Limbo's not so bad for satellite broadcaster DirecTV.

EL Segundo-based DirecTV Inc., the nation's largest satellite broadcaster, finds itself planted firmly in the middle of a battle between two media moguls.

News Corp. Chairman Rupert Murdoch wants the 19 percent stake in the voting shares of his media conglomerate controlled by Liberty Media Corp. Chairman John Malone. To get it, he's reportedly offered to swap News Corp.'s 38 percent controlling stake in DirecTV, worth an estimated $9 billion dollars.

So how does it feel to be in play?

"This isn't about us," said DirecTV President and Chief Executive Chase Carey. That was just about all he was willing to say at the Merrill Lynch Media & Entertainment Conference in Pasadena last week. He did make a point of saying News Corp.'s potential divestiture was not the result of weakness on the part of DirecTV. "We couldn't feel better about where we are today."

Liberty Chief Executive Greg Maffei agreed that regaining the stock is Murdoch's primary motivation, and noted that talks involving other News Corp. assets--in addition to, or instead, of DirecTV--had been going on for years.

"What we will end up with at News Corp., I don't know. The range (of assets) depends on whether you can find some operating asset you think you can want to own for the long term, that is synergistic potentially with some of the things we might end up with.

"Would Rupert want to sell and could we agree upon a price?" he asked. "That's why this isn't done yet and that's why it may never get done."

DirecTV, which bases roughly 1,500 of its 6,000 employees in El Segundo, has a market cap of $23.6 billion and had sales of $12.2 billion last year. In the second quarter, DirecTV earned $459 million, up 182 percent from a year earlier and its revenue increased 12 percent, to $3.5 billion.

Challenges ahead

The company's performance has been solid, though growth is slowing. The long long-term viability of satellite as a distribution platform is cloudy, however, and in the short term, the Internet-TV-phone packages offered by cable telephone companies are adding pressure.

Still, even without a swap, the future has potential. Murdoch and DirecTV execs have talked of a billion-dollar deal that would lead the satellite broadcaster to provide broadband Internet services to subscribers by 2007, by investing about $1 billion in broadband access.

The Internet and other digital media are figuring prominently in Murdoch's business strategy of late, highlighted by News Corp.'s acquisition of social networking site MySpace.com last year. He drew headlines by calling DirecTV a "turd bird" in a recent interview, but is he ready to walk away from a moneymaking operation for which he paid $6.6 billion just three years ago?

That's why a complete divestiture wouldn't make sense for the media behemoth, according to said Sanders Morris Harris analyst Steve Mather.

"I think it's unlikely that News Corp will give up its board control and share of DirecTV just two years after they bought it," he said.

There have been reports that the swap could involve News Corp.'s National Geographic Channel, its coupon company or television stations. An asset along those lines is likely to be part of the deal, because including a business that has been held for five years in a swap provides a significant tax advantage for both parties.

"Liberty has its own media portfolio and could leverage DTV to let them grow and it would take an active interest just like News Corp.'s," Mather said. "I just don't think it's a good time to bail on DirecTV."

Tom Watt, managing director at Cowen and Co LLC, said he believed the deal made sense for both entities.

"Liberty may take the stake up from 38 percent to over 50 percent to gain control," he said. "A complete buyout is less likely but not impossible."

Give them Liberty?

Liberty has embarked on a strategy of exchanging its passive equity interests for active interest and control over the past few years, and some analysts say acquiring DirecTV would enhance its profile on Wall Street, making it seem less an amalgam of unrelated assets.

The tech holdings in Liberty's portfolio would create opportunities for DirecTV to compete more aggressively against the cable and phone companies. And there is speculation that Malone and Englewood, Colo.-based Liberty could push through DirecTV's merger with its top rival, Denver-based EchoStar Inc. The companies are appealing the ruling of the Federal Communications Commission, which blocked the deal on antitrust concerns.

Despite the initial street reaction (DirecTV shares dipped initially on reports of a potential swap, but have since risen slightly to around $19) most observers don't think such a deal--should it ever come to fruition--would be bad for DirecTV.

"It has seemed abundantly clear in the last several quarters that DirecTV management is calling the shots," wrote Doug Shapiro of Banc America Securities. "So severing the News Corp. relationship might not have any impact on the way the business is run.

By ANNE RILEY-KATZ

Staff Reporter