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Murdoch Tries Indirect Play for DirecTV

September 22, 2000|SALLIE HOFMEISTER

News Corp. Chairman Rupert Murdoch is on a mission to buy DirecTV.

At this early stage, it looks like mission: impossible.

Hughes Electronics Corp., which owns DirecTV, the nation's leading satellite television service, has been meeting with prospective buyers in the last several weeks, and its management is expected to lay out its progress at a board meeting today.

Analysts say News Corp. is likely to be at the top of the list, but that Sony, Disney, Viacom and Vivendi have also expressed interest.

But Murdoch appears to need the El Segundo-based company the most. The U.S. is a glaring gap in the global satellite patchwork News Corp. hopes to take public next month. His Sky Global Networks reaches virtually every corner of the globe but here and parts of Western Europe.

Despite the daredevil buying and shrewd deal making that catapulted his company into the big leagues, Murdoch has failed to crack the lucrative U.S. satellite market. DirecTV would put him in the game--and just behind cable leaders AT&T and Time Warner in the nation's pay-TV races.

But the deal could be a stretch for Murdoch. DirecTV is valued at more than $40 billion and would represent News Corp.'s most expensive acquisition yet.

Price is only one hurdle. Hughes' conservative parent, General Motors Corp., wants a huge lump of cash and a grade A stock currency, both of which News Corp. lacks.

The 69-year-old Murdoch is now contemplating a series of complicated stock swaps he hopes will make his bid acceptable. One source close to the negotiations says that with talks just beginning, Murdoch's strategy could go through "a hundred gyrations." Sources say Murdoch is looking at several moving parts, any of which could change.

But this seems certain: Murdoch's strategy would reshape the power base at News Corp. as well as at Pasadena-based Gemstar-TV Guide International.

It could also create complications for AT&T: In the deal, Murdoch's secret weapon is his close friend and ally John Malone. After selling his cable empire to AT&T last year, Malone has turned to deal making full time. He brings a passel of assets to the table through his company, Liberty Media Corp., which owns stakes in dozens of tech and media forces, including Time Warner, News Corp. and Motorola.

Malone and Murdoch have agreed to trade assets to make the DirecTV deal possible.

One of Liberty's investments is Gemstar. According to Wall Street analysts who have been briefed on the swap, Malone has agreed to trade Gemstar shares to News Corp.

The swap would put Murdoch, who holds an equal stake in Gemstar, on the path to controlling the company, whose patents cover TV navigational software that is critical to the future of interactive TV.

In exchange for the Gemstar shares, Liberty would get a mix of shares of News Corp. and of its aspiring public unit, Sky Global Networks.

Liberty already owns 8% of News Corp. In one scenario, the proposed swap would expand Liberty's News Corp. holdings to just under 20%. The numbers were still shifting Thursday, when Liberty and News Corp. were in the midst of negotiating terms of the swap.

Liberty sources, however, said the terms would almost certainly make the company the largest shareholder outside the Murdoch family, which has a controlling 30% stake.

Sources close to Liberty claim that Malone could end up with a seat on the board or even a title such as vice chairman down the road.

In a sign of the deepening trust and friendship between the two men, there are whispers that Murdoch is setting up Malone to step in if anything happens to him.

But in helping Murdoch buy DirecTV, Malone could oddly be building a fierce competitor to AT&T, where he is the largest individual shareholder.

The government might also object because, technically, Liberty is a subsidiary of AT&T. Malone sold Liberty and its cable parent, Tele-Communications Inc., to AT&T in March 1999, becoming its largest shareholder. An unusual part of the deal was AT&T's agreement to allow Malone to retain control of Liberty.

Regulators could object to a cable operator such as AT&T owning, through Liberty, a large stake in News Corp., a station owner, because of rules banning such cross-ownership.

The endgame in these contortions is beefing up the size of Sky Global Networks, the satellite company that News Corp. is teeing up to go public. GM has told analysts it won't take News Corp. shares as currency in the DirecTV purchase, preferring a stock not tied to the boom-and-bust cycles of Hollywood. So Murdoch is thinking of offering GM a stake in Sky. (Common wisdom, however, is that GM won't want an unproven stock like Sky either.)

Sky's assets include pieces of satellite services such as Britain's mighty BSkyB and could be worth $35 billion or more, according to analysts. But with only part-interests in most of these properties, Sky is considered a hodgepodge, without a centerpiece such as DirecTV to give it sizzle on the Street.

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