Duo form Discovery Communications

Negotiations were in the works since last year

John Malone’s Liberty Media and Conde Nast parent Advance/Newhouse are cleaning up the ownership structure of the Discovery cable empire in an effort to satisfy Wall Street’s demand for transparency and make it easier for the newly created public entity to do deals.

Liberty-controlled Discovery Holding Co. and Advance/Newhouse Programming Partnership announced plans late Wednesday to combine their existing stakes in the cabler to form a publicly traded company called Discovery Communications.

Discovery Communications will succeed Discovery Holding as the public company with full ownership of Discovery Channel, TLC, Animal Planet and a dozen other sibling channels. Advance/Newhouse previously held equity interests in two of those channels: It owned 33% of the Discovery mothership and 10% of Animal Planet. Company will swap those stakes for preferred stock in Discovery Communications.

“This deal cleans up the various loose ends and makes everything clearer” to public investors, said Chris Marangi, cable analyst with Gabelli Partners.

Marangi added that the streamlined ownership structure will make it easier for Discovery Communications to pursue share buybacks and acquisitions.

Discovery Holding’s stock has been a standout in the embattled media sector in recent months. It gained nearly 2% Wednesday to close at $26.43, within sight of its 52-week high of $29.81 and up more than 20% since March.

The new structure will entail no change in the management configuration of the public company, which will continue to be headed by John Hendricks as chairman of Discovery Communications and David Zaslavas CEO.

Post-production company Ascent Media, formerly a wholly owned subsidiary of Discovery Holding, will be folded into Discovery Communications.

As part of the new setup, Advance/Newhouse will own about one-third of the outstanding shares and have the right to elect three members of Discovery Communications’ board of directors. It will also exercise a measure of control over the management of the company, or as the companies put it in a press release, Advance/Newhouse will be able to “exercise approval rights with respect to the taking of specified actions by the new company and its subsidiaries.”

Some of the moves announced Wednesday had been anticipated. In early May, along with reporting earnings for the fiscal second quarter, Discovery said it had postponed creation of the new public entity until the fiscal third quarter. In December, it had signed a letter of intent with Advance/Newhouse.

Marangi said some of the steps engineered by Zaslav, a former top NBC exec, since he took over as CEO in the last 18 months have ramped up Discovery’s visibility. He includes the deal with Oprah Winfrey for an Oprah-branded network, OWN, to kick off later this year; the transformation of Discovery Home channel into Planet Green; and another rebranded channel called Investigation Discovery.

Malone is famous for being intensely averse to paying taxes, and many of his legendary chess moves in his decades in the media biz have involved tax-free transactions. Not surprisingly, the press release noted that the new arrangement for Discovery is “subject to various conditions, including the receipt by the parties of the opinions of tax counsel.”

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