Malone to leave DirecTV following recapitalisation transaction

Satellite broadcaster DirecTV is to undertake a recapitalisation transaction that will eliminate the high-vote stock currently held by media mogul John Malone and his family.
Under the terms of the agreement, the Malone family will exchange their 21.8…

Satellite broadcaster DirecTV is to undertake a recapitalisation transaction that will eliminate the high-vote stock currently held by media mogul John Malone and his family.

Under the terms of the agreement, the Malone family will exchange their 21.8 million shares of Class B common stock for approximately 26.6 million shares of Class A common stock. As a result, the family’s voting interest in DirecTV will fall from 24.3% to around 3%, the same amount as their equity interest. John Malone will also resign as chairman of DirecTV’s board of directors.

The reason for the move is in order to satisfy a condition imposed by the Federal Communications Commission that dates back to Liberty Media’s acquisition of News Corp’s 38.4% controlling stake in DirecTV in February 2008. At that time, the FCC expressed concerns over the potential overlap of DirecTV’s satellite business in Puerto Rico, DirecTV Puerto Rico, and Liberty Global’s Puerto Rican cable business, Liberty Cablevision Puerto Rico.

The FCC ruled that the attributable interests connecting the two broadcasters must be severed within one year. These interests were predominantly John Malone’s position as chairman of both DirecTV and Liberty Global as well his significant holdings in both companies. As a result, DirecTV placed its ownership interests in DirecTV Puerto Rico into a trust managed by an independent trustee who had been granted to sell the ownership.

With no sale having since taken place, the FCC recently informed DirecTV that the trust arrangement could not remain in place indefinitely and was not alone sufficient to comply with the requirements of its order, particularly due to Malone’s continued de facto control of DirecTV. To that end, DirecTV approached Malone and initiated discussions over the potential recapitalisation transaction.

Alongside Malone’s imminent departure as DirecTV chairman, Liberty’s president and CEO Greg Maffei and Liberty board member Paul Gould will also resign from the DirecTV board of directors.

DirecTV stated that it believes that these actions will satisfy the FCC condition and enable the company to resume control and retain ownership of its subsidiary in Puerto Rico. Closing of the transaction is subject to FCC approval and is expected to be completed within the next several months. DirecTV was advised by Centerview Partners and Malone by Kern Consulting.

Malone and his family took control of the DirecTV Class B stock as part of the merger of Liberty Entertainment and DirecTV in late 2009, which saw Liberty spin off its 54% stake in DirecTV, along with three regional sports networks, a 65% stake in Game Show Network and games developer Fun Technologies. Under the terms of that transaction, each Class B share entitled the owner to 15 votes per share, as compared to one vote per share for class A stockholders, as well as a number of additional consent rights.

This two-class structure had infuriated some of Liberty’s minority shareholders and a group led by Blackthorn Partners, which is the largest public shareholder in Liberty Media, filed a lawsuit in February 2010 claiming that John Malone and his wife unfairly benefitted from the merger. The case is ongoing.