Liberty To Merge DirecTV With Some Media Assets

DirecTV will be merged into a new company incorporating Liberty Media's regional sports networks and Game Show Network -- while Starz Entertainment and other businesses under John Malone's Liberty Entertainment unit will spin off into a separate company called Liberty Starz -- under the terms of a deal announced Monday.

"We view this as a defining transaction for DirecTV," said DirecTV CEO president and CEO Chase Carey on a call with investors.

Under the terms of the deal, John Malone, his wife and associated trusts will hold shares of DirecTV Class B common stock entitling them to approximately 24% of DirecTV's total voting power.

The Malones have entered into an agreement that includes, among other things, provisions requiring them to vote their shares in support of the transaction and agree to certain limitations on their rights to sell or acquire shares, according to the companies.

While Carey said DirecTV would have preferred to have a single-vote structure, the deal "aligns Dr. Malone's interests with that of other DirecTV shareholders." He added that the existing equity structure for the company "was less than ideal."

Liberty president and CEO Greg Maffei said the deal "clarifies DirecTV's capital structure, reduces its shares outstanding, eliminates stock overhang and arbitrage issues, and provides DirecTV with strategic content businesses. And this transaction offers value to Liberty's shareholders by eliminating the discount in our tracking stock structure and allowing them to continue to participate directly in the strong performance of DirecTV."

Liberty Entertainment currently owns a 54% stake in DirecTV. Each holder of the Liberty Entertainment tracking stock will get 0.9 share of Liberty Entertainment common stock and retain 0.1 share of Liberty Starz stock. Liberty Entertainment and DirecTV will then merge, with the combined business called DirecTV.

The companies expect the split-off to occur before the mergers, which are currently expected to be completed in the fourth quarter of 2009.

Carey will continue to serve as DirecTV's president and CEO. In addition, the companies said they expect that the current executive officers and board of directors for DirecTV, including Liberty's representatives, will continue to serve in their existing capacities.

DirecTV holders will get one share of DirecTV Class A common stock for each share of common stock they currently hold. Liberty Entertainment shareholders (excluding Malone, his wife and associated trusts) will get approximately 1.11 shares for each Liberty Entertainment share they hold.

The only surprising part of the deal, wrote Credit Suisse analyst Spencer Wang in a research note, "is the size of John Malone's voting power post-merger." Whereas Malone will hold about a 24% voting stake in the newly formed entity, Wang said he would have expected Malone's voting stake in the new entity to be in the range of 15% to 17%.

Shares of DirecTV Class A common stock are expected to be listed on NASDAQ under the symbol DTV. Malone's super-voting shares -- DirecTV Class B common stock -- will not be listed on any stock exchange.

In February 2008, Liberty completed its swap of 16.3% of News Corp. for control of DirecTV, the three RSNs and $465 million in cash.

The steps in the transaction include Liberty Media proceeding with the previously announced split-off of Liberty Entertainment, which will hold the majority of the assets and liabilities currently attributed to the Liberty Entertainment group tracking stock.

According to the companies, Liberty Entertainment Inc. will be comprised of: (1) approximately 54% of the common stock of DirecTV, (2) Liberty Sports Holdings, which owns three regional sports networks -- FSN Pittsburgh, FSN Rocky Mountain, and FSN Northwest; (3) a 65% interest in Game Show Network and FUN Technologies, (4) approximately $30 million in cash in addition to cash generated by operations after March 31, and (5) $2 billion in debt.

DirecTV will provide Liberty Entertainment Inc. up to $650 million in funding pursuant to a term loan facility in order to service the debt.

Businesses, assets and liabilities of the Liberty Entertainment group tracking stock not included in the split-off of Liberty Entertainment will continue to be attributed to the Liberty Entertainment group, which will be renamed "Liberty Starz."

Liberty Starz will consist of Starz Entertainment, 37% of satellite-broadband provider WildBlue, PicksPal, Fanball and approximately $650 million in cash and cash equivalents. The Series A Liberty Starz common stock and Series B Liberty Starz common stock are expected to be listed on NASDAQ under the symbols LSTZA and LSTZB, respectively.

Carey said the breakup fee for the transaction is $450 million.

The deal must clear approvals by the Securities and Exchange Commission, the Federal Communications Commission and the Internal Revenue Service. In addition, it must be approved by DirecTV common stock shareholders and Liberty Entertainment tracking stock (other than Malone and Liberty directors and officers).

Executives said the deal is designed to be tax-free, pending IRS approval.

DirecTV sees new opportunities to develop the RSN businesses, Carey said on the call Monday. "Given our focus on sports, the importance of sports for us, we really do believe and are excited about the opportunity to work with them and build that business," he said.

Game Show Network also presents "tremendous upside," Carey said.

However, he said other content deals DirecTV will consider in the future will be "opportunistic": "Content is always pretty pricey... most of the content assets we've seen would not give us the upside we would want," Carey said.

Also on the call Maffei, as he has noted previously, said there are potential partnerships between DirecTV and satellite-radio provider Sirius, such as bundling, programming initiatives and potentially mobile video. Liberty earlier this year bailed out Sirius, which was fending off bankruptcy and a buyout offer from Dish Network.