Murdoch Tries Indirect Play for DirecTV

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.

By contributing DirecTV, GM could claim at least 50% of Sky, based on Wall Street’s estimates of market values. That could fit GM’s requirement that Hughes retain a controlling 51% in any transaction.

But Murdoch also wants control. And piling assets into Sky Global would help keep News Corp.’s interest from dipping below 50% in a merger with DirecTV.

Beefing up Sky would also allow it to raise more cash. Instead of the $3 billion to $4 billion stock offering originally planned, Sky could raise $6 billion or $7 billion, which is closer to GM’s demands.

“The only way News Corp. can buy DirecTV is by putting as many assets into Sky as possible to get its valuation above $40 billion,” said one analyst briefed on the transaction but restricted from talking for the record.

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That is the motive behind Liberty’s Gemstar swap idea. Liberty could contribute Gemstar directly to Sky for an equity interest in the IPO. Or it could give the Gemstar shares, worth about $9 billion, to News Corp., which would in turn put them into Sky.

The trade would also give Murdoch an opening to control Gemstar. Sky Global currently holds a 21.3% stake, which would double with Liberty’s shares.

Sky’s board seats would also double to six--as many seats as Gemstar founder Henry Yuen holds. Yuen is obligated to vote in support of Liberty and Sky and vice versa, but only until 2005. That’s when Murdoch would move in for control.

The Gemstar technology is at the heart of Sky’s strategy to become the worldwide platform for pay TV. Yuen built the company’s $40-billion market value by buying up the major patents surrounding electronic TV guides and suing all encroachers. Liberty and News Corp. owned Gemstar’s chief rival, TV Guide, but ended up merging the companies in summer to settle a patent infringement lawsuit brought by Yuen.

Deals such as Gemstar are at the core of the tightening bond between Malone and Murdoch, both empire builders and shoot-from-the-hip mavericks. Malone became the king of the cable gatekeepers by building TCI into the industry leader and using its clout to extract equity stakes in channels wanting carriage for Liberty. Murdoch inherited two marginal newspapers from his father and used it as a foundation for building a global satellite-TV empire.

The two men were suspicious rivals in the early ‘90’s, even as Malone cut Murdoch the slack--albeit at a cost--to expand his American beachhead.

Malone and Murdoch altered business models more than once. One time was when TCI agreed to launch News Corp.’s 24-hour news channel, Fox News. A latecomer to cable, Murdoch was locked out because cable systems were overcrowded. But Malone came to the rescue, agreeing to roll out Fox News for an eye-popping “carriage fee” of $10 per household. The deal has set a high barrier of entry since, closing the door on all but the established players.

But people who know both Murdoch and Malone say the breakthrough in their relationship came when they tried to join forces in the satellite business. News Corp. had struck a joint venture in 1997 with DirecTV’s leading rival, EchoStar Communications. Dubbed “the Death Star” by the cable industry, the new Sky service was going to cut cable off at the knees by offering the local broadcast channels then lacking from satellite.

But Malone talked Murdoch out of the venture. Malone persuaded Murdoch to join a cable-owned satellite venture instead. Ultimately, U.S. regulators nixed the deal because they wanted News Corp. as a competitor rather than an ally to cable.

Malone and Murdoch have since forged several joint ventures. Liberty became a large shareholder of News Corp. by converting its 50% ownership in a sports partnership with News Corp. into a stake in the parent company.

Several sources close to Liberty say Murdoch is now positioning Malone to play a supporting role in a succession plan at News Corp. After fighting off prostate cancer this summer, Murdoch has asked Malone to, as one source put it, “protect the interests of Lachlan and James” should anything happen to him.

Murdoch’s two sons, who are 29 and 25, respectively, are working their way up the ranks in the company. Lachlan is running the newspaper group based in Australia, and James just took the post as head of the money-losing Star TV.

News Corp. executives say the notion that Malone would be surrogate dad is ridiculous. They say Murdoch, who underwent chemotherapy treatments in Los Angeles this summer, never considers his mortality. He thinks only of his next conquest.

Liberty executives say the transaction is financially motivated. They say Malone sees the stock swap as a way to trade fully valued Gemstar shares for undervalued News Corp. shares. While Gemstar has more than doubled in the last year, News Corp. has lagged the media sector.

News Corp. shares, at $52.75 Thursday on the New York Stock Exchange, trade for about 46 times this year’s estimated earnings per share. Gemstar, at $72.39 on Nasdaq, trades for about 130 times earnings.

Analysts, in fact, say Malone’s vote of confidence could lift News Corp. stock. “News Corp. is trading at a massive discount to other media, and if this deal were to occur, investors would have comfort knowing that John is there,” said Jessica Reif Cohen, an analyst at Merrill Lynch. “Malone is a brilliant strategist and a brilliant investor. Liberty has doubled in value each of the last three years before this year.”

Liberty shares, at about $18 on the NYSE, are in the tank right now, however, because of wireless investments that Wall Street doesn’t like.

A high-profile role for Malone at News Corp. could be delayed by his current entanglements at AT&T.; Liberty executives say the potential regulatory conflicts could be sidestepped by making Liberty’s interest in News Corp. passive. Just as Liberty’s current 8% stake is nonvoting, its additional shares might be too.

But why would Malone take such a large position without having votes? He might if the shares converted to voting stock once Malone extracts Liberty from AT&T;’s grip. That’s all part of the plan but cannot happen before next year.

After losing $1 billion on paper as AT&T;’s stock has plunged this year, Malone has become a pest on the board and disenchanted with management. In an attempt to recover some of his losses, Malone is pushing a proposal at AT&T;’s board meetings this week that could result in the break up of the telecommunications giant.

Given Malone’s disruptive record at AT&T;, some analysts say Murdoch is taking chances that few chief executives would bear.

But the risk may just be part of the price of winning DirecTV.

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Coming to America?

News Corp. Chairman Rupert Murdoch is vying to buy DirecTV in the United States to fill in the missing link in his worldwide satellite television strategy.

Potential Rival Bidders

* General Electric: A top-flight stock currency and the favorite of DirecTV parent General Motors. But fears of stock dilution have kept NBC’s owner out of deals.

* Sony: Needs distribution outlet for its Hollywood studio’s content. But the Japanese electronics giant probably won’t bite without a U.S. partner.

* Disney: Rivals have entered the entertainment giant’s turf because of its aversion to risk and a not-invented-here mentality.

* Vivendi: Its chief wants to be media king, but has his hands full with a pending purchase of Canal Plus and Universal Studio’s parent, Seagram.

* Viacom: Runs counter to its focus on high-margin, ad-driven businesses like radio and cable networks. Still digesting CBS acquisition.

Source: Company reports