NGC Part of Liberty-News Talks


New York -- Liberty Media Corp. chairman John Malone confirmed that his company is in talks with News Corp. concerning its 17% voting stake in the media giant controlled by Rupert Murdoch, but Malone appeared less optimistic that an agreement could be reached by August.

Earlier this month, on a conference call with analysts to discuss Liberty’s fiscal-third-quarter results, Murdoch said News Corp. was in discussions with Liberty concerning the 17% voting interest, and he was optimistic that a deal could be reached by August.

But at Liberty’s annual investor meeting here Thursday, Malone said that while the talks have been amicable, there are other factors that could complicate a deal.

“I’m glad that Mr. Murdoch’s views are that we are converging on a solution,” Malone said. “We continue to look for a win-win-win solution that is good for us, good for News Corp. shareholders and good for the Murdoch family. We think we have a couple of theories that we’re moving forward on.”

“That relationship is in good condition,” Malone added later. “The issue comes down to third-party approvals or third-party involvement in transactions that we’ve modeled with News Corp. but that we’re not ready to say anything about.”

Analysts have speculated that Liberty is angling for News Corp. to include its National Geographic Channel in a cash-rich split, exchanging the voting stake for cash and a small operating asset. And while Malone said Thursday that NGC would be a perfect fit with its Discovery Communications Inc. networks, he added that NGC’s structure would not allow such a deal.

Because NGC has not been a five-year trading asset for News Corp., it does not fit the criteria for a cash-rich split, Malone said.

“If it’s part of a transaction, it would be basically purchased as part of the transaction for cash,” he added. “And since it doesn’t have any GAAP [generally accepted accounting principles] cash flow, it would be a boon for News Corp.”

Also complicating any NGC deal is the ownership stakes of other parties in the network -- the National Geographic Society, NBC Europe and British Sky Broadcasting Group plc in the United Kingdom.

Malone said he would be interested in acquiring the channel in any transaction, but it would require the blessing of the Society.

“There would be no point in trying to buy the channel without having a strong working relationship with the Society,” he said, adding later that while he believes Liberty could get News Corp. to agree to include NGC in some sort of resolution, it remains to be seen whether a deal could be engineered that would make economic sense.

Still, Malone said that if all ducks fall into place, a deal for the News Corp. stake could be made by August.

“If you can get over all of the third-party issues and keep the tax guys happy, a deal could be announced in that time frame,” Malone told reporters after the meeting. Asked if the only third-party issues revolved around NGC, Malone replied, “There are others.”

Regardless of what happens with NGC, Liberty is clearly on the prowl for acquisitions -- it has about $5 billion in cash, and it is substantially underlevered -- but management said there are few attractive properties for sale.

Earlier, Malone said that with debt at about three times cash flow, Liberty needs to increase leverage in order to deliver a sufficient return on equity to investors. While that could mean that the programming giant sacrifices its investment-grade credit rating, he added, Liberty is willing to risk it.

However, Malone said that it is unlikely that Liberty will be able to buy U.S. cable assets, adding that he tried to get into the auction for Adelphia Communications Corp. -- won by Comcast Corp. and Time Warner Inc. -- early on, proposing a deal that would have combined Adelphia with Charter Communications Inc.

“That opportunity disappeared. The pricing got to where we didn’t think we could make decent return on that kind of investment,” he said, adding that any cable buys Liberty makes in the future will likely be in the international market.

As far as cable networks go, Malone said, Liberty will likely look at smaller international networks that would complement Discovery.

He added that the planned spinoff of its 50% interest in DCI and 100% of Ascent Media Group is on track to be completed in June.

Malone also said that while Liberty is talking with DCI’s other partners -- Cox Communications Inc. and Advance/Newhouse Communications own about 50% of the company -- it is unlikely that they will contribute that interest to the spinoff.

He added that Cox and Newhouse want the governance of DCI to stay the same, but they don’t want to take any tax risk, either. That, he said, would violate the Morris Trust structure of the spin, which requires the spinoff entity to retain more than 50% of the value and more than 50% of the vote.

“With the passage of time, post-spin, these Morris Trust issues go away,” Malone said. “In that fullness of time, it will be much easier for the entity to accommodate the governance and ownership ambitions of Cox and Newhouse merging in. To try and do that in the short run is really a daunting challenge for the lawyers and the tax guys.”