DTV Gains Content, Independence

Highlights include DirecTV Group Inc. (DTV - Analyst Report), Liberty Entertainment (LMDIA), Liberty Media Corp. (LINTA - Snapshot Report), News Corp. (NWS - Analyst Report), AT&T Inc. (T - Analyst Report) and Verizon Communications Inc. (VZ - Analyst Report).

DirecTV Gains Content and Independence After Liberty Media Spin-Off

DirecTV Group Inc. (DTV - Analyst Report) -- in a move to gain autonomy and potentially sell itself -- will merge with its majority shareholder, Liberty Entertainment (LMDIA) after that entity's previously-announced spinoff from its parent Liberty Media Corp. (LINTA - Snapshot Report).

The post-spinoff DirecTV will own 54% of the common stock of DirecTV, and gain content assets  -- three regional sports networks, the majority of the Game Show Network and Internet game company FUN Technologies.

Liberty Media, which is controlled by cable pioneer John Malone, currently owns a 51% stake in DTV shares and has 48% voting control. The stake was acquired from News Corp (NWS - Analyst Report) in February 2008 in exchange for Liberty's stake in NWS. After the spin off, John Malone will relinquish his voting power and control just 24% of DirecTV through super-voting Class B shares.

Near-term, the deal is expected to be marginally dilutive. Longer-term, however, I think the merger-spinoff is necessary to maximize DTV's shareholder value -- potentially in an acquisition by AT&T Inc. (T - Analyst Report) or Verizon Communications (VZ - Analyst Report). The telecom providers are currently rolling out their own Internet-based television services to compete with the cable operators' "triple play" packages -- posing a serious threat to satellite providers, which cannot provide VOD, Internet access or telephony because their platforms lack two-way interactivity (no uplink).

Although AT&T and Verizon both offer co-branded satellite service with DirecTV for areas in which the telecoms have not yet reached on their own, it seems a matter of time before they complete their build-outs -- replacing DirecTV -- or acquire satellite TV providers.

Near-term, however, we expect satellite and cable TV will be relatively defensive recession investments, suffering less subscriber attrition in the recession than other forms of entertainment, and DirecTV in particular should benefit from its recent efforts to weed out its lower-end customers most likely to churn.

We are maintaining our Buy rating on shares of DirecTV.