Murdoch to Discuss a New Bid for DirecTV

Rupert Murdoch and John Malone are gearing up for a second run at DirecTV, but this time as 50-50 partners, sources said, an unexpected change that reflects their different agendas as they pursue the nation’s leading satellite TV provider.

Top executives of Murdoch’s News Corp. are scheduled to discuss a new deal in New York today with representatives of General Motors Corp., which owns DirecTV through its El Segundo-based subsidiary, Hughes Electronics Corp. Sources close to the companies said the meeting is a preliminary one and may not cover such details as price and structure.

But it will be the first since News Corp., with $500 million in financial backing from Malone’s Liberty Media Corp., lost a bidding war for Hughes a year ago to EchoStar Communications Corp. GM put DirecTV back on the auction block last week, after the EchoStar merger was abandoned in the face of opposition by federal regulators.

Murdoch has long craved DirecTV, seeing it as the missing link in News Corp.’s worldwide satellite operation, which spans from China, through Asia and continental Europe, to Latin America.

Even before the EchoStar-Hughes deal was scrapped, News Corp. had amassed a war chest this year big enough for a solo bid should DirecTV become available again. Still, some on Wall Street say the company’s balance sheet would be less strained with Malone’s help.

Less clear has been Malone’s motivation, especially Liberty Media’s insistence that it would pursue Hughes even without Murdoch.

Liberty is mostly a collection of media investments managed by a mogul better known for his ruthless opportunism and clever financial engineering than his operational prowess.

“Everyone is trying to figure out why Liberty is so adamant about owning DirecTV ... it’s not immediately obvious what strategic benefits Liberty gets,” said Merrill Lynch analyst Jessica Reif Cohen.

But those close to Malone say there is a logical explanation for his proposed 50-50 structure. Although he was content last time around to be a silent partner, they say, the Denver mogul is now being driven by concerns over how Liberty is regulated.

Because so many of Liberty’s assets are minority investments rather than controlling positions in operating companies, Malone is said to be worried that securities regulators could reclassify it as a mutual fund, triggering undesirable tax consequences and preventing it from hedging its positions by using financial instruments such as derivatives.

“Liberty has always danced close to the edge of being ranked as a mutual fund,” said one executive close to the situation. “It’s been an ongoing concern.”

Sources said Malone hopes to free Liberty from the regulatory uncertainty through two upcoming transactions in which it would have control powers. Hughes is one of those deals.

The other, word of which first surfaced this summer, would see Liberty emerge as the single largest stockholder in a new company that would hold the U.S. entertainment operations of Vivendi Universal, including its Hollywood studios, theme parks and the recording label.

Under one scenario being discussed, Liberty would contribute its 100%-owned Starz Encore Group, valued by Wall Street at about $5 billion; its 3% stake in Vivendi; and cash in exchange for an equity position of about 30% in the new company, sources said. Malone’s partner in such a deal, some say, would be Barry Diller, co-chief executive of the Universal assets and chairman of USA Interactive Inc. Malone is a major shareholder of USA Interactive.

However, it’s far from certain that Vivendi will be willing to go along with Malone’s plan. Billionaire Marvin Davis has made his own offer for the entertainment assets, and other bidders also are likely to surface.

Liberty Chief Executive Robert Bennett has portrayed the DirecTV deal’s merits as financial, arguing that the asset is undervalued and on the verge of turning cash-flow positive.

As for Liberty’s need for joint control with News Corp., company officials said the strategy is in keeping with a promise to shareholders in the wake of a spate of disappointing minority investments since 2000 that have decimated Liberty’s stock value.

“Our shareholders are more comfortable if we have control or significant influence over the outcome,” said Liberty spokesman Michael Erickson. “We want to control our destiny.”

Liberty shares have fallen 68% from a peak in early 2000, as media and technology stocks have plunged and a couple of the companies in which Liberty invested have come under investigation or filed for bankruptcy protection.

So far, News Corp. seems to be giving Malone what he wants.

The two companies are talking about giving Liberty board representation and governance powers equal to News Corp.’s, according to sources close to the situation.

Liberty and News Corp. each would put up half of the estimated $5 billion that Wall Street says it would cost for GM’s 30% controlling stake in Hughes.

Malone, however, is keeping his options open.

One source said he will not be represented at today’s meeting because he wants to retain rights for his company to pursue Hughes on its own should News Corp. not agree to all his conditions.

Neither Malone nor Murdoch returned calls seeking comment. GM officials could not be reached for comment.

Liberty once controlled an enviable array of cable programming. But since the mid-1990s, it has exchanged many of these holdings for minority positions in the world’s largest media giants. For instance, Liberty sold its 20% stake in Turner Broadcasting System to Time Warner and now owns 4% of AOL Time Warner Inc.

Malone sold Murdoch his 50% stake in their sports joint venture as well as a 22% interest in Gemstar-TV Guide International Inc.

Liberty now owns 18% of News Corp., slightly less than Murdoch’s own 20% in equity.