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News Corp.'s Sweet Liberty

Nat Worden

Rupert Murdoch finally made it official Friday.

News Corp. (NWS Quote) will divorce Liberty Media (LCAPA Quote), ending a relationship that started off sweet and then turned sour.

Under the terms of the widely expected agreement, Liberty will exchange its entire 16.3% stake in News Corp. -- about 324.6 million Class A shares and 188 million Class B shares -- for a 38.5% stake in satellite operator DirecTV (DTV Quote). Liberty also will receive $550 million in cash and regional sports networks in Denver, Pittsburgh and Seattle.

News Corp., the owner of properties such as Fox News, 20th Century Fox and the New York Post, said the deal will unlock "tremendous value" because it will immediately add to earnings; allow it to sell its stake in DirecTV at an attractive valuation on a tax-free basis; and help it accomplish an $11 billion stock buyback, representing 16% of its outstanding stock.

Andrew Baker, an analyst with Cathay Financial, was less enthusiastic.

"It's not bad for shareholders -- it's not a great deal, either," says Baker.

He estimates that News Corp. shareholders are giving up $12.6 billion of value -- the market value of DirecTV shares before the deal became public, its cash and the value of the regional sports networks -- for roughly $11.2 billion in News Corp. stock.

In return, however, shareholders should benefit from the big reduction in the company's outstanding share count. That will increase its free cash flow per share, and News Corp. can still repurchase an estimated $3 billion of stock in the next year or two, further enhancing its valuation.

"News Corp. is overcapitalized, which means it can unlock value for shareholders by reducing its share count," says Baker.

By divesting itself of DirecTV, News Corp. is addressing that issue and getting rid of an asset that was not living up to expectations.

"They basically realized that it wasn't doing for them what they thought it would do," says Baker. "They acquired it in the first place because they wanted to control programming distribution, but now they've been trying to get this Fox business channel up and running for a long time, and owning DirecTV hasn't done much for them to help the process."

But the real prize in this deal went to Murdoch, who was able to tighten his grip on News Corp. by elbowing John Malone, the chairman of Liberty Media, out of the picture. Having once been business allies, relations cooled between the two men when Liberty accumulated a 19% voting stake in News Corp. two years ago.

Murdoch's family controls News Corp. through a roughly 30% voting stake, but Malone's move raised the specter of a control fight, and News Corp. responded by adopting a poison-pill takeover-defense plan to stop Liberty from buying more stock.

Now that Malone has surrendered his voting rights, News Corp. said it plans to eliminate the poison pill once the agreement is completed.

For his part, Malone's new DirecTV stake catapults him to a high-profile spot in the media industry. In a statement, he said: "We are extremely pleased with the successful, tax-efficient conversion of our News holding. Our investment in DirecTV will create financial, operating and strategic flexibility."

For Murdoch, it was a small price to pay.

"The main beneficiary in all this is Rupert Murdoch," says Baker. "He's gotten rid of the one challenge for his family's continued control of News Corp."

Shares of News Corp. recently were up 4 cents, or 0.2%, to $22.56.