Malone to Buy a Controlling Stake in QVC

Liberty Media Corp. agreed Thursday to spend $7.9 billion to purchase control of the hugely profitable home shopping channel QVC, a move that comes on the heels of the company’s efforts to snap up Vivendi Universal’s U.S. entertainment assets.

The timing of the purchase from Comcast Corp. -- which will give Liberty the 57.5% of QVC that it doesn’t already own -- caught many by surprise. That’s because Liberty, controlled by cable magnate John Malone, was thought to be focusing on the Vivendi properties, which include the USA and Sci Fi cable channels and Universal film and television studios.

Still, analysts say that with $15 billion in deal-making leverage, Malone has the resources to pull off both purchases at once -- and many predict he will.

“I don’t think it is an either-or proposition,” said Matthew Harrigan, managing director of Janco Partners, an investment banking firm, in Denver.

The acquisition of the world’s largest home shopping channel helps Malone to meet his goal of converting Liberty into an operating entity rather than a mere portfolio manager.

Meanwhile, a purchase of Vivendi’s assets would further catapult Liberty into the big leagues of media, although the Englewood, Colo.-based company would still lack the strength of such behemoths as AOL Time Warner Inc., Viacom Inc. and Walt Disney Co.

For Comcast, the sale dramatically improves the cable company’s balance sheet by reducing its towering debt just eight months after its $30-billion acquisition of AT&T; Broadband, one of the largest in media history.

“This gives Comcast huge liquidity,” said Jessica Reif Cohen, an analyst at Merrill Lynch.

Liberty spokesman Michael Erickson didn’t return a call seeking comment.

Liberty is among five suitors vying for the Universal entertainment assets, with Vivendi asking for minimum bids of $11.5 billion, sources say.

The other bidders include an investment group headed by Edgar Bronfman Jr., Metro-Goldwyn-Mayer Inc., Viacom Inc. and General Electric Co. subsidiary NBC.

Liberty has some financial flexibility going forward. Because of the way the QVC deal is structured, Liberty can pay a combination of stock, cash or a three-year note, according to Comcast. The stock portion is capped at 7.5% of Liberty’s shares outstanding, worth about $2.56 billion.

QVC’s ample cash flow of roughly $900 million a year also will allow Liberty to borrow an additional $4 billion, Cohen said.

“It gives Malone very predictable cash flow with which to service any debt he’s going to take on at Universal,” said Larry Gerbrandt, senior analyst at Kagan World Media.

Executives at Vivendi were caught off guard by Malone’s QVC bid. But they did not view it as a sign that he was any less interested in the Universal operation, one Vivendi executive said.

Analysts said the QVC purchase reduced the pressure on Liberty’s chairman to overpay for the Vivendi properties.

One factor motivating Malone’s recent acquisition hunt is that his company runs the risk of being regulated as a mutual fund and then suffering undesirable tax consequences. To avoid that fate, Liberty needs to own more operating assets, offsetting the company’s portfolio of minority stakes in media properties.

Currently, Liberty has operating control of only one asset: Starz Encore, worth about $5 billion. Liberty’s total market value is about $30 billion.

Malone is, in many ways, a different kind of media mogul. The Denver entrepreneur has never been enamored of Hollywood or the volatile movie business, nor has he any experience in managing a studio.

In the past, Malone has been a bargain shopper, avoiding the kind of bidding war that may emerge for the Vivendi assets.

Even with QVC, Liberty will lack the clout to compete toe-to-toe with the giants that now control the media business.

To prevent being marginalized, Malone has also contemplated buying not only QVC and Vivendi but also Hughes Electronics Corp.

News Corp. has since agreed to purchase control of Hughes, the owner of satellite television leader DirecTV.

Comcast and Liberty have been negotiating since March, when Malone exercised an option that forced Comcast either to sell its stake or buy all of the shopping channel.

On Monday, Liberty set the total value for QVC at $13.8 billion, at the high end of Wall Street’s range of $11 billion to $14 billion. Comcast had five days to decide whether to buy at that price.

Malone may well have expected Comcast to snatch the remainder of QVC.

Sources said that last week he told officials at Goldman Sachs, which is representing Vivendi in the sale of its entertainment assets, that he was sure Comcast would buy out his stake in QVC. That, he figured, would net him about $5 billion to help finance his Universal bid.

After a board meeting Thursday, however, Comcast agreed to sell. The transaction is expected to close by year’s end.

Comcast executives said the deal was too good to pass up.

“We’re disciplined buyers and disciplined sellers, and at this price we feel it’s smarter to sell,” said Steve Burke, president of Comcast Cable. Comcast put up $300 million for its stake in QVC as a founding investor 11 years ago.

Comcast Class A shares rose 35 cents to $31.02 on Nasdaq. Liberty shares fell 14 cents to $11.45 on the New York Stock Exchange.