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QVC Gets Liberated

After months of negotiations, Liberty Media Corp. finally added to its stable of operating assets, agreeing to purchase Comcast Corp.'s 57.5% interest in cable shopping channel QVC Inc. for $7.9 billion.

The deal will give Liberty full ownership of QVC — it already owns 42.5% — and the network's nearly $1 billion in annual cash flow.

The deal also comes as Liberty is one of five companies bidding for Vivendi Universal S.A.'s U.S. entertainment assets.

According to terms the companies announced last Thursday afternoon, Liberty would pay the purchase price in a combination of cash, a three-year unsecured note and by issuing Liberty common stock not to exceed 7.5% of shares outstanding, or about 218 million shares.

The deal is expected to close by the end of the year. At that point, Liberty would own 98% of the network. QVC management will own the remaining 2%.

The deal gives Liberty its second operating asset, to go along with Starz Encore Group. With distribution in 85 million homes, 2002 revenue of $4.4 billion and 2002 cash flow of $858 million, it's a powerful operating asset.

"Liberty Media has always followed a strategy of investing in businesses with creative, entrepreneurial and focused management teams," Liberty president Dob Bennett said in a statement. "QVC is no exception, and we are very pleased to welcome [QVC president] Doug Briggs, [QVC COO] Bill Costello and the entire QVC team to the Liberty Media family."

Liberty has had its eye on QVC for months — in March, it notified Comcast of its intention to exercise its exit rights from the partnership.

Per those exit rights, Comcast had the first chance to buy out Liberty's interest in the network.

If Comcast declined, Liberty could buy out Comcast's interest.

If neither partner wanted to buy QVC, the network would be put up for sale to a third party.

According to some MSO sources, Comcast president Brian Roberts was upset when Liberty exercised those exit rights in March.

"This has been a very difficult decision for Comcast," Roberts said in a statement last Thursday. "QVC is an exceptional and unique business, but we took a very disciplined financial approach to our evaluation.

"The cable business continues to be our core focus. With the opportunity to sell at an attractive valuation in excess of $14 billion, we have the flexibility to improve our already strong financial position and to invest for future growth. I believe this is a terrific outcome for both parties."

It is not clear just how much of the purchase price will be in cash. But Liberty has $5 billion in cash and another $10.4 billion in marketable securities.

UBS Warburg LLC cable debt and equity analyst Aryeh Bourkoff said that depending on the cash portion of the deal, it could substantially reduce Comcast's outstanding debt. He added that the sale of QVC — once a prized jewel in the Comcast stable — brings into question Comcast's other content holdings.

"This [the QVC sale] is consistent with the stated goal of Comcast to increase its financial flexibility in 2003," Bourkoff said. "This more than delivers the company per its goals.

"The question now becomes as Comcast becomes more of a pure play cable story, what the company's focus will be in terms of driving incremental growth as well as the ultimate strategy for the content business."

Bourkoff wasn't implying Comcast would sell other content businesses, such as its 50% interest in E! Entertainment Television, 91.3% of The Golf Channel, 100% of Outdoor Life Network, several regional sports networks, regional network CN8: The Comcast Network and a video-game network called G4.

"I think it means the company is trying to build more of a war chest to drive growth in the future, which we think could be focused on various content acquisition and/or a more aggressive foray into the voice business."

A source familiar with both Comcast and Liberty agreed, saying the Philadelphia-based MSO "always considered QVC as their commerce play, not a content play."

According to the source, Comcast approached Liberty a few weeks ago with a solution to what could have been a drawn-out process.

"They basically agreed that to continue on the path of the previous exit arrangement, it had uncertainty on time, uncertainty on outcome, it was even conceivable that they could keep the status quo," the source familiar with both companies said. "Comcast sat down with them and said 'Let's enter into a revised agreement, we'll sign a definitive purchase and sale,' have Liberty put a number on the table [valuing the entire network] and Comcast would decide whether it wanted to buy or sell."

According to the source, the number Liberty put on the table last Monday was $13.75 billion, or about 15 times 2002 cash flow.

The purchase comes just as Liberty was looking like a lead contender (among five bidders) to buy Vivendi Universal Entertainment, a group of cable channels, movie and television production studios and theme parks that could sell for as much as $15 billion. But Janco Partners cable analyst Matt Harrigan said it wouldn't be much of a stretch for Liberty to do both.

He said Liberty could take on a partner for VUE, in light of the QVC purchase, but noted that QVC is virtually debt free and threw off more than $800 million in cash flow last year.

"They [Liberty] could easily put $3 [billion] to $3.5 billion of debt on QVC," Harrigan said.