Liberty Media to Spin Off Discovery Communications

Liberty Media Corp. (L) is spinning off its stakes in Discovery Communications and Ascent Media Group as John Malone (search) continues to reshape his vast holdings in a bid to prove they should be valued higher.

The transaction, announced on Tuesday, will create a new publicly traded company called Discovery Holding Co. (search) and include Liberty Media's 50 percent stake in Discovery and 100 percent ownership in Ascent. It is designed to be tax-free for shareholders and the company.

Liberty Media, based in Englewood, Colo., did not specifically say why it was separating the two units from the rest of the company, which includes home-shopping channel QVC, Court TV and a stake in Rupert Murdoch's News Corp.(NWS).

News Corp. is the parent company of the Fox News Channel, which operates

The deal could make it easier for Malone to buy full ownership of Discovery, which owns cable networks Discovery Channel, Animal Planet, Travel Channel and BBC America, or for another company to buy him out.

Discovery alone could be valued between $10 billion and $15 billion based on its 2004 operating cashflow of $663 million. The valuation assumes single-digit percentage growth in 2005, which is what the company is forecasting, and a 15-20 multiple on that figure, which is what analysts estimate it is worth.

"This deal theoretically makes Discovery more liquid," said Paul Kim, a media analyst with Tradition Asiel Securities. "It's a fantastic asset that anyone would want, including Time Warner, Viacom, News Corp. or Comcast. But the ownership structure has been very complicated."

Cable company Cox Communications and magazine publisher Advance/Newhouse each own one quarter of Discovery. Ascent Media provides post-production sound and video services for film and TV companies. It mixes music, edits sound and duplicates DVDs.

Liberty Media also reported financial results on Tuesday, disclosing that Discovery's annual revenues had increased 19 percent from 2003 to $2.4 billion and Ascent's increased 24 percent to $631 million.

Overall, Liberty Media narrowed its quarterly loss to $2 million, or breakeven on a per share basis, compared with a loss of $931 million, or 32 cents a share, a year earlier.

In the spin-off, holders of Liberty Media series A and series B shares will receive 0.05 share of the corresponding series of Discovery Holding Co. common stock for each Liberty Media share as of the record date, which has not been set. Cash will be delivered in lieu of fractional shares.

The Discovery spin-off is expected to be completed in the second quarter. Liberty Media said it has asked the IRS to rule on the tax-free nature of the move.

Malone, one of the pioneers in the cable industry and chairman of Liberty Media, has been financially restructuring virtually all his holdings over the past year to simplify them for investors and to try to prove they are worth more.

He spun off his international assets into Liberty Media International and then used them to launch a bid to buy the rest of European cable operator UnitedGlobalCom. He is also in the process of taking public Japan's biggest cable company, Jupiter Telecommunications.