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AT&T Votes to Spin Off Liberty Media Group

Telecom: Move would help firm meet FCC cable requirements and free dissident shareholder to pursue acquisitions.


Weeks after approving a radical restructuring of AT&T Corp., directors of the troubled telecommunications giant on Wednesday voted unanimously to spin off its Liberty Media Corp. programming arm.

The decision could free cable mogul John Malone, the dissident AT&T shareholder who controls Liberty Media, to pursue acquisitions without worrying about conflicts of interest with the telecommunications giant.

Spinning off Liberty, which owns interests in cable channels as well as wireless, Internet and technologies that compete against AT&T, also could help the phone giant comply with regulatory conditions imposed this year on its $50-billion acquisition of the Media One Group cable company.

Wall Street was not altogether surprised by the move. AT&T's stock closed at $20.56, down 13 cents a share, on the New York Stock Exchange. Liberty was up 6 cents, to $15.63 a share.

Analysts say AT&T is running out of time to meet the Dec. 15 deadline imposed by the Federal Communications Commission to choose one of three options for complying with federal rules that limit cable ownership.

Company officials said the decision to spin off Liberty is consistent with AT&T's plan, announced last month, to split itself into three companies and four stocks that will track its long-distance, cable, wireless and corporate businesses. The breakup, which follows a 60% drop in AT&T's stock price this year, is designed to make it easier for investors to value these businesses, which have different profit potentials and risks.

The spin-off of Liberty is subject to a favorable Internal Revenue Service ruling that the transaction would be tax-free to AT&T shareholders. Liberty Media would trade as its own publicly traded stock by the second quarter of next year.

Liberty has traded as a separate "tracking stock" of AT&T since it was purchased by the telecommunications giant as part of the purchase of cable titan Tele-Communications Inc. To make that transaction tax-free, Liberty became a subsidiary of AT&T even though Malone, the controlling shareholder of both TCI and Liberty, retained voting control of Liberty.

The tax-free status of that deal could be jeopardized if AT&T sells TCI or Liberty within two years of the March 1999 purchase. AT&T will ask the IRS for permission to spin off Liberty before March on the grounds that industry conditions have since changed.

Not only is AT&T undergoing a radical restructuring, but the FCC gave the company the option of reducing its ownership of cable content to comply with federal limits. The purchase of Media One this summer made AT&T the nation's largest cable operator, with interests in systems that reach about 34 million subscribers. That put AT&T above federal ownership caps that prevent cable operators from reaching more than 24 million homes. AT&T also picked up Media One's 25% stake in Time Warner Entertainment, which owns cable systems, Home Box Office and the Warner Bros. studios.

The FCC, worried about AT&T's enormous clout over distribution and content, gave AT&T three choices to come into compliance. It could:

* shed 11% of its cable subscribers--an unfavorable choice given that AT&T had just spent $100 billion to become the industry leader.

* spin off Liberty and other programming interests. Liberty owns Encore/Starz, the movie channel, and stakes in USA Networks, BET Holdings, QVC and Discovery Communications.

* unwind a partnership with Time Warner Inc. that controls about 15% of the nation's cable subscribers.

AT&T and Time Warner have been in negotiations to unwind their partnership, but those talks have stalled over price. AT&T values its stake at $15 billion, but Time Warner says it's worth $7 billion.

Analysts say that in announcing the spinoff of Liberty, AT&T is trying to buy time and gain leverage in the negotiations with Time Warner.

Wednesday's decision is a victory for Malone, who has been pushing to free his company from AT&T. After losing $1 billion on paper in AT&T's stock slide this year, Malone--AT&T's largest individual shareholder--has become a chief irritant of the board and Chief Executive C. Michael Armstrong and the leading proponent of a breakup of the company.

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