SIZING UP DIRECTV

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Gemstar Deal Swells Murdoch War ChestJohn Malone and Rupert Murdoch's latest big deal could pave the way for Murdoch to make a run at coveted direct-broadcast satellite leader DirecTV Inc.

The deal points: Liberty will swap its 21 percent stake in electronic program guide provider Gemstar-TV Guide International Inc. for about 486 million shares of non-voting News stock, raising its stake in News to 18 percent from 8 percent. News will control 43 percent of Gemstar, with an eye toward an eventual controlling stake.

Liberty also will swap some of its Gemstar stock and some international satellite assets for about 5 percent of Sky Global Networks, News' satellite holding company. And Liberty also will buy $500 million of Sky Global stock-about 1 percent-from an initial public offering.

News chairman Murdoch has wanted DirecTV for quite a while-he was rumored earlier this year to be considering a hostile takeover of General Motors Corp., the DBS provider's parent company, just to get a crack at the satellite assets.

Liberty, controlled by chairman Malone, becomes the largest non-voting shareholder in News, with 18 percent of outstanding shares and gains 5.8 percent of Sky Global.

And Liberty's $7.2 billion worth of Gemstar stock could be part of the war chest Murdoch needs to buy DirecTV-if Hughes Electronics Corp. decides to sell to him.

DirecTV would fill a huge hole in News Corp.'s satellite holdings, now mainly in Europe and Asia. By placing Gemstar stock in a soon-to-be-public entity-Sky Global-News develops a deal currency to help buy DirecTV.

"As the Sky Global value escalates, we believe it becomes increasingly interesting (and potentially less dilutive) to General Motors," wrote PaineWebber Inc. analyst Christopher Dixon in a research report.

Murdoch wouldn't speculate on DirecTV in a conference call with analysts and reporters, but did not rule out a deal.

"It's too early to comment on that," Murdoch said during a conference call. "But I think you can certainly confirm that we would be interested if General Motors decided to do anything."

Murdoch recently unloaded 7 million shares of DBS rival EchoStar Communications Corp. for $343 million. Last December, he sold 11 million shares of EchoStar for $763 million. This latest deal gets him $500 million in cash from Liberty for Sky Global shares. Those three deals generate $1.6 billion in cash.

But Murdoch apparently will need more than that to make a serious move on DirecTV.

According to published reports, Hughes parent General Motors Corp. is leery of News and Sky Global stock, preferring a less volatile currency valued on earnings rather than cash flow. Though the Liberty deal adds a considerable amount of stability to both News and Sky Global stock, GM also is rumored to want at least $9 billion in cash for DirecTV.

Murdoch also will have competitors for DirecTV. GM is said to be entertaining several suitors for the DBS asset, including The Walt Disney Co., Vivendi S.A., Viacom Inc. and EchoStar.

But most analysts see News as the most logical buyer. The size of such a deal-expected to top $50 billion-could be cost prohibitive for Disney. Viacom is still digesting its $48 billion purchase of CBS Corp.; Vivendi is in the middle of a $30 billion merger with The Seagram Co. Ltd.

Some analysts feel EchoStar simply doesn't have the financial strength to snare DirecTV without a partner.

Murdoch and Malone have formed a sort of mutual admiration society and have made considerable sums in deals ranging from sports-programming alliances to Gemstar-TV Guide.

But Malone is not known for his ability to sit quietly on the sidelines. Although the Liberty chairman's investment is passive-he will not gain voting rights or receive a seat on News Corp.'s board of directors-his will be a powerful voice once the News deal is completed.

Malone described the deal last week as a "triple play," giving Liberty a stake in a global distribution company, an interest in satellite distribution with Sky Global and, indirectly, a stake in Gemstar.

"For us, it's a great change in our portfolio," Malone said during the call. "It's a recognition for Liberty shareholders to participate fairly broadly in a leadership role in this wonderful global converging media and information marketplace."

Murdoch said Malone would be welcome on the News Corp. board "but that would be up to him and us also having to watch the regulatory situation."

As a tracking stock of AT & T Corp., Liberty could fall under U.S. federal regulatory scrutiny if Malone were to have a voice in the programming and distribution direction of News or Sky Global. But the non-voting nature of the investment could keep regulators at arm's length.

DirecTV may have been a driving force for the deal, but News also wants to control Gemstar-TV Guide, which Murdoch believes will be a major player as interactive television services take hold.

"The world is just now beginning to appreciate Gemstar's patented electronic programming guide," Murdoch said. "In the converging broadband world, the key player will be Gemstar."

Murdoch cited the 3 million television sets with installed Gemstar guides and said the interactive guide could be integrated easily into Sky Global products around the world.

Sky Global's distribution assets include News Corp.'s stakes in direct-to-home platform British Sky Broadcasting Group plc, Italian pay TV platform Stream, Asian pay TV platform and programmer Star TV, Japanese DTH platform SkyPerfecTV, Sky Brazil, Sky Mexico and Sky Multi-Country Partners.

Though Gemstar has an IPG deal with AT & T Broadband, the largest U.S. cable operator, other MSOs have resisted signing on because of what they see as prohibitive pricing. But gaining access to News Corp. satellite properties-with an estimated 9.6 million subscribers-and potential access to DirecTV's 10 million subscribers and national footprint would give Gemstar a substantially larger customer base.

CIBC Oppenheimer Corp. Internet/digital new-media analyst John Corcoran said that although Gemstar already has a relationship with DirecTV, any potential deal between the DBS company and News Corp. would accelerate Gemstar's efforts to sell its products to the satellite provider.

Gemstar chairman Henry Yuen said there may be some technical hurdles to overcome, but the company's guide can be installed on the next generation of digital boxes.

News Corp. president Peter Chernin said Sky's StarTV systems do not currently have a guide, while BSkyB uses a native guide.

"As we move into the next generation of boxes, we will roll out Gemstar's IPG across our platform," Chernin said. "Over the mid- to long-term, I would anticipate that we will try to penetrate across the entire Sky Global base."

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