Like most of Liberty Media Chairman John Malone's transactions, the recent shift in his ownership of News Corp. stock involves a wicked web of financial engineering. But media and Wall Street executives' bewilderment over the transaction has less to do with the structure than with one simple question: Why?
The startling part of the transaction is that News Corp. executives did not know that Liberty had been quietly collecting so much voting stock over the past several months. Although the executives are close, Malone notified News Corp. Chairman Rupert Murdoch in a phone call Tuesday afternoon, only a day before Liberty disclosed the deal to the public.
Liberty abruptly revealed last Wednesday that it had quietly spent $1.5 billion gathering 9.1% of News Corp.'s voting stock, adding to its long-held $8 billion non-voting stake in the media giant. But Liberty tied up much of the voting stake in an elaborate financial derivative, limiting its loss if News Corp.'s stock price drops but giving Malone 80% of any gain over the next five years. At that point, the derivative unwinds.
"Essentially, Malone rents the votes for five years," said Sanford Bernstein & Co. media analyst Tom Wolzien. "The question is, to what end?"
Speculation zoomed around Wall Street that Malone wants to stage a takeover or wants to trade the stock for some of News Corp.'s assets. Liberty was silent about the goal of the transaction.
Financially, it's understandable. Fulcrum Capital media analyst Richard Greenfield says that, in the end, Liberty shifted much of its play in News Corp. from non-voting to voting and hedged its risk that News Corp. stock would drop below $33 per share but incurred essentially no costs.
But keeping Murdoch in the dark on the weeks-long accumulation of shares is what confuses other media executives. Murdoch and Malone are close and have been partners in a multibillion-dollar series of transactions dating back to their interest in regional sports networks in the late 1980s. Malone sold The Family Channel to Murdoch for News Corp. stock. He teamed up with him to control what is now Gemstar/TV Guide but traded his end in for more News Corp. stock. Malone has also bought even more shares for cash.