Liberty boosts DirecTV stake

Company purchases 78.3 million shares

John Malone’s Liberty Media, using a characteristically arcane maneuver, has boosted its controlling DirecTV stake to 48% from 41%.

The increase, announced Thursday, came via the purchase of 78.3 million shares in the No. 1 U.S. satellite provider. That private transaction was funded by a loan of $1.98 billion. The loan was secured in part by a new “equity collar” on 110 million DirecTV common shares.

The equity collar is a series of options to buy or sell stock at set prices that together seeks to preserve the value of DirecTV shares against future volatility. Basically, Malone has bought 110 million puts — or the right to sell shares at a specified price in the future. This guarantees for the lenders of the $2 billion that Malone’s DirectTV stock can be sold at a price that will repay the loan, even if the stock market tanks in the future.

Malone, who holds a doctorate in engineering, is known for uncovering methods of pulling off intricately detailed transactions designed to help Liberty dodge major tax hits and build equity in creative ways. Since the 2005 spinoff of Discovery, though, Liberty has started to evolve from a strategic investor to more of an operating company.

“These transactions reaffirm our belief in DirecTV, the quality of its service, and the performance of Chase Carey and his management team,” said Greg Maffei, Liberty’s prexy and chief exec. “The additional shares and equity collar each increase our exposure to DirecTV’s equity and further align Liberty’s interests with those of the DirecTV shareholders.”

The news gave Liberty more positive things to crow about in the wake of a bitter loss in a Delaware court in a fight with InterActive chief Barry Diller, whose frayed relationship with Malone took the spotlight during a week of testimony.

The prospect of plugging Liberty assets such as Starz Encore or Overture Films into DirecTV’s base of 16.8 million subscribers is appealing. Direct has struggled a bit lately to match cable’s video-on-demand offerings, but its aggressive pursuit of high-definition offerings and commitment to marquee brands like the NFL has scored it points.

April Horace, an analyst who covers Liberty and other media companies for Denver-based investment bank Janco Partners, said the move suggests Malone may be ready to embark on a much more aggressive step. “He may want to make a tender offer for the whole thing,” she said.

Under terms that existed before Malone completed a swap of assets with Rupert Murdoch in February that gave News Corp.’s former controlling stake to Liberty, she said a tender offer would have to be made in order for Liberty to reach 100% ownership. After Liberty, the biggest shareholders of DirecTV are mutual funds and hedge funds, all with single-digit percentages of outstanding shares.

Shares in Liberty Media Entertainment, a tracking stock issued by the parent company in March that includes the DirecTV stake, rose 5% Thursday to close at $24.29. DirecTV shares gained almost 2% to $26.44.

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