Media Moguls’ Spinoff Push

Liberty Media chairman John Malone finds that breaking up is smart to do.
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Cable tycoon John Malone joined a growing parade of media moguls -- Sumner Redstone, Barry Diller and Charlie Ergen -- in embracing the strategy of breaking up their companies into two or more completely separate, publicly traded stocks.

Malone-controlled Liberty Media said this past week that it plans to separate, via a cashless stock distribution to shareholders, its Liberty Entertainment unit, which owns pay movie channel Starz and roughly 50% of DirecTV.

Although the strategy has yet to produce a success, it’s a little-appreciated trend that’s been sweeping the media-stocks sector since January 2006, when Redstone orchestrated the creation of separate Viacom and CBS companies.

Diller-led InterActiveCorp created four spinoffs Aug. 21 including pure-play TV shopping company HSN.

Ergen-led EchoStar and satellite-TV operator Dish Network began trading separately in January.

“There is pressure to improve valuations, so the companies try something new,” said Neil Begley, senior vice president at Moody’s Investors Service. “This is all an effort to bolster stock prices.”

But the go-small-to-prosper strategy also represents a 180-degree reversal of the consolidation mania in the 1990s.

Companies now executing the breakup strategy sell it to Wall Street as making more tightly focused companies that are nimble, more easily evaluated by the investment community than sprawling conglomerates and can use their own stock to finance acquisitions within their niches. Drawbacks are higher costs from duplicative overheads and smaller scale.

Other companies on the bandwagon are newspaper-TV conglomerate E.W. Scripps (its former basic-cable Food Network and Home & Garden Television began trading separately as Scripps Networks Interactive in July), Time Warner (scheduled to completely separate from its 84%-owned cable-TV-systems subsidiary later this year) and TV broadcaster Belo (which unloaded its sagging newspapers into a separate company in February).

Cablevision Systems -- led by another mogul, Charles Dolan, a cable-industry founding father -- is thinking about separating in some way its Rainbow Media Holdings collection of basic-cable networks, which could be another example of the trend depending on how it’s structured.

Stock analysts praised this past week’s Liberty Entertainment spinoff announcement, in part hoping that it would be a catalyst for buyouts, which would make the trend finally succeed due to premium prices paid in takeovers.

Investment houses speculated that separating Liberty Entertainment positions it to eventually buy the roughly one-half of DirecTV it doesn’t already own, which has an indicated stock market value of $15 billion.

Two other companies whispered as “deal stocks” in potential buyouts are Scripps Networks and HSN because the basic-cable networks sector is booming and undergoing consolidation.

At the moment, Liberty Entertainment is merely a tracking stock under the umbrella of and wholly owned by Liberty Media. Tracking stocks are halfway measures to give investors nominally separate stock representing a tight business focus within a bigger company. Parent companies designate divisions, usually high-growth segments, to be attached to tracking stocks to trade alongside the parent company’s shares.

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