The deal will secure Murdoch's grip on News Corp., the global media empire he founded from a single newspaper in Australia. It also will mark the return of Malone's Liberty Media as a major player in U.S. television programming and distribution.
"During 2006 we converted many passive investments into strategic operating businesses, but this transaction is the largest and most important,"said in a statement.
"DirecTV and the regional sports networks represent a critical step in our efforts to transform Liberty Media into a well-positioned, focused operating company," he said.
News Corp., owner of the 20th Century Fox movie studios and, said it will exchange its 38.4 percent stake in DirecTV Group, $550 million in cash, and three regional sports networks for Liberty Media's 16.3 percent stake in News Corp.
The swap, which the companies expect to close in the second half of 2007, amounts to an $11 billion stock buyback for News Corp., considered one of the biggest in corporate history, UBS analyst Aryeh Bourkoff said.
"It's a great deal for News Corp and Liberty given it's a tax efficient resolution of the ownership structure," he said.
The deal ends two years of negotiations between long-time associates and rivals Murdoch and Malone, who once helped rescue the News Corp. chief from near bankruptcy.
Malone had quietly snapped up close to a 20 percent voting stake in News Corp. in 2004, a move that spooked Murdoch, who enacted an emergency poison pill provision to block a potential hostile takeover within days of Liberty Media's disclosure.
The Friday deal should remove the threat of Malone from News Corp., but in giving up, Murdoch also loses a hard-won position atop the U.S. media distribution business. His $58 billion company controls newspapers and satellite TV holdings in Italy, the United Kingdom and Asia.
News Corp.'s class A shares fell 3 cents, or 0.14 percent, to $21.55 in New York Stock Exchange trading, following the announcement of the agreement.
Liberty Media Capital shares rose $3.98, or 4.25 percent, to $96.62 on the Nasdaq. The company has said control of DirecTV would give it more power when negotiating distribution for the QVC shopping channel and Starz Entertainment network.
Malone exited the distribution business in the late 1990s after selling cable company TeleCommunications Inc. to AT&T. This deal marks his return as a top U.S. distributor of video and Internet services, although the financial attraction of the tax-free swap was the primary motivation, analysts say.
As chief executive of TCI, Malone was a feared and revered leader of U.S. media. Former U.S. Senator and former Vice President Al Gore famously dubbed him "Darth Vader," the heavy-breathing villain in Star Wars.
Malone had acquired equity stakes in companies that produce programs carried by his system as a condition to guarantee carriage of the networks on TCI, which helped him lock up big stakes in companies such as News Corp. and Time Warner. Liberty Media is the second-largest holder of Time Warner shares with a 4 percent stake as of January 31, 2006.
The cable industry pioneer, who has sought to replicate TCI's cable TV success globally through his control of Liberty Global, has been eager to play a role in the U.S. satellite TV business in the past.
Malone's TCI once held a stake in Primestar Partners, co-owned by big cable operators and had considered bidding against Murdoch to control DirecTV in 2003.
The transaction values DirecTV shares at about $21.50, a 14 percent discount to Thursday's closing price of $25 on the New York Stock Exchange. But the deal terms are in line with average trading prices over the past six months, Merrill Lynch analyst Jessica Reif Cohen said in a research note.
DirecTV shares have risen about 30 percent since September when reports about the deal were first published. The stock was down 16 cents, or 0.64 percent, at $24.84 on Friday.
The swap has been approved by the boards of News Corp. and Liberty Media, and is expected to close in the second half of 2007. Final approval is subject to a regulatory review and approval from News Corp.'s B-class shareholders.
DirecTV CEO Chase Carey, a former News Corp. executive, will remain at the satellite TV service.
News Corp. says the deal will immediately boost its earnings per share.