QVC Group Inc (QVCGA) 2004 Q4 法說會逐字稿

Good day, everyone, and welcome to the Liberty Media Corporation conference call. Today's call is being recorded. During this presentation, we may make certain forward-looking statements about business strategy, market potential, future financial performance, new service and product launches and other matters. These statements involve many risks and uncertainties that could cause actual results to differ material -- materially from such statements, including, without limitation, possible changes in market acceptance of new products or services, competitive issues, regulatory issues and continued access to capital on terms acceptable to Liberty. Please refer to the publicly filed documents of Liberty Media Corporation, including the most recent Form 10-K filed by Liberty Media Corporation for additional information about Liberty and for or about the risks and uncertainties related to Liberty's business.

At this time for opening remarks and introductions, I would like to turn the call over to the President and Chief Executive Officer, Mr. Robert Bennett. Please go ahead, sir.

Thank you very much. Good morning, everyone. Thank you for joining us today. Also on the call, we have Bill Costello, who is QVC's COO, CFO and President of their international operations. From Discovery, we have Judith McHale, the President and CEO, and Barb Bennett, the CFO. From Starz, we have Bob Clasen, the President and CEO, and Bill Myers, the CFO, and from Ascent Media, we have Ken Williams, who is the CEO. Also here at Liberty, we have with us our chairman, John Malone, as well as several other Liberty executives, in fact, most of the liberty executives, as I look around the room. All of us will be available to answer your questions at the conclusion of my prepared remarks. Before we get to this morning's announcement on the spinoff, I'd like to spend a few minutes discussing our 2004 results, as well as the fourth quarter activity for Liberty and our 3 large private businesses. I'll also touch on some balance sheet and liquidity highlights before opening up the call for questions.

We had a very good year in 2004, and we're very pleased with our progress against the objectives that we outlined at our May 2004 conference. In May, we indicated that our 2004 objectives would be to focus on internal growth in the form of maintaining the momentum at QVC, reinvigorating Starz's revenue growth, and extending Discovery's strong market position. Exploration, by which we meant looking into TV commerce, IP programming, location-based services and other communications technologies, acquisitions that would -- were consistent with our operating group and exploration strategies, and -- and finally, to reduce the discount in our stock price through a combination of simplification, capital structure tuning and structural adjustments. I'll discuss all of these in more detail, but for now, I say that we have a very solid revenue growth at each of our 3 large private assets. QVC and Discovery also turned in excellent OCF growth, and we're very pleased with the subscriber growth trends at Starz. These represent very good progress towards our internal growth objective.

In the area of exploration, progress is a little bit more difficult to measure, but we made some, nonetheless. Starz Download Service, Starz Ticket and Discovery's educational video streaming activities are great examples of capitalizing on IP-delivered programming, and we certainly expect more in that area in the coming year. TruePosition is now broadly deployed on the Cingular and the T-Mobile networks and we're working on several international deals, and Current Communications continues with its commercial current tests, and WildBlue should be launching their commercial -- commercially launching their residential service later this year, so I -- I view our progress in that area as very positive as well.

With respect to acquisitions, we actively reviewed a number of acquisitions that were consistent with our objectives, but none of them came our way. But we will continue to analyze opportunities to deploy our capital in ways that will drive additional shareholder value. And then finally, in the area of reducing the stock discount, I think we've done a decent job so far, but we still have some more work to do, and we'll talk about that a bit more later.

So let's look now at -- at some of the operating specifics. Our operating results in 2004 were excellent. Liberty reported consolidated revenue of 7.7 billion and consolidated OCF of 1.5 billion, reflecting the first full year with consolidated QVC results. On a total combined basis, which includes our subsidiaries and equity affiliates at 100 percent, revenue increased by 16 percent to 10.4 billion, and total combined OCF increased 17 percent to 2.25 billion. This exceeded the guidance we set forth at our May 2004 conference of 15 percent revenue growth and 12 percent OCF growth.

Results at our Interactive Group were a major driver of the total combined growth. For the Interactive Group, combined revenue grew 16 percent and combined OCF grew an impressive 23 percent. While QVC is the largest component of the Interactive Group, Ascent Media also contributed to the strong results, with a 24 percent increase in revenue and a 31 percent increase in OCF.

The Networks Group turned in combined revenue growth of 15 percent and combined OCF growth of 3 percent, 29 percent if you exclude Starz, which, as we expected, had a down year. While this is still pretty solid, the Networks combined growth rates were a little bit shy of our May estimates of 17 percent revenue growth and 6 percent OCF growth. The Networks Group was dominated by the results of Starz and Discovery, but we also had a strong contribution from CourtTV, which reported a 22 percent increase in revenue and a 21 percent increase in OCF.

I think it's fair to say that our strong operating performance last year reflects the efforts and successes and the strength of the individual management teams that we have operating these individual businesses, which is a nice transition to QVC. For the year, QVC grew revenue by 16 percent to 5.7 billion and OCF by 21 percent to 1.2 billion. Revenue was at the high end of our raised guidance, which was low to mid-teens, and OCF was nicely above our raised guidance of high teens. QVC's growth was driven by very solid domestic results and exceptionally good international results.

For the domestic business, full-year revenue increased 8 percent and OCF increased 10 percent. This strong growth was due in part to a very good fourth quarter, where revenue increased 9 percent and OCF increased 14 percent. I should point out that the fourth quarter OCF growth rate was the highest for the domestic business since 2002. Domestic growth was driven by a 9 percent increase in shipped units -- or units shipped, to over 105 million units. The increase in units shipped was partially offset by a 1 percent decline in the average selling price, due to overall product mix changes to lower-priced apparel and accessory products. While priced lower, apparel and accessories had higher gross margins, which contributed in part to increased domestic OCF. Domestic growth margins improved from 36.5 percent in 2003 to 37 percent in 2004. Operating costs as a percent of revenue were about the same as last year.

On the international side, full-year revenue increased 48 percent and full-year OCF more than doubled. All 3 of QVC's international markets had very good results, with revenue increases of 32 percent, 50 percent and 70 percent for the U.K., Germany and Japan, respectively. International revenue growth was due to continued distribution growth, increased sales per customer and increased average sales prices across all 3 markets. We also got some help during the year from exchange rates. If you exclude the effective exchange rates, international revenue increased by 35 percent and OCF increased by 77 percent. Higher revenue, combined with improvements in gross margin and operating leverage, led the -- the -- led the -- to the increase in OCF. The international OCF margins improved from 12 percent last year to 16 percent in 2004. We expect revenue in 2005 to be up in the high single-digits percents and OCF to be up in the low double-digits.

Moving on to Starz, Starz revenue increased 6 percent to 963 million, which was at the high end of our range, and OCF came in slightly above the increased range target at 239 million. Subscription unit growth for the year was very impressive. Starz units grew 15 percent to 14.1 million, and Encore units grew 12 percent to 24.5 million. Our flagship Starz service has more subscribers than Showtime, and both Starz and Encore have significantly higher total-day viewership than Showtime. The overall -- the growth in Starz and Encore units led to overall subscription growth of 15 percent, from 151 million to 173 million. Overall unit growth is linked directly to more aggressive sales campaigns, new affiliation agreements and the rollout of Starz On Demand at substantially all of Starz -- Starz's major cable distributors. Revenue didn't grow as fast as subscription units, primarily due to the increase in subscription units for the Thematic Multiplex service, which has a lower subscription rate than the other services, as well as due to certain fixed-rate contracts that provide for fixed monthly payments, regardless of the number of subscribers. OCF of 239 million was 129 million lower than 2003 as a result of substantial increases in programming expense, which we have discussed throughout the year, but we were able to offset a good-sized chunk of the increased programming expense with revenue growth.

The Starz team is continuing their focus on a revenue growth initiative. Starz is actively engaged in affiliation conversations with cable operators and the [inaudible] to broaden -- as well as satellite distributors -- to broaden and to improve the distribution of our linear services, and yesterday Starz announced that its Starz Ticket service will double the number of available titles from 150 to 300 titles. The number 1 comment from customers was that they wanted more titles, and we've responded accordingly. We expect to continue increasing the number of titles available on the service throughout the year.

In 2005, we're expecting revenue of between 1 point -- between 1 billion and 1.05 billion, which is the mid to high single-digits increase, and we're expecting OCF of between 150 and 170 million. 2005 will be the last year we expect OCF to be down, as Starz will have fully absorbed the major programming cost increases, and we expect to return to OCF growth in 2006. In general, I think it's fair to say we're quite encouraged by the progress that Starz made in 2004.

Looking at Discovery, Discovery Communications, the consolidated revenue increased by 19 percent and OCF increased by a very strong 31 percent for the year. Revenue was at the high end of guidance and OCF was just above the raised guidance. Discovery's U.S. networks grew revenue by 19 percent for the year, due primarily to affiliate revenue growth of 37 percent. This growth was driven primarily by a combination of free subs converting to pay and reduced launch support amortization associated with affiliation agreement extensions. Subscriber growth and contractual rate increases also contributed to affiliate fee growth. For the international networks, which now also includes the international ventures, affiliate revenue growth was due to subscriber gains. International ad revenue, which increased 31 percent, was due to subscriber gains, as well as positive ad trends in several of the international markets.

U.S. ad revenue continued to face the same issues that we discussed in our third quarter call, that is, difficult comparisons, a soft scatter market and ratings declines at TLC, most specifically with Trading Spaces. The Trading Spaces franchise is still very solid, however, it faces difficult comparisons to last year's record ratings, which were peaking in the third and fourth quarters of 2003. The rating situation at TLC was partially offset by nice growth in ratings, audience delivery and ad revenue at the Discover Channel, Travel Channel, Discovery Health and Discovery's emerging networks. For 2005, we're expecting a shift in ad dollars from broadcast to cable to continue to benefit Discovery. Discovery's CPMs are solid and we continue to have strong interest from our cross-platform partners, with the expectation of further expanding these relationships in 2005.

Strong OCF growth for both the domestic and international divisions helped to drive overall OCF growth, as did a 13 million decline in the OCF losses at the other divisions. The domestic business was very effective at controlling costs, particularly personnel and G&A expenses, reflecting the flexibility of Discovery's cost structure. International OCF continues to benefit from scale economics, as operating costs are spread over a larger subscriber base. Discovery's 2005 guidance calls for revenue growth in the mid teens and OCF growth of low double-digits. This OCF guidance is lower than in past years, due primarily to 2 initiatives. The first is the international lifestyles initiative and the second is in education.

At the end of 2004, Discovery undertook an initiative to relaunch some existing international networks, Discovery Travel and Adventure, Discovery Home and Leisure and Discovery Health, and launched several new networks to create a package of 3 lifestyle-focused networks for distribution on a global basis. This initiative is designed to complement Discovery's high-quality factual portfolio of channels offered outside of the U.S., as well as to leverage Discovery's brand recognition for high-quality programs. The lifestyle initiative requires additional investment in programming, marketing and branding. DCI will also commission programming of regional interest as a key component of the content strategy, as well as expanded use of new media applications, including interactive television, T-commerce and broadband websites. Discovery expects to spend approximately $100 million over the next 2 years on this initiative.

With the acquisition of United Streaming in 2004, Discovery began expanding beyond its traditional education business of airing educational information on its networks and selling hard copies of such programmings to schools, and began streaming educational -- educational video material to schools via the Internet. United Streaming is the leading educational broadband streaming service in the U.S. The service earns revenue through annual subscription fee -- fees paid by the school or school districts who use the service. Discovery plans to continue to expand this service in schools and to begin offering a video streaming product directly to the home of subscribers. Discovery expects to spend approximately 100 million over the next 3 years on this initiative as well. That wraps up our review of the 3 major operating businesses.

Looking now at our capital and liquidity resources, at year end our cash and liquid investments were $1.7 billion, roughly the same as at the end of the third quarter. Our nonstrategic public holdings and derivatives were about $9.6 billion, which it's -- it's probably worth pointing out here that the aggregate value of our public holdings and derivatives, that is our nonstrategic public portfolio plus our stakes in News Corp. and Interactive Corp., increased from 20 billion at the end of the third quarter to almost 23 billion at year end, which is an -- an increase of over $1.00 a share -- $1.00 per Liberty share. Total debt of 10.9 billion was 543 million lower than at the end of the third quarter and roughly 1 billion lower than at the end of 2003, due to debt paydowns under our debt reduction program. We accomplished our objective of paying down 1 billion of debt in 2004, which brings our total debt paydown to 3.5 billion under the debt reduction program. We intend to pay down another 1 billion in 2005. We were able to maintain cash and liquid investments at 1.7 billion as a result of cash generated from our consolidated subsidiaries, as well as cash received from settlement of financial instruments.

We're very comfortable today with our debt position. Pro forma for the spinoff we've announced today, we have about 1.4 billion of 2004 OCF, and at the end of the year, we'll have about 9.5 billion of debt. So assuming a 3-times leverage on that 1.4 billion of OCF, that leaves about 5.3 billion of debt to be supported by our other assets, and our -- our 23 billion of marketable securities provides more than 4 times coverage of that remaining piece of debt, and our interest coverage is at about 3 times, over 3 times. So I think there's -- there's no question that we're a better credit today than we were before we bought QVC. If anything, we may be a bit underleveraged and overcapitalized at the moment, and we will continue to be so after we spin off Ascent and Discovery.

So let me summarize. In summary, I think we had a very solid year. We made significant accomplishments towards our growth objectives and towards further simplification. QVC and Discovery reported very good revenue and OCF growth, and Starz made substantial progress on its revenue growth initiatives and towards returning to OCF growth in 2006. Throughout 2004, we raised our guidance at all 3 of our large private businesses, and we still exceeded the raised guidance for the full year. We spun off LMI, Liberty Media International, we disposed of a number of nonstrategic businesses, we paid down another billion of debt and we converted a significant portion of our News Corp. shares from non-voting shares to voting shares. We also made some progress towards reducing the discount in our stock, but we still have work to do, and another step towards this objective involves this morning's announcement that we plan to spin off our ownership interests in Ascent Media and Discovery Communications into a new publicly traded company called Discovery Holding Company.

Exactly 1 year ago, as it turns out, we announced the LMI spinoff, which I think everyone would agree has been very successful for the Liberty shareholders. From the date the spinoff was announced, the aggregate increase in Liberty shareholder value was 16 percent through December 31, '04. Today we're announcing our plan to spin off our 100 percent ownership in Ascent Media and our 50 percent ownership stake in Discovery. The current plan is to distribute .05 of 1 share of stock in the new company for each outstanding share of Liberty. Subsequent to the spinoff, Liberty will not retain any ownership interest in Discovery Holding. Our objective is to simplify Liberty and to create a new public company that will be more efficiently valued in the public markets. A pure-play content company will provide an attractive investment vehicle for our shareholders, Discovery is one of the preeminent television programming properties in the world, and Ascent is one of the world's leading service providers to the media and entertainment industry. By separating Ascent -- Ascent Media and Discovery, we hope to improve their ability to grow their businesses and to drive further consolidation in their respected fields.

This also creates a separate public currency, which makes it relatively simple, if they elect to do so, for Cox and Newhouse, our partners in Discovery, to contribute their Discovery ownerships into Discovery Holding. If they do so, Liberty shareholders would own a little over half of Discovery Holding, and Cox and Newhouse would each own a little less than 25 percent of Discovery Holding. We've had discussions with both of -- both of these parties and we're hopeful that they'll join us. However, I have to point out that the discussions are at a preliminary stage and it's too early to predict the ultimate outcome. We plan to file the necessary SEC documents later today and we're targeting -- targeting completion in the second quarter. The only significant condition of the spinoff is receipt of an opinion from counsel to the effect that the spinoff will qualify as a tax-free distribution for our shareholders.

I've already talked about the financial results at Discovery, but let me just spend a few minutes talking about their businesses. Discovery is a fantastic business, and John Hendricks and Judith McHale and the rest of their management team deserve a tremendous amount of credit for the success of Discovery, since the launch of the Discovery Channel 20 years ago. Discovery has over 1 billion subscribers around the world that it manages through its U.S. and international networks division. The U.S. networks include some of the most widely distributed networks in the U.S., including The Discovery Channel, TLC, The Learning Channel, Animal Planet, Discovery Health and The Travel Channel. The international networks manage a portfolio of channels, primarily The Discovery Channel and Animal Planet, that are distributed in virtually every pay-TV market around the world. As I mentioned earlier, the international networks are also focused on creating a portfolio of lifestyle networks that take advantage of Discovery's extensive content library and expertise in factual-based programming. Discovery Commerce includes 115 retail stores, and Discovery Education, which was formed in 2004 to manage Discovery's expansion into video streaming education, includes the movement towards streaming educational video materials into schools and homes via the Internet.

While these initiatives will temporarily cause OCF growth to be lower than in past years, we're very supportive of the initiatives because we believe the investments will yield long-term benefits and value. The Discovery shareholders and management have always emphasized reinvestment in new channels and businesses, and we think that these 2 initiatives merit the investment that we're planning to make, and we think that the creation of a separate public company holding its interests will accelerate and -- and improve their ability to perform against those objectives.

Looking at Ascent Media, Ascent is the leading provider of services to the media and entertainment industries. With Discovery as one of its largest customers, Ascent's services are focused on the high-growth areas of media and entertainment. For 2004, Ascent reported 631 million of revenue, a 24 percent increase over 2003, and 98 million of OCF, a 31 percent increase over 2003. Ascent's year-over-year growth was due to a combination of acquisitions and organic growth. If you exclude the acquisitions, revenue increased 12 percent and OCF increased 16 percent. Ascent is the product of several acquisitions we made in 2002 involving companies that provide content management and distribution services. Ken Williams and his management team have done a very good job integrating all these businesses and transforming the Company to take advantage of changes taking place in the way that companies develop, store, and transport content, in particular, movement towards more flexible storage and transportation of digital content, and the changing face of video-based advertising. Given Ascent's profile, strength and existing relationship with Discovery, we believe this is a very good combination.

That pretty well concludes my prepared remarks. At this time, we will be happy to respond to your questions.

Thank you. Today's question-and-answer session will be conducted electronically. To ask a question, press the star key, followed by the digit 1 on your touchtone telephone. Please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star, 1 for questions. We'll go to Jessica Reif Cowen, Merrill Lynch.

Thanks. A couple of questions on News Corp. Did you reclassify that as a nonstrategic asset, and if so, could you talk about a potential resolution and timing, and if you were to do that, would you use the proceeds to buy back stock or for something else?

No, we -- I did not reclassify it to a nonstrategic asset. We do consider that to be a strategic asset, and it's made even more strategic by the fact that, you know, our -- our voting power is now approximately the same as our -- our equity ownership. As -- as we've said in the past, we have not had any conversations with News Corp. on -- on this topic since late last year. We may have some in the future, but I don't really want to try to handicap or -- or predict what, if any outcomes there will be. As -- as I -- as I think we've said pretty consistently, we think News Corp. is a great company. It is a core strategic holding of ours, and we're delighted to hold it. If -- if we have a -- a conversation and it turns out that there is an outcome that is better for Liberty and -- and better for News Corp., then that's something I -- we -- we would be pursue, but to date we have not had meaningful conversations and we're -- we're happy owning the business -- owning the assets and stock.

Would you care to -- can you just answer the last part of it? If -- if you were to come to some agreement, what would you do with the proceeds?

That -- that's -- that's presupposing what the agreement would be.

Okay. All right.

I -- I really -- I don't want to -- I don't want to try to handicap, because we haven't had a conversation of substance, and so I don't want to try to predict (A) you know, what, the direction would be, and -- and (B) how it would come out and -- and (C) what we would do in that circumstance. There's just too many -- too many ifs lined up there.

All right. Thank you.

Our next question, Richard Greenfield, Fulcrum Global Partners.

Yes, hi. When you think about the new entity, is it correct to say that you will not, as you currently do, have any access to the Discovery free cash flow at the new entity and, also, unless Cox and Newhouse decide to put their stakes in, should we assume that management of -- of Discovery will not receive compensation or have -- be impacted by the stock price of the new company you're spinning out? Thanks.

The Company -- the Company as we're spinning it out would own our 50 percent interest, and -- and so as long as that's what it owns, nothing would change in the governance of Discovery or the way the business is operated or managed. So, you know, in -- in the event that -- that our partners do join us, then, you know, it -- it has a different look, but absent that, it's basically the status quo, except that we've got a, you know -- we have, I think, still a better currency that would be available to us.

There's no Liberty stock or significant Liberty stock owned by Discovery employees or management that would then yield them a significant stake in this new entity?

I -- I -- I don't know what their personal holdings may be, but they -- they have not participated in our compensation schemes.

Thank you.

Our next question, Bishop Cheen, Wachovia.

Good morning. A question on the spinoff. Did you alert the credit agencies ahead of time, and can you tell us what their take on the spinoff has been, if -- if you did talk with them?

I can answer half the question. We did -- we did talk to them. We met with Moody's, S&P and Fitch yesterday. I will leave it for them to -- to tell you what their conclusions are. I think we -- we presented the facts to them and the facts basically as I described them on the call, which is, I think, that we are a better credit today and a better credit pro forma for the spinoff than we were before we made the QVC acquisition, but I can't -- I -- I'll let them speak for themselves in -- in terms of what, if any, effect it has on their -- their -- their ratings of our debt.

Okay, and then one quick followup. The -- the pro forma that you gave, the 9.5 billion of debt, that basically includes the commitment to pay down roughly $1 billion in calendar '05, and the 1.4 of operating cash flow, that is including the kind of growth we would expect from the remaining Liberty Media cash-flowing assets?

No, actually, I think the '05 will probably be a little bit higher. What I was using was the '04 number and backing out Ascent. So the '04 number was around a billion and a half, so I backed out 100 for Ascent [inaudible].

Okay.

And -- and, yes, the 9.5 of debt did assume that we, as we intend, pay down another billion of debt this year.

Okay. Very good. Thank you.

Our next question, Michael Savner, Banc of America Securities.

Thanks very much. I wanted to follow up on that -- that question. If the rating agencies come back and they don't see it the same way, what -- what alternatives do you have to appease them, or is that something that you're not interested in doing? But I guess there are some direct and indirect consequences if you were to lose your investment-grade rating. And then second, just checking my math on the -- the Discovery guidance, so if these initiatives are going to -- on the international side are about $100 million over the next 2 years and assume it's, you know, 1550, would we then assume that, adjusting for initiatives, your growth rate at Discovery would still be close to -- your operating cash flow growth would still be around 20 percent?

Yes, I think, roughly.

Roughly.

We -- we -- I haven't gone -- done the math precisely, but I think that sounds about right.

Okay.

On the rating agency question, it's -- you know, I think we -- we've made our case, and I think we -- we've made it very clear that we think we're a very strong credit and we're perfectly comfortable with our credit position. You know, it's up to the agencies to -- to determine, you know, from their own point of view how they view that, and -- and, you know, they'll do what they do. I don't see us making any changes to our strategy or -- or to our approach or to the things that we're doing, you know, through -- in response to -- to any decisions they may make.

But don't you need to maintain your investment-grade rating to access the derivative market and some of the commercial paper markets, or is that not correct?

Well, we don't really access the commercial paper market. I mean, we have short-term lines, but we have so much liquidity, we don't really have to access that market. We have substantial liquidity available to us by exiting or monetizing our derivative portfolio, which we can do very quickly and very tax efficiently. We have access to, you know, probably $5 billion on a pretty tax-deficient basis, maybe more in relatively short order. So I don't see that, you know, if -- if -- if they did elect to downgrade us, I don't think that would affect in any material way our access to capital.

Terrific. That much.

You're welcome.

Our next question, Raymond Katz, Bear Stearns.

Yes, good morning. Dob, you mentioned a -- a very interesting point, which is you think you're perhaps -- you're even more underlevered and -- or overcapitalized. How do you address that in a year in which you're going to pay down 1 billion dollars more of debt? Doesn't that exacerbate that situation?

It -- it does somewhat. The -- the -- the point of the debt-reduction program was as much to deal with the short maturity of the debt as with the total amount of debt. So we, you know -- we have a significant maturity coming due in '06. By chipping away at some of it this year, it will make it easier for us to deal with next year's. Now, the question will be next year do we elect to pay down that remaining debt or refinance it, and -- and as I've said, I think we're -- we're quite comfortable with our debt position. So after this 1 billion of debt, I wouldn't necessarily assume that we're planning to pay down any more, as opposed to refinancing the rest of that debt as it comes due. But part of -- a big part of our objective was to both demonstrate to ourselves that the free cash flow we were buying from QVC was going to be sufficient to handle the debt that we took on, and also to deal with the short maturities, more than to deal with the overall, aggregate level of debt.

Thank you.

Our next question, Philip Olsen, UBS.

Yes, just in terms of -- of broader capital structure changes, you had indicated previously that maybe you would look at a separation of the Company into -- you know, as an evolution to 2 separate classes or to a content and interactive company. The spinoff you announced today seems kind of a step in that direction, but in your mind, are there further changes that you could envision making to the corporate structure to further improve the -- the clarity or -- or to drive simplification?

There may be. I think this, you know -- we've been focusing all of our energy on this one for the last couple of months. So there -- there's nothing else that we're immediately, you know -- is immediately pending. I think overall, you know, what we're try to do is convert our large liquidity position tax efficiently into operating businesses, and then, you know, having done that, if -- if -- if we then find ourselves with other businesses that might -- just as LMI did and as we think Discovery Holding will do, we'll trade better as separate public companies and we'll create a currency and an opportunity for those companies to grow with their businesses, then we might look at -- at -- at further disaggregation. But at the moment, I would -- this is what we're working on.

Thanks.

Our next question, Spencer Wang, JPMorgan.

Thanks, and good morning. With respect to Discovery, given the ratings issues at TLC and -- and the core Discovery network ratings look like they've flattened out a bit, can you just talk about your expectations for the upfront? And then secondly, on Starz your guidance for programming cost increases in '05 seem to be a little bit lower than what the guidance was in the '03 10-K. Can you talk about what the change was? Thanks.

Judith, would you like to respond to the -- the Discovery upfront question?

Yes, absolutely. We're actually already beginning to see activity in that regard, and we're really quite pleased with what we're seeing. It looks as if we are already going to have a fairly strong upfront as -- as we go forward. In terms of ratings, we view those as a cyclical issue and we're very excited about a lot of the programming we have coming on board, starting particularly in the next quarter. So we -- it was difficult with Trading Spaces, as Dob alluded to in terms of difficult comps, but we're pretty confident as we look forward.

And on Starz?

On the Starz question, either Bob or Bill, you guys want to --?

The answer would be that as you get closer to the year, you're able to more accurately estimate the -- or take a look at the box office performance, and so the adjustment is in terms of our clarity now and how many titles they're coming, when they're coming and their box office performance, and then just a normal course adjustment.

So it's better information.

We're closer.

Thank you.

Our next question, Kathy Styponias, Prudential.

Hi. My question also is related to Starz, I guess more of a strategic question. If you look at the -- the other pay channels, Showtime and HBO, their investments in original programming having clearly paid off in -- in terms of ancillary revenue streams, like DVD sales. Just wondering what your thoughts are on there. And Dob, for you, just wondering why other content assets weren't included in your -- your spinoff. Clearly, CourtTV is something that's going to be rationalized over the next few months. Is your stake in the Game Show channel also something that we should look for it to be rationalized over the next several months? Thanks.

Let me -- I'll answer the second part of the question and then let -- let --ask Bob to address the first part. We concluded that what we were trying to get was a business that was as -- as pure a play as possible and that -- that -- we said that one of the objectives here is to create a -- a currency that will be available for Discovery -- Discover Holding to go -- or, you know, to try to take advantage of and possibly further consolidate the industry or take advantage of acquisition opportunities in the business that will extend their reach, both domestically and internationally. But that was going to be most successful if we had the cleanest possible play. So that was one -- one reason why it's -- we did not include, for example, Starz or -- or Game Show or Court, I think it's obvious why we didn't include that. Another reason was simply trying to make it as -- to facilitate a transaction with Cox and Newhouse, the -- the -- the less other -- the fewer other things that are in it, the easier it is to facilitate that kind of transaction, so we felt that both from a --a trading point of view and from an ease of facilitation of a subsequent transaction if we're successful with that, it was better to go with just Discovery and Ascent.

And with regard to your -- the first part of your question, we currently are focused on movies for a number of reasons. One is that you have a very simple consumer message in a very complicated marketplace right now, with so many more general-interest products. Also, the -- while we wouldn't ever say we would never go into original programming, it's a hit-or-miss kind of business, as opposed to the movie business where the studios spend billions of dollars branding the products that we bring to our channels. And also, we have 14 channels with both our Starz and Encore brand and believe they're -- and those are for uncut movies, both classic movies and -- and newer movies. And we think there are opportunities to go forward and cross-promote and create a strong movie-related branding for both of those brands. Also, I'd -- I'd point out that I think with regard to DVD sales, that is a, you know -- an opportunity perhaps that we're missing, but we do believe that DVDs may be more transitional and that eventually we'll all be in the business of providing down -- electronic downloads, with the support of the studios under the proper digital rights management, as a much more efficient delivery mechanism.

Thank you.

And we'll go next to Andy Baker, Cathay Financial.

Thank you, and good morning, and congratulations on a great quarter. Just a -- a quick question. Is it safe to assume that the reason Ascent was assume -- was included in the spinoff was just to provide some liquidity and some free cash flow? Because obviously at Discovery you don't get any of that. And then a second question. You mentioned 9.6 billion of nonstrategic public holdings in derivatives. Can you give an after-tax figure for that as well?

I think you -- what I would rather give, as I told you, we have access if we -- we can take about 5 billion of that and convert it to about 5 billion with relatively little tax. The other has more -- the rest of it, which a lot of which is underlying exchangeables and things, has more friction costs associated with it. And we have capital loss carryforwards and so forth to -- to shelter a --a lot of the -- the transition. I can't remember what the other question was. Oh, Ascent.

Yes.

Ascent is in there -- yes, I think, you know, to have an operating business is, you know, helpful to the business and important to the structure, and to have some free cash flow and -- and a little bit of debt capacity makes the overall package better, and -- and Ascent and Discovery, you know, do a fair amount of business with each other and so there's a logic from that point of view.

Great. Thanks. Since that was so quick, if I could have just one quick followup. You -- for the past couple of transactions you have done, this as well as the LMI, which you -- you effectively, you know, brought the equity base down substantially, and in the past you had mentioned that a stock buyback might not be that meaningful because you had such a huge equity base you'd have to take -- it would take a lot to move the needle, as, you know, the needle -- it gets smaller and smaller, the overall package here. Would you consider stock buybacks as an -- as a good use of capital and a way to decrease the discount to NAV?

Well, we're -- I mean, we're always looking at -- at how to best invest our capital, and -- and -- the -- the -- the leading choices, you know -- we've got a -- a billion of debt to repay. After that, the leading choice is our acquisitions and then equity repurchase. So if we can't find acquisitions that make sense, then, you know, our attention turns to equity buybacks, although they're not mutually exclusive. We could do some of both. But I think simply by moving assets, moving equity value out into separate public companies, I think, reduces the discount in and of itself, either that or it moves more of the discount onto a smaller base and therefore implicitly increases that discount.

Yes, if -- if I could say that there's a fundamental philosophy that you're seeing here, which is the effort to disaggregate from Liberty's portfolio businesses which, when set up separately, can be consolidators and leaders in their space. So that, for instance, the LMI International company, released from being essentially an investment portfolio within Liberty, becomes a dominant operating company in its space and it's -- it's moved on very nicely, getting a strong balance sheet and putting itself in a position to consolidate the international cable and, to some degree, programming businesses, and is already clearly the largest player in that space. Similarly, Discovery in this structure is well positioned, once it becomes public, and particularly if -- if the Cox and Newhouse folks choose to combine with it to go forth and dominate the non-fiction space, and we -- and -- and do that as a direct asset of Liberty shareholders. In other words, a tax-free direct participation by Liberty shareholders in that vehicle. So, I think that the philosophy that we're pursuing now at the board level in Liberty is to -- to see what other assets we have within Liberty. They don't have to be huge, but they should be assets that can become, when separated from the portfolio, leaders in their field and the -- sort of the -- the black hole, if you want to call it that, that consolidates other assets around them and becomes a very strong growth asset that our shareholders would own directly. I think you can expect a lot of focus on that kind of analysis of value creation, as opposed to the rather simplistic sell it, pay taxes and use the resulting money to buy stock back, which we analyzed to be pretty inefficient.

Great. Thanks a lot.

We'll take our next question, Tuna Amobi, Standard and Poor's.

Good afternoon. Thank you. I guess I have a question for Dob and for Dr. Malone I guess my first question, on Ascent Media, is there any attributable, you know, debt for Ascent Media, and what is the -- the enterprise value that's implied for the Discovery, the new company? And I guess the other question for Dob as well would be the -- how is it that after the contribution, if indeed that occurs, from Cox and Newhouse, that you would end up with more than 50 percent in the new company? And Dr. Malone, I'm not sure if I should take your comment to mean that, you know, there could be more, you know, spin from the existing, you know, assets of Liberty Media as presently constituted. And kind of a followup to that, yesterday on the LMI call, Dr. Malone, I was actually looking forward to some more clarification, you know, following the comments you made regarding the, you know, possible News Corp., you know, discussions. It seems like Dob is saying that you -- you haven't talked to them at all, all year, but reports have it that you and Rupert have been, you know, talking. Can you provide some more color on that? Thanks very much.

Well, Ascent has no debt. I think that was your first question. The implied value of -- of Discovery, there really isn't an implied value. We -- we will spin it off and it will trade where the -- the market, you know, thinks it should trade. The -- the relative -- the reason why I said that the Liberty shareholders would own a little bit more than 50 percent and the Cox -- Cox and Newhouse would each own a little bit less than 25 percent is simply the value of Ascent. If -- if it were just Discovery, then it would be 50 and 25 and 25, but since Ascent does have value, that will increase the -- the Liberty side of the ownership a little bit and commensurately decrease the Cox and Newhouse by a little bit, to the extent of the -- the value of Ascent.

Okay.

With respect to Ascent combined, first of all, Liberty has no -- no anticipation of receiving distributions from Discovery in the near term if it didn't spin it. So, in effect, Discovery uses all of its cash flow that it generates internally to grow the business, rather than to distribute it in the form of dividends to its shareholders. So we felt this was the best way to realize value and to essentially turn Discovery loose.

With respect to News Corp., yes, I've had communications with Mr. Murdoch on a regular basis. However, they have not involved negotiations with respect to our holdings in News Corp. It would imprudent for us to be engaging in those discussions at this time, while News Corp. is continuing to try and complete its buy-in of Fox. You know, any material developments between us and News Corp. would cause them a great deal of difficulty with respect to filings and so on, in their transactions with Fox. So I would not expect negotiations with News Corp. to proceed until that transaction is closed and everybody on that side is happy with it, at which point I would guess that discussions between Liberty and -- and News Corp. will proceed. It's not entirely clear what form those will take. There have been a number of -- as the press has reported, there have been a number of alternatives suggested, including doing nothing. And the press has picked their favorite, but I -- I -- I'm not sure that I -- that I would -- would go along with the press in that regard.

So I -- I think with respect to News Corp. and our holdings in new -- News Corp., we'll just have to see what develops, but -- and, yes, I think the other answer is yes, you could expect that at least we will be considering at the -- at the board level additional disaggregations. However, I think were we to disaggregate anything that was really liquid and efficiently liquid and generated material cash flow, we would clearly move to restructure the debt so that we didn't put undo stress on the remaining debt structure of the Company.

Thank you very much.

Our next question, Robert Routh, Jefferies & Company.

Yes, good morning. Just a few quick questions, first regarding acquisitions. A while back, it was kind of rumored or speculated that you were looking at both the -- the phone towers as well as possibly Liberty Media having an interest in IFC, AMC and WE, the cablevision national networks. I 'm wondering if you can comment on whether or not there is any truth to -- to that, and if there is, kind of where that may or may not stand? Second, I'm wondering if could you comment as -- as far as the spinout of DHC goes, which makes a lot of sense, why you didn't consider doing it via Dutch auction rather than an outright spinout to try and shrink the equity base and get the equity leverage that -- that Liberty is kind of known for? And finally, given this -- this recent transaction, I'm wondering whether you can comment on whether the current asset groupings of interactive tech ventures and -- and networks, does that still make sense, or is it now kind of not so much as logical, those groupings, as -- as it was previously, given that you've taken one asset out of one grouping and one out another and put them together, and you're kind of kicking them out there? Thank you.

On -- on the first question, yes, we did look at the Sprint towers business. We thought that that was an opportunity for us very efficiently to convert a low-basis stock position, which we have largely hedged and collared, and therefore had no upside, and it was an efficient way -- potentially efficient way to convert that holding into an operating business, which we think has attractive growth, you know, dynamics to it. As it turns out, that's not a -- a transaction we could do -- that the structure we were proposing was not -- it was not one that Sprint wanted to pursue, particularly following the -- the Nextel announcement. So, that was one that we thought made a lot of sense from both a new business point of view and a transition of our sort of nonstrategic assets into strategic assets point of view.

On the -- the question of AMC and WE, you know, we've -- we've had no discussions whatsoever, and I have no reason to believe that those assets are -- are for sale. I think there -- there is potential logic, given the size of -- of Starz and the fact that AMC and Starz are -- are in similar businesses. There might well be opportunities or -- or synergies or, you know, strengths by putting them together. But that's not a -- a conversation that we've had, I don't -- and to my knowledge, those assets aren't -- aren't for sale. What was -- oh, the operating segments. I don't know, that's something we'll -- I guess we'll address. They're, you know -- we -- we'll have to see. I think it's, you know the -- the networks group is -- is Starz and -- and Game Show principally, interactive is QVC as well as a few others. We'll address that going forward, whether that makes the most sense to -- to report in that way, and also I guess we'll -- we'll -- we'll take a look at how we, you know, are structured internally. I think it has served a purpose in terms of getting people focused on areas of the business, and I think that has been beneficial to us, but, you know, that's something we'll look at in the coming months.

Okay. Great. And the -- and regarding the structure of the DHC spinout, why a spinout rather than a Dutch auction-type transaction?

Simplicity.

Fair enough. Thank you very much.

It's just the easiest way to do it.

We'll go next to Matthew Harrigan, Janco Partners.

Most of my questions were answered, but could you comment quickly on whether both Expedia and I guess the cats and dogs component at [inaudible] would be regarded as strategic businesses and -- and is there any provision on the revenue side, I mean, if there wasn't a transaction that developed, you know, closer working relationships between QVC and some of the businesses over in -- in -- in Barry Diller's pond, because it does looks like there's probably some logical linkages.

We -- we look at our -- our interactive holding as a strategic business, a strategic holding, because of the nature of the businesses and because of the nature of our ownership, and the -- separating them into 2 businesses won't change that. We expect that the structure of the spinoff will be that we'll continue to have the B shares and we'll continue to have a voting agreement with Barry with respect to both companies, so I don't really see that necessarily changing. What other the opportunities the spinoff creates, I think, we'll -- that -- that I see as doing, I think, we'll have to, you know -- we'll look at them as -- as the time comes around. I don't know if there's anything in particular that would drive a closer working relationship between HSN and QVC. They're -- they're both out there competing pretty aggressively, and I would expect them to continue to do so.

Congratulations on the string of transactions.

Thank you.

We'll go next to Edward Santevecchi, Nomura Securities.

Yes, hi, everyone. Thank you. The one question I -- I really have is, as I -- as I listen to the questions and the answers today, one thing that kind of keeps coming to mind is I know you're happy with your capital structure right now, but there seems to be this contention going on with the rating agencies. What we're really curious about is, you know, next year as $3.8 billion comes up for refinancing, you know, are you willing to potentially refinance those in maybe below-investment grade versus kind of doing what the agencies kind of need to you do to maintain this investment- grade rating, and potentially saving a significant amount of interest next year?

We have a lot of flexibility, as I said. You know, in our -- our derivative and nonstrategic investment portfolio, we have access to more than enough capital to repay that debt, if that's what we elected do. We also have the ability to refinance it at different levels from a [inaudible]. For example, QVC has very strong cash flow, and we could very readily put a debt facility against QVC that would probably be as cheap or even cheaper than our current debt or -- or what we could issue in the public market, even with an investment-grade rating. So, I -- I feel like we have a lot of different alternatives in terms of how to deal with that debt next year.

Okay. Thank you.

And our next question, Brendan Lyons, Goldman Sachs.

Yes, hi. I have 2 questions relating to your News Corp. holding, to the extent you can discuss that. Firstly, can you indicate what your tax base is on your current News Corp. holding, and secondly, if you were to enter a deal with the company and let's say it involved you selling your shares, would it be both the voting shares and non-voting shares, or how do you think about that holding?

I think we have not publicly disclosed what our basis is in the News Corp. holdings. It's probably not too hard to recreate, which is basically that the shares that we bought this year is -- is the bulk of our basis and that we bought -- or, I'm sorry, last -- early last year, is the bulk of our basis. So that's somewhere around 1.7 billion, 2 billion, something like that. Again, on -- on any potential transaction, since -- since we really have not had substantive discussions recently with the -- the News Corp. team, I -- I don't want to, you know, predict or prejudge any particular outcome.

So just to clarify on the tax base prior to the most recent purchases, you essentially had a -- close to a zero tax base on your old holding?

On the -- our -- most of our holdings has -- has come in -- in 2, 3 transactions principally. One was when we sold Fox Sports to News Corp. several years ago, and we had relatively little basis in that. Another was when we sold our interest in Gemstar, and we had relatively little basis in that. And then the third large one was when we bought the voting shares at the beginning of 2004, and that we -- we paid for with cash, so we have -- we have no basis in those shares when we bought them.

Thanks for clarifying.

You're welcome.

Our next question, Adam Schwartz, First Manhattan Company.

Yes, I'd like to ask Dr. Malone, when you look at Liberty today and in your view to simplify the Company, could you just elaborate how you look at the Company in terms of its pieces, including the spinoff that's being created? How -- how do you simply look at Liberty?

Well, I think you look at the largest pieces, right? And you certainly -- the international piece which -- which, you know, was a miscellaneous investment position, is now, you know -- we -- we've turn that into, I think, the dominant international player, with a very strong balance sheet and a strong growth position. We hope to do the same with this spinoff of Discovery and what I would call the non -- the non-fiction entertainment space, video space, globally. There is no reason why Discovery can't accelerate its growth through careful acquisitions, as well as the kind of new channel launching it's doing, and really become the dominant player in that space on a global -- on a global basis.

The third area that Liberty has focused on is -- is the whole shopping interactive area, where the combination of QVC as the dominant video shopping business globally and IAC, with its -- with its Internet activities, particularly separated from its travel business, you know, makes a pretty good fit and -- and a very strong combination that would clearly be the dominant player in -- in commerce, electronic commerce, both Internet and video. So I see that as a cluster that ultimately could go forth, has enormous juice and -- and could grow and consolidate and -- and has the capability to do anything that it finds attractive to do. The third area is -- is the movie subscription business, which, you know, has gotten beat up a little bit in the last year or so, but still has a lot of presence. I think it has more shelf space in the distribution world than -- than anybody else, in terms of channel access to and customers. I suspect in the U.S. it is -- it is the number 1 shelf space occupant, and certainly very strong in its movie category. How to -- how to grow that and turn that into a kernel that -- that then could be a consolidator in its space is -- is a fascinating question, but certainly one to consider. And then, of course, News Corp. I regard to be the dominant global player, vertically integrated player, in distribution and programming. And, therefore, I'm delighted that our -- our shareholders today indirectly have a position in News Corp., and it would be delightful if they could have a position directly in News Corp.

So, those are -- those are the ways that I perceive, you know, the collection of assets. In addition, we have an investment portfolio, you know, that is -- we call nonstrategic. And we have in the past been able to generate substantial business activity in venture capital or technology, if you want to call it that. So I wouldn't discount the ability to be a --a venture capital entity, perhaps separate or perhaps part of what we already have. But that' s kind of in my mind how I see the -- the portfolio.

So -- so do you see about 5 pieces to Liberty essentially, 5 components?

Yes, something like that, but it remains to be seen, because when one looks at how best to grow those pieces, it's not entirely clear which should be together and which should be separate. It would seem me where there's very little synergy between the pieces, other than financial, one has to look as to whether or not those financial synergies or -- or -- can be replaced by direct access to the market or by some combination with some other entity. Where the synergies are substantial and internal, then separation is a painful thing to do and one would not want to -- to separate. Obviously, we set this whole problem spinning when we sold off the TCI cable platform, which -- which was really the glue and the market power that drove the other businesses. Since then, we have been attempting to find market power again in -- in each one of these businesses, and we've succeeded in several and we hope we will succeed in the rest, I think is the right way to look at it. I mean, we certainly had no power, no market power in our passive investment in Gemstar, for instance, but we found market power by combining it into News Corp.

Similarly, with Black Entertainment Television going into Viacom or the -- the many transactions that we've done over the years which have led us to be a portfolio of investments in the media industry, Time Warner, for instance. We went from, you know, an equity interest in Turner to an equity interest in Time Warner, which we now regard as nonstrategic, but it's still a very -- we're still, I believe, the largest shareholder in Time Warner. So the same thing, what -- what Dob was describing as our effort to convert some of our Sprint holdings into a tower business, was one effort essentially to convert from a, you know -- a passive, call -- call it dead money position, if you want, into an active business with good growth and good tax attributes in a -- in an efficient way. We'll continue that -- that -- that undertaking and that challenge. It's not easy, but I believe we -- we're making very good progress in that regard, and we would hope that whatever the outcome, the goal is to give our shareholders direct ownership of grow -- of growing-value assets. And -- and, you know, following the Jack Welch lead, you want those to be the market leaders in their field, whether it's a big field or a little field, you'd like them to be market leader positions.

Just one followup question to the spinoff. It's a gutsy move that you're making and that assumes that under one scenario, if Cox and Newhouse go along with you, there will be a very successful spinoff, and if for some reason they don't go along with you, then perhaps it's not as successful. Could you comment?

Well, sure, I mean, are you asserting that there aren't people out there who would like to own half of Discovery, separated from Liberty?

I'll --

Do you think maybe -- I can think of a few people, you know, who would love to -- to own the Liberty half of Discovery and perhaps ultimately try and take out the other half, assets that might be of great interest to the owners of the other half. So, I mean, there are lots of ways this thing can evolve, but -- but our bet is that -- my bet is -- I would give a very high -- I'll put a fair amount of money on the table here that Cox and Newhouse will want to merge into this vehicle and that, in fact, we will have succeeded in -- in taking Discovery public and owned directly by Liberty shareholders, and freed it of -- of any -- any double taxation issues. That's the goal, and clearly that's what we hope to achieve, but I would say the downside isn't so bad.

Well, we're betting with you. Thank you.

All right.

We'll take our next question, Adam Spielman, PPM America.

Thank you. I just wanted to explore a couple comments Dr. Malone made. I think as -- as a firm, you've said you -- you're overly capitalized, overcapitalized. You've also, you know, to the extent some high cash flow-producing assets, you know, move around, you would think about restructuring debt. Similarly, you have also said, I think, you know, after 2005 it sounds like this $9.5 billion debt load is -- is kind of a -- a steady state or level that you're -- you're relatively comfortable with. How -- what internal -- just throwing the rating agencies to the side for a second, what internal metrics do you look at that you're comfortable with liquidity, and where do you think is the right kind of capital structure, you know, either in terms of leverage or coverage or asset coverage?

Well -- well, Dob said we were overcapitalized. But -- but I agree with him because, in effect, a lot of these derivatives and hedges we have are nothing more than monetizations where we haven't drawn the money. Okay? In other words, there is no risk in the underlying equity securities that -- that are in these derivatives. So when I look at it, I just subtract $5 billion from the 9.5 and I say, you know, that's a no-brainer. It may be dead money, but it's a no-brainer because the derivatives, the -- the collars, in effect, that we have, pretty much cover the -- the debt exposure, and therefore, what I look at in -- in my own mind is a 1.5 billion of cash flow and 4.5 billion of net debt, and it's 3 times, and that -- that's just on stuff that we've already got derivatives against where we know what the -- what the minimum proceeds are going to be.

So I -- that's why I have problems with the rating agencies, because if it was me, I would say if you've got a derivative with a AA or AAA credit on the other side, essentially a put, why you don't just net that against gross liabilities when you look at leverage. But that's how I look at it. And we're there without having to use either the News Corp. stock or the IAC stock. We're in that kind of a mode, i.e., you know, 3 and a half -- 3 times leverage on our operating business and no liquidation of News Corp. or IAC, which really means, you know, as Dob says, we probably are well capitalized and still have $11 or $12 billion of liquid securities in those 2 strategic holdings.

They're effectively unlevered.

They're effectively unlevered. So that's how we look at it. And you know, frankly, it's been a little frustrating that the rating agencies don't net a -- a hedged debt against gross debt when they look at leverage calculations, but they have their rules and -- and we understand that. But internally that's not how we look at it.

Is it 3.5 times -- is that something that you think about going forward, to the extent assets move around?

Yes, I think that -- that, you know, frankly you don't want to have a big cash-flowing entity that isn't leveraged. So I think, clearly, any separation of cash flow from the Corp. you would want to put 3 or 4 times leverage on it just for tax and -- and return on equity reasons. The only reason we're not leveraging up to spin off Discovery and Ascent is Discovery and Ascent can't support a lot of additional debt back to the parent, because they don't have a lot of free cash flow that's available to them, okay? So -- plus, we don't have a big tax basis in those assets, so if we were to put a lot of debt on them, it would be taxable to the -- to Liberty on the -- on the separation. So effectively, you know, what we've done is we've put about the right amount of debt relative to the underlying tax basis and relative to the ability to support. So that -- that's kind of the arithmetic that we look at.

So I would just basically say that -- that, you know, we would tend to want to -- as -- as we've said with LMI if -- if anybody was on the call yesterday, to me, for that kind of a business, optimum leverage is 5 times, with 4 of it being senior and one of it [inaudible]. Now that's not maybe investment grade, but who cares? There's plenty of money available in that space for that business, okay? I'm not saying that Liberty should have that attitude, but I'm saying the international business has that attitude. Why should it forego equity returns, provided -- the average debt cost in LMI is 3.7 percent, okay? And a lot of that cost is actually the result of interest rate hedging to protect from floating rate. So, look, you're not investment grade, but you're borrowing at 3.7 percent. What's so [expletive] bad about that? So, I think you have to look at the businesses and you have to capitalize them and leverage them appropriately if you expect to get decent equity returns. If you -- if your leverage is low and you don't have a lot of tax shelter, the beneficiary, believe me, is the government, not the shareholder, okay? And the bondholder should largely be indifferent. So that's -- that's -- I guess that's the philosophy I have, since you asked.

can't resist one more, I mean, Liberty domestic, arguably more mature, stable assets than Liberty International, if you're -- if you want to be 5 times International, why 3.5 domestic?

Well, I think there some assets within Liberty that should be quite a bit higher than -- than 3 or 3.5. There are other assets, like -- like equity positions that, you know -- that don't generate cash flow and then are difficult to put a lot of leverage on and be comfortable and sleep at night. So when you look at the portfolio in Liberty, I think that while we find ourselves, you know, well capitalized, I don't think we want to go and -- and put a lot of debt against -- against our -- what is it, $12 billion of IAC and News Corp. (A) we have no way of servicing it, and (B) you know, what happens if the stock price drops? I mean, you may be forced to liquidate a position that you don't want to liquidate. So that's kind of the philosophy. Take the leverage up on things that have highly predictable cash flow streams and get -- get good equity returns that way. But on things that don't have predictable cash flow streams, be very conservative on your leverage, unless you're going to hedge them or collar them in such a way that then you can borrow against the position and all you've done is deferred taxes. I mean, that's the philosophy.

Thank you.

Our next question --

Time for one more question.

And we'll take that from Vijay Jayant, Lehman Brothers.

Happy to be last. In terms of Discovery's free cash flow, can we just talk about the fact that no other reinvestment in some of the other initiatives you talked about, will this new entity need to do a rights offering to -- to fund this operation? It looks unlikely, but also its acquisition path, can you just talk about, you know, similar to what LMI did. Is this the path we're going on to?

I don't think so. When we look at both Ascent and Discovery, there -- they both have, you know, internally generated cash to support their operations, as well as access to standalone debt. So, our -- our intention is -- is not to do a rights offering at this time. It looks like both of them have capacity to -- to fund their own businesses. You know, I can't say that's forever, but certainly in -- in the near term, it looks like they both have adequate capital and capital available to them to drive their businesses.

I think it would be more likely Discovery would use its equity in -- in strategic acquisitions than -- than -- than be needed for internal development.

All right. Thanks so much.

All right, well, thank you all very much for joining us today. Of course, Mike Ericson and Julie Valentine are always available to answer other questions, or feel free to call any of us if you've got more questions. Thanks a lot. Bye.

This does conclude today's conference. Thank you for your participation. You may now disconnect.