Malone setting up QVC shop?

Liberty ponders $7 bil net purchase

NEW YORK — All eyes will be on John Malone’s Liberty Media in the coming weeks.

That’s because the financier may finally make his biggest acquisition in recent history and trigger a round of opportunistic dealmaking in what is increasingly a buyers’ market for juicy media properties.

Liberty currently has the right to either exit its QVC joint venture with debt-laden cable operator Comcast or take over the whole network. Talk about high stakes: Comcast’s share of the home shopper could cost Malone up to $7.3 billion.

Though Malone typically has not sought to buy control of networks, especially when they are profitable and tax exposed, there is increasing feeling that Liberty will seek to buy out Comcast’s controlling position in the highly lucrative TV shopping net.

According to a research note Thursday by Prudential Securities, Liberty is likely to be a buyer of QVC and will trigger the appraisal process this year. Part of the bank’s reasoning is that Comcast is too heavily leveraged to easily purchase Liberty’s 42% QVC stake, worth around $5 billion, if compelled to do so by Malone. Secondly, it would be tax-efficient to consolidate QVC under one owner, thereby allowing Liberty to use its $4 billion in operating and investment losses to shelter QVC’s increasingly large — and taxable — net profits. Right now, neither Comcast nor Liberty can access QVC’s free cash flows (estimated at around $400 million this year) tax efficiently.

Fat cash balance

The ever-secretive Malone isn’t giving away much about his strategic intentions, despite the fact that his name and Liberty’s has been connected with virtually every possible acquisition on the media block. DirecTV, Vivendi Universal, AOL Time Warner and a host of cable channels could all be in the sights of the savvy dealmaker, particularly given his company’s cash-rich balance sheet. Some speculate that given the depressed level of Liberty shares (below $9 and trading at a discount to the perceived net value of its assets), the company could even contemplate a major stock buyback or privatization.

Investors are looking for a catalyst to reinvigorate the firm, including a takeover of QVC (and possibly a subsequent merger with Barry Diller-controlled Home Shopping Network) or acquisition of a major stake in DirecTV with News Corp., a company in which Malone is now the largest single shareholder.

Liberty has good reason to buy out QVC, including the fact that a buyout would keep Liberty safely within the bounds of the Investment Act, which requires any company with 40% of its assets in public stocks to register as an investment company. Also, QVC’s ample cash flow and healthy balance sheet could facilitate future acquisitions and fund-raising for even bigger game.

Prudential reckons Comcast’s stake is worth around $7.3 billion, which Liberty could partly finance by agreeing to reduce the exorbitant fees Comcast is obliged to pay for Starz Encore stemming from an expensive long-term deal carriage deal signed with AT&T Broadband prior to its merger with Comcast.

QVC has over 75 million subscribers in the U.S. plus another 41 million to its international versions. Company, which throws off a substantial amount of cash, has been valued at roughly $13.5 billion.

HSN link?

The more intriguing outgrowth of a Liberty play on QVC could be a future link with HSN. Liberty owns a 20% stake in HSN parent USA Interactive and is on good terms with its chief exec Diller.

Though Diller dismissed the idea of an imminent sale or combination regarding HSN in a recent conference call, he did say having full control of the network was not essential. There is also strategic and financial logic for putting the two TV shopping channels together, including reducing or eliminating the hefty distribution fees HSN must pay cable operators for carriage.

Ticking clock

The clock started ticking on Liberty’s 60-day put option Feb. 15. During this period, Liberty may put its 42% stake in QVC to Comcast, buy Comcast’s 58% stake in QVC or else take the home shopping net public. If no action is taken, Liberty can trigger the appraisal process next year.

But Comcast’s financial position leaves it less able to drive a hard bargain now than it might in a year. Given that, sources suspect Liberty will probably exercise its option now.

Comcast sources refused to comment on the status of negotiations with Liberty.

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