Comcast deal gives Liberty some options

Co. may get cash, stock, 3-year note for shopping channel

This article was updated on July 6 at 7:13 p.m.

NEW YORK — It’s one down and one to go for resurgent dealmaker John Malone.

Malone’s Liberty Media kicked off the fireworks last Thursday, agreeing to buy a controlling stake in cable net QVC from joint venture partner Comcast for $7.9 billion.

Deal values the lucrative home shopping net at a hefty $14 billion. That marks a massive increase in value on Liberty’s initial $100 million investment in the shopping net a decade ago, while giving Malone a potent new tool in the even bigger bid to buy Vivendi Universal Entertainment.

Under the agreement, Liberty can pay for Comcast’s 58% stake using a combination of cash, stock (up to a limit of 218 million shares, or roughly $2.6 billion) and a three-year note.

And while the outlay will tax Liberty’s resources heading into round two of the VUE sweepstakes, the terms open the possibility that Comcast could get equity in an enlarged Liberty-VUE should Malone be successful in his bid to buy the studio and cable nets from Viv U.

In fact buying QVC could be strategically advantageous for Liberty in formulating its bid for VUE, especially if it can bring Comcast in as a Liberty shareholder. Along with the cash flows and debt capacity it will gain from QVC, having ready access to Comcast’s cable footprint could facilitate the rollout of new cable nets.

According to Oppenheimer analyst Thomas Eagan, a guarantee of distribution across the Comcast systems would create an extra $880 million in value assuming USA Networks could launch two channels.

Janco Partners analyst Matthew Harrigan agrees that getting a speedy resolution on QVC gives Liberty more cards to play in the upcoming second round of VUE negotiations.

Liberty maintains it has sufficient funds to complete both the QVC and VUE deals provided it doesn’t pay all cash for either.

Company claims to have immediate access to $5 billion in cash plus access to another $10.4 billion it can access from unwinding other liquid holdings, hedges and other securities derivatives. Possibly more important, Malone would be able to borrow up to $3 billion against QVC’s debt-free balance sheet to beef up his VUE war chest or for investment capital after a deal.

“I still think Liberty can do the VUE deal, but they will have to do some fast financial work” to access those resources, said Harrigan.

Suit settlement possible

A friendly resolution with Comcast, he noted, may also signal a resolution to an outstanding lawsuit between the two parties over Starz Encore carriage terms. Comcast has refused to pay the pricey rate card Liberty had previously negotiated for the pay movie net with AT&T Broadband prior to its acquisition by Comcast last year.

Analysts were surprised by the relatively quick settlement on the deal, which had been under negotiation ever since Liberty triggered an exit option and appraisal of its stake in QVC in March.

Both partners had set themselves up for a win-win scenario as they debated over the right to buy out the other’s equity stake in the network in recent months. In the end, Liberty’s desire to take full operating control of a major, and profitable, asset combined with Comcast’s interest in reducing its hefty debt load won out.

“The cable business continues to be our core focus,” said Comcast CEO- prexy Brian Roberts, who added that the company now has “the flexibility to improve our already strong financial position and to invest for future growth.”

Reducing debt

Comcast will now be able to drastically reduce its debt load, possibly to $20 billion by the end of the year, down from its current $33 billion. Comcast also has other programming acquisitions on its radar, including Cablevision’s stake in the Fox regional sports networks, as well as smaller cable system purchases. One analyst even speculated that a bid for Cablevision, long considered a likely target for Time Warner Cable, would not be out of the question for Comcast.

In addition to getting regulators off its back (Liberty has long hovered barely within the legal definition of an operating company as opposed to a fund manager), Liberty gains access to QVC’s estimated $800 million in operating free cash flow.

Merging shop nets?

Further down the road, Liberty’s acquisition also opens up the long-speculated possibility of merging QVC with Barry Diller’s smaller home shopping rival HSN. Liberty owns a 20% stake in HSN parent InteractiveCorp. (formerly USA Interactive).

Harrigan further noted that “being buddies with Comcast and Rupert Murdoch with DirecTV gives Liberty even more power than when they owned TCI to launch cable nets. These companies have incentive to work together.”

And while there is little doubt that Malone’s team of Denver-based financial wizards can successfully assemble the funding and dealmaking terms to pull off both of these blockbuster deals, the lingering question among investors is how Liberty intends to manage its new fully consolidated operating company, never mind the challenges that it would face if it wins the race for VUE.

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