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Malone channels Discovery

Liberty spins off new publicly traded company

NEW YORK — A cable juggernaut is set to hit Wall Street as John Malone’s Liberty Media plans to spin off its half of Discovery Communications into a new publicly traded company called Discovery Holding.

A candid Malone acknowledged that the transaction — a year after a spinoff of Liberty Media Intl. — is another play to “find market power” he thinks Liberty lost when it sold its TCI cable systems to AT&T.

“Since then, we have been attempting to find market power again in each one of these businesses. We’ve succeeded in some and hope we’ll succeed in the rest,” he said during a conference call to discuss the spinoff and Liberty’s latest earnings.

Liberty shares rose 2.64% to $10.50 on the news.

Malone mused about potential alliances in electronic commerce with QVC parent IAC InteractiveCorp and in distribution perhaps with News Corp. He envisioned a venture capital business — “perhaps separate, and perhaps part of what we have.”

Liberty owns big stakes in Barry Diller’s IAC and Rupert Murdoch’s News Corp.

Post-TCI, Liberty became a hodgepodge of assets — a few owned outright, with minority stakes in lots of others. It was a mix Wall Street didn’t appreciate, and Liberty stock reflected it.

Liberty was so pleased with the international spinoff that execs have been mulling for months whether their content assets would be more valuable as part of a standalone company.

The new DHC will include Liberty’s 100%-owned Ascent, a smaller media services group that does sound mixing for TV and film. Discovery is its biggest customer.

Idea is that a spinoff, likely in the second half, makes it simple for Cox and Newhouse — Discovery’s two other owners with about 25% each — to contribute their stakes to the venture.

“I’ll put my money on the table that Cox and Newhouse will be willing to put their money on the table. Clearly, that’s what we hope,” Malone said.

He and Bennett noted that a deal with Cox and Newhouse would be easier with a near pure-play Discovery — which is one reason Liberty didn’t include other cable assets like Starz Encore in the new entity.

Consolidation minded

Malone said a pure-play Discovery would be better positioned to pursue “consolidation in the industry, both domestically and internationally.”

He’d like Discovery to “dominate the nonfiction video entertainment space” through acquisitions and new channels.

The 20-year-old cable net founded by current CEO John Hendricks now owns Discovery, TLC (The Learning Channel), Animal Planet, Discovery Health, the Travel Channel and Discovery Times — a joint venture with the New York Times Co.

Company has a video arm, retail stores and a robust merchandising biz. Discovery HD Theater is a 24-hour network with all high-definition programming.

Liberty currently splits its businesses into interactive, networks and tech/ventures.

Liberty owns stakes in Court TV, shared with Time Warner, and GSN with Sony. Along with its investments in IAC and News Corp., it’s also a big holder of Time Warner stock.

Liberty hasn’t had any conversations with News Corp. about unraveling its stake since late last year. Malone said he doesn’t expect any talks until News Corp. completes its buy-in of Fox Entertainment.

“I am not exactly sure how those discussions will proceed. There are a number of possibilities, including doing nothing,” he said. “We’ll just have to see what develops.”

Wall Streeters and people close to News Corp. think Murdoch will look to separate Liberty from its large voting chunk of News Corp. stock as soon as possible. News Corp. last year put in place a poison pill to fend off any possibility of a hostile takeover by Liberty, which has always maintained that its intentions are friendly.

The DHC spinoff is intended to be tax-free to Liberty shareholders.

Transaction calls for Liberty Media shareholders to receive one share of DHC for every 20 Liberty shares they own as of the record date — which hasn’t yet been set. Cash will be paid for partial shares.

‘Not compelling’

Not everyone’s bullish on the new company. Some analysts still don’t get why Liberty didn’t include more assets in DHC.

“In our view, even anchored by Liberty’s 50% stake in Discovery, we believe DHC is not a compelling standalone entity. Following the spinoff of its international distribution and content assets, Liberty Media Intl., and the potential “cash-rich” deal with News Corp, we regard the DHC spinoff as further indication that Liberty could eventually be dissolved,” wrote Merrill Lynch analyst Jessica Reif Cohen.

On the earnings front, Liberty reported a fourth-quarter net loss of $2 million, or breakeven on a per-share basis, on revenue of $2.35 billion.

A year earlier, the company lost $931 million, or 32¢ a share, on revenue of $2.04 billion.

Discovery boosted cash flow 21% to $182 million. Quarterly revenue rose 15% to $693 million. For the year, the cabler posted $663 million of cash flow on $2.4 billion of revenue.

Ascent Media’s cash flow rose 35% for the quarter to $27 million on revenue up 23% to $173 million. It posted annual cash flow of $98 million on revenue of $631 million.

At QVC, cash flow rose 18% for the quarter to $411 million. Domestic revenue rose 9% to $1.3 billion. International revenue surged 40% to $474 million.

Starz Encore saw quarterly cash flow drop 54% to $46 million. Revenue rose 6% to $248 million

Company noted a jump in programming costs to $564 million for the full year 2004 from less than $400 million a year earlier. Increase stemmed from a higher cost per title due to new rate cards for certain movie titles and amortization of deposits previously made under the output agreements.

Unit also had higher sales and marketing expenses.

Starz!, which execs say is on the mend this year, has no plans to try to match its pay TV rivals in original programming. Execs called that “a hit or miss business — unlike movies, where studios spend millions to market the movies that come to our channels.”

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