Company must buy cable channel or sell its stake

NEW YORK — Liberty Media on Monday triggered its option to force an ownership change for home shopping net QVC (Daily Variety, Feb 21). A 30-day appraisal period for QVC, which Liberty jointly owns with Comcast Corp., is now under way, putting the buy-or-sell decision squarely in the cabler’s court.

While it would be futile to try to predict the final outcome or deal terms, Liberty chairman-CEO John Malone clearly looks to have the upper hand, whether his goal is to take control of the lucrative shopping web — as many believe he will — or to take the proceeds from a sale.

The two companies are contractually bound to agree on a value for QVC by the end of March, or they’ll be forced to seek a third-party appraisal. Once QVC’s fair market value — estimated at north of $13 billion — is set, Comcast gets another 30 days to decide whether to buy Liberty’s stake at that price or put the option to Liberty to buy its stake.

The buyer can use cash, stock, a three-year note or a combination. An additional contract clause requires the parties to make the sale tax-free or at least as tax-efficient as possible.

Three possible results

There are three possible outcomes for QVC: 1) Comcast summons the necessary funding to buy out Liberty’s 42% take in the profitable cable net; 2) Liberty buys out Comcast’s 58% stake in QVC (valued at around $7 billion), giving Malone an operating business with access to buoyant cash flows (as opposed to its dozens of non-consolidated minority holdings, whose cash flows remain out of Liberty’s reach); or 3) Both companies opt to sell QVC to a third party or an IPO. There likely would be several parties interested in the profitable home shopping net, but a third-party sale is considered the least likely option.

QVC is one of Liberty’s largest private holdings, and whether Malone winds up selling his 42% stake to Comcast or buys out the cable operator’s majority position, a robust valuation no doubt will boost Liberty Media shares. Analysts reckon Liberty now is trading at a 33% discount to its net asset value.

Balance sheet blues

Though heavily indebted Comcast has won high marks for its fast operational turnarounds with newly acquired AT&T Broadband, the cabler is not in a comfortable position to spend upwards of $7 billion to buy out Malone without seriously straining its balance sheet.

Common wisdom among Wall Street analysts is that Comcast is more likely to be a seller than a buyer of QVC, given its stated commitment to significantly reduce its $30 billion debt load.

Furthermore, Comcast sources said Monday at a Bear Stearns investment conference in Florida that its new cash flow targets are not dependent on having QVC. That suggests Comcast would be comfortable giving up its revenue stream, perhaps using the estimated $4 billion in net proceeds from a sale to deleverage further.

QVC generated just under $1.4 billion in sales in the fourth quarter of fiscal 2002, according to Comcast’s recent results.

Liberty Media has plentiful cash with which to buy out Comcast should the latter feel too stretched financially to retain control. On the other hand, if Liberty were to exit, the proceeds would further pad its deal-making war chest, which it could use to pursue DirecTV and/or Vivendi Universal Entertainment.

Tough negotiating ahead

Even if Comcast can orchestrate a deal to buy out Liberty, whether by using its credit lines or issuing additional stock, Malone surely will drive a hard bargain. Comcast is litigating to reduce the high carriage fees it is obligated to pay Liberty for Starz Encore. Some believe Malone may use that bargaining chip in any negotiations over QVC.

Liberty has good strategic reasons for pursuing control of QVC and its plentiful cash flows. Malone’s company has $4 billion in losses that it could use to shelter QVC’s net profits. Taking control of QVC also would ease regulatory concerns that Liberty should be counted as an investment concern rather than an operating company.

Finally, given that Diller and Malone are cooking up an offer for Viv U Entertainment assets, it’s conceivable the two men could look to merge Diller’s Home Shopping Network with QVC.

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