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Put Option Nigh for Liberty's QVC Stake

The clock is ticking for Liberty Media Corp. to decide whether it will exercise a put option that could change the ownership structure of cable shopping channel QVC Inc.

The Denver-based media giant has the right to put its 42.5 percent stake in QVC to Comcast Corp. beginning Feb. 10. Liberty then has 60 days to decide whether to ask Comcast to purchase its stake for cash, buy out the MSO's 57.5 percent interest in the channel or put the entire network up for auction to a third-party buyer. Liberty and Comcast also could float an initial public offering for QVC.

But Liberty, which also has the option to do nothing, has been quiet concerning its intentions. According to sources familiar with the company, it is unlikely that the Denver-based media giant will let the deadline pass without taking any action, mainly because Liberty would have to wait until 2004 until those rights come up again.

A Comcast spokesman declined to comment. Liberty officials did not return calls.

Most analysts, though, expect the media giant to make a play to buy out Comcast's 57.5 percent interest in the channel, expected to be worth some $7 billion. While that is a hefty amount to take on, several analysts said Liberty could do it rather easily.

Stifel Nicolaus & Co. cable analyst Ted Henderson said a Liberty buyout of Comcast's stake makes the most sense because it would allow Liberty to gain access to all of the shopping channel's $720 million in annual operating cash flow.

"The market will embrace very warmly if Comcast sells the asset and use the proceeds to pay down debt," Henderson said. "And I think the market would also embrace Liberty buying and operating the asset. Right now, QVC is a bad asset for Liberty — they don't consolidate it, they don't get the cash flow benefit from it and they have no say in management."

Liberty has been a big proponent of home-shopping channels — it also has a stake in USA Interactive's Home Shopping Network — so taking full control of QVC would not be out of the question.

While not addressing QVC specifically, Liberty president Robert Bennett said on a conference call with analysts in November that gaining full access to cash flow from its assets is a priority.

"Conceptually, we would rather have cash flow than not have cash flow," Bennett said. "Like most companies, we would rather own an asset that is generating a direct return to us as well as appreciating than one that is only appreciating."

Financing options

There are several ways that Liberty could finance the acquisition, said Henderson. Currently, Liberty has about $2.5 billion in cash on its books and has access to another $5 billion through its lines of credit.

In addition, Henderson estimated that Liberty could leverage QVC's free cash flow in an acquisition, raising another $4 billion for the purchase.

Liberty could also add some non-cash elements into the mix, such as its 10 percent interest in E! Entertainment Television (Comcast owns the other 90 percent); Starz Encore Group's litigation with Comcast over its carriage deal and its ownership of 6 Megahertz of spectrum on Comcast's cable systems.

While Comcast would be giving up a big free cash flow generator, Henderson said Wall Street would look more favorably on using the sale of the asset to pay down debt.

Coming up with that cash could be difficult for Comcast, which is currently digesting its $54 billion acquisition of AT&T Broadband. The company currently has about $28 billion in debt — or about 4.5 times 2002 cash flow — and has an investment-grade rating from two major credit agencies. Taking on another $5.1 billion in debt could be a problem, especially since the company has made it known it will do nothing to jeopardize that rating.

Although selling QVC would mean the loss of a major cash cow for Comcast — especially during a period when it can use all of the free cash flow it can get — Henderson and other analysts said the company would derive the most benefit by selling.

Plate is full

"As much as Comcast loves the QVC asset, they've got a lot on their plate now," Henderson said. "I think it's fair to say that nobody's investing in Comcast stock moving forward because of their position in QVC. If Comcast buys that asset all they really do is eliminate a minority interest in their financial statements."

QVC has been a stellar asset for Comcast for years. Its results are prominently featured in practically every analyst conference presentation the company makes.

And it has been growing.

In 2001, QVC reported revenue of $3.9 billion, an increase of 10 percent over the prior year, and operating cash flow of $722 million, up 16.6 percent. In the first nine months of 2002, QVC revenue grew 13 percent, to $3 billion; operating cash flow was up 17.7 percent, to $572.2 million.

Goldman Sachs & Co. analyst Richard Greenfield estimated that 2002 cash flow for the unit would rise to about $840 million.