Malone Follows the Money

Liberty Media chairman John
Malone’s decision to exchange his supervoting
shares in DirecTV for common
stock in the satellite-
TV giant
had one simple
motivating factor,
to some analysts
who follow
the company:

By reducing
his voting stake
in DirecTV to
about 3% from
24.3%, Malone
gets around
5 million additional
shares in the company, worth an extra
$160 million.

Moreover, by satisfying conditions set by
the Federal Communications Commission
back in 2008 when Liberty bought a controlling
stake in DirecTV from News Corp., Liberty
Media doesn’t have to alter its position
in Liberty Global.

That international cable operator, some
analysts believe, has greater growth potential
than DirecTV.

In deal terms disclosed on April 6, Malone
will exchange 21.8 million shares of class-B DirecTV
shares for 26.5 million class-A common
shares. Malone, Liberty CEO Gregg Maffei and
Liberty Global board member Paul Gould will
resign from DirecTV’s board of directors.

The move springs from a series of transactions
that began with Liberty’s acquisition of
News Corp.’s controlling interest in DirecTV and
culminated in the media giant merging its Liberty
Entertainment unit into DirecTV in 2009.

Liberty said it believes the most recent
transaction will satisfy the FCC requirement
that it either divest of its Liberty Cablevision
cable asset in Puerto Rico or its interest in
DirecTV Puerto Rico.

Liberty had placed the DirecTV Puerto Rico
asset in a trust run by an independent trustee,
but was informed by the FCC recently that the
move would not satisfy its conditions.

The deal could also bode well for Direc-
TV shareholders in that it makes an eventual
sale transaction simpler — something that
has been speculated about for years — by removing
any uncertainty regarding the valuation
of Malone’s Class-B shares.

While a sale is not believed to be imminent,
Collins Stewart media analyst Tom
Eagan said a more immediate result could
be a cash dividend to shareholders.

“Malone is historically anti-tax, and dividends
are taxed,” Eagan said. “The board has
been looking [at] both buybacks and dividends,
but we had always thought that Malone
would have voted down a dividend.”

Eagan said DirecTV has substantial financial
firepower to offer a cash dividend.
Its current debt load is about 1.6 times annual
cash flow, a level it has indicated it might
want to raise to 2.5 times.

Miller Tabak media analyst David Joyce
said another factor for Malone could have
been a desire to keep his Liberty Global interest

Milestones in Liberty Media’s ownership of DirecTV:

12/22/2006: Liberty agrees to acquire 38.5% stake in DirecTV from News Corp. in deal
estimated at about $11 billion.

02/28/2008: Liberty completes acquisition of DirecTV interest. As a condition of Federal
Communications Commission approval, Liberty agrees to divest of its interest in Liberty
Cablevision of Puerto Rico or its DirecTV Puerto Rico unit .

09/03/2008: Liberty proposes placing its DirecTV interest (now at about 57%)
in its Liberty Entertainment tracker and merging Liberty Entertainment with

11/19/2009: Liberty Entertainment completes split-off and merger with DirecTV.
04/06/2010: To satisfy FCC conditions, John Malone agrees to exchange 21.8 million
shares of super-voting stock in DirecTV for 26.5 million common shares.

SOURCE: Liberty Media, press reports