Murdoch Buying Out Sports Partner Malone

Underscoring his goal of dominating world sports entertainment, Rupert Murdoch has agreed to take control of a group of regional cable TV networks and an expanded stake in two New York professional sports teams by buying out his sports partner, cable maverick John Malone.

Sources said Wednesday that the two media moguls have agreed to a deal under which Malone’s Liberty Media Corp. would sell Murdoch’s News Corp. its 50% interest in their sports partnership. In exchange, Liberty would get stock in Murdoch’s Australia-based company worth about $1.4 billion.

Neither News Corp. nor Liberty Media would comment.

The deal would enable Murdoch to be freed from the management constraints of the more conservative Liberty Media, sources said, allowing him to spend more aggressively in building the sports empire that is a cornerstone of News Corp.’s global expansion. Murdoch has used sports rights worldwide to enrich television assets that include Britain’s BSkyB, Asia’s StarTV, Japan’s JSkyB, and the Fox broadcast network in the U.S.

Last year, News Corp. bought the Los Angeles Dodgers. Murdoch also obtained options for 40% of the Kings hockey club and 10% of the Lakers basketball team to prevent his biggest rival, Walt Disney Co.’s ESPN, from gaining local programming rights to the teams.

Under the deal with Liberty, News Corp. would take 100% control of Fox/Liberty Networks, which was formed in 1995 to challenge ESPN’s stronghold over sports television. The partnership’s assets include the FX entertainment channel, a dozen regional sports networks, including Los Angeles-based Fox Sports West and Fox Sports West 2, and interests in more than 15 additional regional sports channels, as well as in cable networks including Speedvision, Outdoor Life Network and the Golf Channel.

Liberty would become one of News Corp.’s largest shareholders, with a 5% equity interest, adding to Malone’s already significant entertainment holdings, which include 10% of Time Warner, 21% of USA Networks Inc., 16% of United Video Satellite, 49% of Discovery Communications Inc. and 43% of QVC Inc.

As part of the deal, Liberty would also sell Murdoch its half of the partnership’s 40% stake in the Staples Center under construction in downtown Los Angeles, as well as its share of the partnership’s 40% interests in the New York Knicks basketball team, the New York Rangers hockey team, Madison Square Garden and Radio City Music Hall.

Fox/Liberty holds those assets, along with seven of the regional sports networks, in a partnership with Cablevision Systems Corp., which maintains control.

The stepped-up ownership of the New York teams could put News Corp. in violation of National Hockey League ownership rules should Murdoch exercise the option to buy a stake in Los Angeles’ Kings. The NHL does not allow ownership in more than one club.

Sources close to Murdoch say the Liberty deal could be a precursor to a similar transaction between News Corp. and Cablevision. The Long Island cable operator joined the Fox/Liberty family in late 1997, bringing with it a complement of sports channels that the partnership needed to achieve the national reach to go head-to-head with ESPN.

Together, the three partners’ 28 regional sports networks have rights to air games of 69 of the nation’s 75 pro baseball, hockey and basketball sports teams.

One source said Cablevision might be interested in selling News Corp. its interests in the regional sports networks outside New York in exchange for regaining full control of Madison Square Garden, the associated sports channels, the two New York pro sports teams and Radio City Music Hall.

Some analysts questioned Murdoch’s rationale for taking a bigger risk on regional sports at a time when rising rights fees are narrowing margins and the partnership is still not making money.

“Regional sports channels are not nearly as attractive as ESPN,” said Spencer Grimes, an analyst at Salomon Smith Barney, who said that Fox/Liberty’s profit potential will never be as high as ESPN’s because of the huge number of games they produce nightly and the more difficult advertising package they offer.

Fox/Liberty produces dozens of games every night, compared with ESPN’s one to three games, driving up costs. Fox is selling national advertisers a package that includes spots on several networks to achieve the same results they get with one network through ESPN.

ESPN’s annual cash flow of more than $600 million dwarfs that of Fox/Liberty, which has yet to make a profit because of the high cost of sports rights and the expense of developing its properties.

Although Fox/Liberty Networks is managed by Fox, its spending is tightly controlled by a board made up of representatives from Cablevision, Liberty and News Corp. The partnership has operated smoothly since a management change at the top of Liberty more than two years ago, but sources say Murdoch considers the board an impediment to fast decision-making.

The partnership agreement has also interfered with News Corp.’s sports purchases. Under the pact, neither partner can pursue sports ventures without including the other--a provision that threw a kink into Murdoch’s talks to buy the Dodgers. Murdoch had been pursuing the purchase alone when news of Liberty’s interest in the deal surfaced, inciting distrust among baseball owners already uneasy about inviting Murdoch into their club. Leading the charge: Murdoch’s nemesis, Time Warner Vice Chairman Ted Turner, owner of the Atlanta Braves.

Ironically, sources say Malone’s sale to News Corp. does not include Liberty’s 50% interest in Atlanta-based Fox Sports South. Sources say Malone plans to sell that stake to Turner to forestall his entry into regional sports through Turner South, a new regional entertainment-sports channel announced by Time Warner in February.