Transfer of DirecTV Stake to Liberty Seen Facing FCC Vote

For nearly 3 years, DirecTV has been pushing to add subscribers through direct sales via the Web or toll-free number (CED June 28/04 p1) and dealers said that probably won’t change with a new owner. In 2004, DirecTV began selling satellite receivers under its brand, parting ways with CE makers’ marques (CED May 5/04 p1). DirecTV direct sales will bring 32% of revenue this year, up from 9% in 2001, the company said earlier this year in an analyst presentation. At the same time, sales through Best Buy, Circuit City and other CE retailers will bring 6% of revenue, down from 48% in 2001, DirecTV predicted.

“The retail side of their business is shrinking, not growing and it’s going down very quickly,” a vp at a Midwest retailer told us. “We're try to identify what that means for our business because a lot of times they offer a little better promotions on line direct to customers than we have in our stores. They obviously can a much better margin that way” by eliminating things like market development funds, and “I would imagine Liberty would continue even more in that direction.”

Retail inventories of DirecTV receivers have been tight and addition of local HD channels hasn’t boosted sales as much as some dealers expected, but “we're not prepared at this point to talk about changing strategy” for satellite, an East Coast dealer said: “But there are certainly other options out there.”

The deal needs FCC approval because it involves a significant interest in a DBS provider, said the lawyer who’s involved in the deal. The long-expected deal would let News Corp. Chmn. Rupert Murdoch regain a big stake in his News Corp. from Liberty Chmn. John Malone. The companies will file needed papers with the Commission “as soon as possible,” said the attorney, who asked not to be identified.

Scrutiny of the deal could fall to the Media Bureau or the International Bureau, that lawyer and an agency official said. We're told that’s Chmn. Martin’s call. The Media Bureau reviewed the 2003 deal that gave News Corp. the stake in Liberty it’s now divesting. That deal passed 3-2, Comrs. Adelstein and Copps dissenting. The Media Bureau also reviewed General Motors’ failed attempt to sell DirecTV to EchoStar.

The FCC may not weigh in on transfer of 3 regional sports networks (RSNs) to Liberty from News Corp. The Commission typically doesn’t review acquisitions of cable networks, since it doesn’t license such operations, said Commission staffers. But conditions placed on the networks in News Corp.’s purchase of the DirecTV stake from General Motors could spur the FCC to review the cable deal, said John Goodman, pres.-Broadband Service Providers Assn. FCC officials declined to comment on procedures for reviewing the transaction because the companies haven’t submitted paperwork.

Some insiders predicted the deal may see relatively smooth sailing at the FCC, since it won’t increase media consolidation. News Corp. will reduce its extensive media holdings by divesting ownership in the world’s largest DBS provider. But critics of media consolidation vowed to review the deal closely. Still, the transaction probably will attract less scrutiny than News Corp.’s purchase of DirecTV, Goodman said, “because the properties involved are not as extensive or significant… The one part of the transaction we think will have some discussion are the RSNs that are currently subject to the conditions” on the previous merger. Those channels, in Denver, Pittsburgh and Seattle, are worth about $600 million, wrote Merrill Lynch analyst Jessica Reif Cohen. The RSNs were included so the deal will be tax-free under IRS rules, said analysts. The companies expect the deal to close by mid-2007.

Congress may study the asset swap as Democrats increase media and telecom oversight, Gene Kimmelman, Consumers Union’s federal policy vp, said: “It definitely will get more scrutiny on Capitol Hill and there certainly will be more pressure on Justice to give it scrutiny.” Lawmakers and DoJ officials probably will question whether under the new arrangement DirecTV would impede independent programmers’ access to subscribers, he said: “This deal has got some questions related to how Liberty treats unaffiliated programming.”

Malone’s reputation for chafing at conditions on deals may affect regulatory review, Media Access Project Pres Andrew Schwartzman said: “His control of this makes me uneasy.” The deal would leave News Corp. less vertically integrated, but would create new concerns about Liberty, Kimmelman said: “Liberty mostly owns programming… I think there will be an analysis of whether Liberty would be in a position to favor its own programming and would have the market power to do so.”

The deal amounts to an $11 billion stock buyback for 16.3% of News Corp., it said, pledging to buy back even more stock next year. Liberty will give up 324.6 million class A shares and 188 million class B News Corp. shares. It will get 470.4 million DirecTV shares, the RSNs and $550 million cash. The agreement needs the approval of News Corp. shareholders other than the Murdoch family and Liberty, News Corp. said. Liberty said it will probably keep Chase Carey as DirecTV CEO and appoint directors to fill News Corp.’s board seats. The companies expect the deal to close mid- 2007. - Jonathan Make, Mark Seavy, Josh Wein