Masters, Liberty Digital Cash in Chips

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After two years of running Liberty Digital Inc. — a vehicle within the vehicle that is Liberty Media Corp. — cable veteran Lee Masters will step down early next year.

His departure is a byproduct of a two-pronged deal that gains Liberty Media 100 percent of both Liberty Digital and Liberty Satellite & Technology Inc. and takes both companies private.

Masters said last week that once the deal closes, the entire Liberty Digital team "will probably be disbanded. I will be part of that." Liberty Digital has about eight professional employees, he said.

That will mark the end of a wild ride for Liberty Digital, spun off from Liberty Media initially to provide a stock currency for deals in the high-flying telecom and interactive-television arenas.

Liberty Digital bolted out of the box, taking substantial positions in Internet companies and ITV firms like ACTV Inc. and Open TV Corp.

As the dot-com bubble burst in 2000, Liberty Digital's value sagged. Its shares — which sold as high as $75 each in 2000 — closed at $2.92 on Oct. 18, down 5 cents.

Its most recent financial statement said second-quarter investment impairments at Liberty Digital totaled $73.5 million, versus $2.2 million in the same period a year ago.

The company retains stakes in OpenTV Corp. and ACTV Inc., which are worth considerably less than when Liberty Digital first invested. Liberty Digital's $104 million investment in ACTV is now worth about $14 million, and the $12.5-million OpenTV buy, once worth $129.5 million, has dwindled to $18.8 million.

"Interactive television hasn't developed the way most people thought," CIBC World Markets interactive television analyst John Corcoran noted.

But Masters scored points for monetizing some egregious Liberty investments before the bottom dropped out. Such scores include a negotiated collar on Liberty's investment in dot-com debacle Priceline.com, which brought in $125 million on an investment of about $10 million. A similar structure for a $3.5 million stake in iBeam Broadcasting Corp. netted Liberty $65 million.

Liberty Media also has switched its focus away from domestic TV in the past year. With systems in Europe, Asia and Latin America, Liberty now directly and indirectly owns about 20 million cable subscribers outside the U.S.

"Given the slow emergence of interactive television, it didn't make any sense to have Liberty Digital as a publicly traded entity," Masters said. Liberty Digital investments transfer to Liberty Media after the acquisition closes.

That includes Liberty Digital's ownership of 6 megahertz of spectrum on all AT&T Broadband cable systems, a holdover from AT&T's purchase of Tele-Communications Inc., Liberty Media's former parent, in 1999.

Liberty Media is buying the 10 percent of Liberty Digital and Liberty Satellite it doesn't already own in exchange for stock. Liberty Digital shareholders will get 0.25 shares of Liberty Media stock for each Liberty Digital share, and Liberty Satellite shareholders receive 0.09 shares of Liberty Media for each Liberty Satellite share.

Liberty Media spokesman Mike Erickson did not return phone calls last week.

Liberty Satellite is a holding company that mainly invests in satellite broadband technologies. Its stock, as high as $22 last year, closed on Oct. 18 at $1.04, down 6 cents.

The deals, which do not require the approval of Liberty Digital or Liberty Satellite shareholders, are expected to close in the first quarter of 2002.

FULL-TIME WORK: OVERRATED

Masters said he will devote time to his investments and a charitable foundation he recently formed with his wife, the Mohn Family Foundation. Mohn is Masters's legal last name.

He remains on the board of directors of Liberty holdings Game Show Network and DMX/AEI Music, which delivers digital music channels to homes and businesses. Liberty owns about 50 percent of GSN.

"Working full-time is overrated," Masters said. "I enjoy the business and want to stay involved from a board standpoint and an investment standpoint, but it is unlikely that I will take another CEO position."

Masters said that he and Liberty Digital senior vice president Craig Enenstein may also work together on some investments, but he would not elaborate.

Masters has a lot to invest. When he left E! Entertainment Television in 1998, Masters reportedly received $15 million to $20 million. Although he said he has no separation package with Liberty, it is obligated to pay him his $826,875 salary for 2001.

Liberty Media also paid Masters $50 million in cash and gave him 5.8 million shares of Liberty Media stock in February as part of a stock-option agreement with stock appreciation rights, according to securities filings.

Masters did not want to discuss his personal finances but said of his compensation deal with Liberty Digital: "We did very well. Life's good."

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