of News Corp.’s interest in that programmer.

Starz Encore has no original content, which could hurt it in the long run, and its high programming costs -- up $40 million in the third quarter and likely to rise in the future -- make it a less attractive acquisition prospect.

Stifel Nicolaus & Co. cable analyst Ted Henderson said in a research note that the more likely scenario is for Malone to leverage his voting stake for News Corp. programming assets, such as National Geographic Channel.

“If merger isn’t the endgame, we view it as more likely that Malone has upped the voting stake to get Murdoch’s attention and signal that Liberty is going to do something with the stake,” Henderson wrote. “The votes ultimately only matter to Murdoch.”

Citigroup Smith Barney analyst Niraj Gupta believes Malone could be trying to force a purchase of Liberty by News Corp., creating a $100 billion content powerhouse and allowing Malone to concentrate on his international cable assets.

“Our investment thesis is unchanged: Over the next six to 12 months, we expect investors to increasingly view Liberty Media as a breakup story,” Gupta wrote.

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