Report to Investors
(Thanks goes to Creek off the Yahoo LMGA board for uncovering this one.)
Liberty Media Corporation
Report to Investors
April, 2000
LETTER TO SHAREHOLDERS
Dear Fellow Shareholders:
Once again, we have the privilege of reporting to you on the state of our Company, describing some of our achievements in the past year, and outlining our aspirations for the future. In summary, 1999 was a remarkable year for Liberty Media Group. Most of our affiliated companies performed very well, the market values of our public affiliates appreciated significantly, we initiated or completed a number of important acquisitions, we embarked on several new initiatives, and we took advantage of the strong capital markets to raise new long-term financing. The resulting value creation was clearly reflected in a nearly 150 percent increase in the price of our stock in 1999.
During the year, we also witnessed an increase in the pace of consolidation in the communications and media business and the resulting emergence of global providers of a wide range of telecommunications services. Technological advances have enabled the worldwide delivery of new forms of information and entertainment products and increased the demand for these products. The importance of scale economics in the creation and distribution of content is driving the trend toward consolidation and globalization.
At the same time, the desire for competitive advantage motivates a trend toward vertical integration. Content companies want to control distribution to ensure availability of their products, while distribution companies want to differentiate their offerings with branded content. Both want to offer bundled packages of services. In this dynamic environment, we believe that value will migrate to those companies that own branded content and those that have direct relationships with the ultimate consumer. Liberty's challenge—and opportunity—is to find the best ways to participate in and profit from these trends.
Creating Value for Our Shareholders
Our past success is the product of how we approach our mission: to maximize the per share value of our equity over a rolling five- to ten-year horizon. We do this through a cycle of value creation designed to make Liberty's overall equity appreciate at a faster rate than the sum of our parts. This should drive a commensurate increase in the price of our stock, as was the case this past year.
The value creation cycle for Liberty begins with acquiring and investing in select businesses with sustainable rates of internal growth that substantially exceed the growth rate of the market as a whole. Our affiliated companies are in the business of satisfying the exploding demand for broadband content and services. They are developing technology, they are creating broadband content services, including electronic commerce, and they are providing the means of distributing these services. It is important to note that while each of our businesses stands on its own, we do not view our holdings as a random collection of high-growth businesses. Rather, we see them as the threads of a single fabric of opportunity.
We maximize the potential of our assets through opportunistic management of our collection of businesses. We seek to combine like assets to create scale and to join groups of complementary assets to create synergy. We also deploy a variety of financial techniques to optimize the returns from our businesses, minimize risk and maintain a balanced capital structure. The last step on the cycle is to efficiently use our assets to generate the liquidity that enables us to restart the entire value creation process with a new business.
Strong Demand Drives Growth Among Our Businesses
Most of our businesses delivered very strong performance in 1999, either meeting or exceeding our expectations for them.
Time Warner , one of the largest media companies in the world, posted record cash flow of $7.3 billion on revenues of $27.3 billion for 1999, up 15 percent and four percent, respectively, compared with 1998. Time Warner advertising revenue grew by 20 percent to more than $5 billion in 1999.
Sprint PCS , the nation's largest all-digital wireless network, serves a population of nearly 190 million. During the fourth quarter of 1999, Sprint PCS posted its fifth consecutive record quarter in the area of customer acquisitions, becoming the first U.S. wireless carrier to add more than one million wireless customers in a single quarter. Since the end of 1998, the Sprint PCS customer base has increased by 121 percent to 5.73 million, and in 1999, revenue rose by $1.96 billion, up 160 percent compared with 1998.
QVC again reported stellar results in 1999. Sales at QVC increased by 19 percent in 1999 to more than $2.8 billion, while operating cash flow grew by 24 percent to $539 million. Over the past 10 years, QVC's revenue and cash flow have grown at compound average growth rates of approximately 16 percent and 24 percent, respectively. QVC's powerful domestic electronic retailing business delivered more than 75 million packages and increased its customer base by one million to more than eight million customers in 1999. QVC's international businesses have also enjoyed success, exceeding $384 million in sales, up 38 percent over 1998. Revenue from QVC's retail website, iQVC, more than doubled in 1999 to nearly $100 million.
In June 2000, Discovery Communications will celebrate the 15th anniversary of the Discovery Channel, and the fact that Discovery's programs, products and services have become available to almost a billion people in 147 countries. For the third consecutive year, the nationwide EquiTrend survey named the Discovery Channel as the leading media brand in overall quality among 61 brands measured, including newspapers, magazines and television. The Learning Channel was third on the list. Overall, Discovery was the only media brand that ranked in the top 10 among all consumer brands. Discovery enjoyed unprecedented growth in 1999, with total consolidated revenues growing by 33 percent to $1.4 billion. Animal Planet continued its rapid growth rate, adding 10 million new subscribers in 1999. Major new initiatives for 1999 included Discovery Health Media, which has quickly become a leading cross-media health information brand, and Discovery.com, which aims to create new revenue streams by extending the reach of Discovery's content services onto the Internet.
During 1999, Starz Encore Group created pay TV's first ''Super Pak'' of up to 12 differentiated premium Starz and Encore movie channels for one low price. Starz Encore was the first to introduce Subscription Video-On-Demand (S-VOD), a new business model that will carry pay television into the new era of broadband services. Using the emerging video-on-demand technology platform, S-VOD allows Starz Encore Super Pak subscribers to view movies at any time with full VCR functionality of play, pause, fast forward and rewind. In 1999, Starz Encore also increased its distribution reach by signing long-term contracts with DirecTV and 15 MSOs, and strengthened its programming through long-term exclusive output deals with Disney, three independent producers and, in early 2000, with Sony Pictures. These agreements include current S-VOD and future Internet rights. Growth among the satellite distributors and the digital services offered by cable companies fueled a 20 percent increase in revenue for 1999 and a 65 percent increase in cash flow to $165 million.
TV Guide, Inc. markets and distributes television viewer guide products to more than 100 million cable and satellite homes each week in the U.S. and markets its products internationally in more than 45 countries. During 1999, United Video completed its merger with TV Guide and relaunched its Prevue Channel using the powerful TV Guide brand. Later in 1999, TV Guide launched Television Games Network, a 24-hour horse racing channel with an interactive wagering capability. TV Guide also signed a marketing alliance with Echostar to convert TV Guide's C-Band satellite customers to Echostar's service.
Telewest Communications , with 1.6 million residential cable television and telephone customers, is one of the largest providers of broadband video and data services in the United Kingdom. It has more than 100,000 subscribers to its new suite of digital services and recently launched the country's first high-speed Internet access services. Telewest revenue grew by 42 percent, and cash flow increased by 40 percent to approximately $339 million in 1999.
Jupiter Telecommunications is Japan's largest cable company, with a base of 4.8 million homes under franchise. Jupiter's networks are capable of carrying television channels, telephony, data and two-way interactive services. Jupiter's digital telephone service represents wireline competition in the local loop for long-time dominant Nippon Telegraph and Telephone. In 1999, Jupiter became the first cable company in Japan to begin testing digital broadcasts. At the end of 1999, Jupiter had 537,000 cable television subscribers, an increase of 42 percent compared with 1998. Residential telephone and Internet lines more than tripled to 28,000.
Jupiter Programming manages and distributes channels for cable and satellite networks in Japan. The Golf Network and Shop Channel now lead the market in their sectors, while CableSoft Network is one of the most highly rated movie channels in Japanese cable. J-Sports recently merged with Sky Sports, becoming the largest shareholder in a three-channel sports operation with partners Sony, Fuji TV, Softbank and News Corp. The new entity, J-Sky-Sports, has an extensive rights inventory that includes baseball, Japan's J-League soccer and a wide range of international soccer events.
Managing Our Assets For Growth, Scale And Synergy
Management of our assets involves two distinct phases. The first phase is to acquire all or a significant part of businesses involved in the creation or distribution of media and telecommunications services. In so doing, we position our Company to benefit from the growth in value of these individual businesses, and we create the building blocks of scale and synergy so crucial in our industry. The second phase is to initiate or support timely acquisitions or mergers that create scale economies for the business involved, reduce the risk in that business, and/or improve the liquidity of Liberty's position. In each case, we are careful to structure transactions to maximize our after-tax returns. Throughout the process, we actively seek opportunities to increase management or shareholder focus on discreet sets of assets.
Last year was an active one for Liberty with regard to these efforts, particularly in the telecommunications and foreign cable arena. We continue to believe that demand for broadband telecommunications services will exceed the physical capacity of the distribution infrastructure for the foreseeable future. This is particularly true with respect to the most expensive part of the distribution network, namely the point of access to the ultimate user. In the past year, we acquired portions of several large companies with unique advantages in the delivery of broadband services to consumers and businesses.
In December 1999 we acquired approximately 32 percent of Astrolink, LLC. Astrolink is planning to launch a constellation of four Ka-band satellites with on-board processing capabilities over the next three years. Once operational, these satellites will constitute a global infrastructure capable of providing fixed, two-way broadband data services anywhere in the world. Possible applications include carrying traffic among local carriers in distant markets, connecting global facilities of multinational companies, and offering Internet and streaming video services to individual consumers in the U.S. or abroad. The global network also will be able to provide services to our other content and distribution companies. The relatively low cost of creating the global infrastructure and the variety of potential service offerings make Astrolink an attractive proposition.
In January 2000, we completed the acquisition of The Associated Group, whose largest asset was a 34 percent position in Teligent. Teligent provides broadband voice and data communications services to small- and mid-sized businesses by means of fixed wireless transmission. Because it does not rely on fiber optic cable, Teligent can serve customers more quickly and at lower cost than the incumbent telephone company competitor in many areas.
In February 2000, we led a group that invested $750 million in ICG Communications, a competitive local exchange carrier and a provider of network facilities and management to Internet service providers, business customers and other carriers. ICG is focused on the development of a complete portfolio of telecom products, such as voice, data and teleconferencing for business customers; and network management functions for Internet service providers and application service providers. Also in February, ICG and Teligent entered into a share exchange and committed to find opportunities for their complementary systems and infrastructure to work together. Both ICG and Teligent can provide key terrestrial services and traffic to Astrolink.
In September 1999 we made an investment in UnitedGlobalCom. UGC, through its majority-owned subsidiary, United Pan-European Holdings, is the leading provider of cable television, telephony and related broadband services in continental Europe. Its ''chello'' broadband Internet service is a leading provider of broadband Internet portal services. This investment complements our existing cable television, telephony and content holdings in the U.K., Ireland and continental Europe, as well as our activities in Japan and Argentina.
We also took steps in 1999 to create a number of smaller corporate units to pursue individual areas of business opportunity. These efforts are motivated by two objectives. First, as we grow in size and scope, we need a way to pursue the myriad opportunities that are presented to us without significantly increasing corporate staff. Second, we want to ensure that the value of our less visible assets is not obscured by our larger businesses. By creating separate publicly traded entities, we attract and motivate entrepreneurial management with specific expertise, and we create a stock that can be used to acquire like assets and raise shareholder awareness of certain groups of assets. So far, we have established two such companies—Liberty Digital and Liberty Satellite—and we are developing a third, Liberty Livewire. We may create others in the future.
As mentioned in last year's letter, we folded certain of our interactive television, Internet and music assets into a new company called Liberty Digital. This transaction was announced in April and completed in September 1999. Liberty Digital has a dual mandate: to develop applications and services under the bandwidth agreement we negotiated as part of the AT&T merger, and to make venture capital investments in the fields of interactive television and Internet content. Exploitation of the bandwidth agreement is dependent on deployment by AT&T and other cable operators of next-generation set-top devices. Since such devices will probably not be deployed in scale for at least another year, Liberty Digital has focused on a steady stream of investments and acquisitions.
In December 1999, we announced a transaction with TCI Satellite, soon to be renamed Liberty Satellite and Technology, Inc. (LSAT), in which we agreed to acquire a controlling interest in LSAT, and to form a joint venture. We contributed all of our satellite-related assets (including Astrolink, XM Radio, Sky Latin America and iSky) into the joint venture, thereby placing them in the hands of a management team with expertise in this field. The transaction was completed in March 2000.
We began to assemble Liberty Livewire in July 1999 with the announced acquisition of Todd-AO, followed by acquisitions of SounDelux and Four Media. When assembled, Liberty Livewire will function as a third-party service company offering an end-to-end package of post-production services and video and Internet distribution services to studios, television programmers and advertisers. These services will facilitate the efficient production and networking of interactive programming and advertising bound for the consumer's TV and PC via cable, DSL and broadcast television distribution, addressing both the narrow band and broadband needs of our customers.
Liberty Livewire is still in its infancy, but could emerge as a very important business as the nature and delivery of video and Internet content continue to evolve. Liberty Livewire not only offers the potential for significant economic opportunity, but it should also add to the value of our other programming businesses by providing a cost-efficient infrastructure for the development of interactive programming services.
We also orchestrated three large merger transactions, all of which demonstrate the transition of our holdings into larger companies. Each transaction offered different benefits to Liberty.
In September 1999, General Instrument announced a merger agreement with Motorola, a leader in wireless communications, networking and semiconductor technology. This transaction brought the value of Motorola's technology resources, brand name and business diversification to GI. The merger made Liberty one of the largest shareholders in Motorola and it also substantially increased the liquidity of Liberty's ownership position, enabling us to use the asset to finance other activities while continuing to benefit from the future growth of Motorola's businesses.
In October 1999, TV Guide announced its agreement to merge with Gemstar International Group. Upon completion of the merger, expected in the second quarter of 2000, our 44 percent interest in TV Guide will convert to approximately 20 percent of the new TV Guide International. Liberty—together with News Corporation, which holds a similar interest—will be the largest shareholders and will continue our active roles in the management of the Company. The objective of the merger is to combine TV Guide's strengths in providing viewer guide information to consumers through its magazine and passive and interactive cable services, with Gemstar's preeminent global position with broadcasters and consumer electronics manufacturers. The scale provided by the combination will also increase the potential audience size available to advertisers and present opportunities for cost savings.
In December 1999, two of our U.K. affiliates, Telewest Communications and Flextech announced their agreement to merge. Our holdings of 22 percent and 37 percent in Telewest and Flextech, respectively, will convert into a 24 percent holding in the merged entity. Following the merger, Liberty and Microsoft will be the largest shareholders of the new Telewest. Our objective in initiating and supporting this merger is to combine Telewest's distribution assets with Flextech's programming businesses. Given the competitive landscape in the market, we believe that an integrated company with an array of voice, video and interactive services will be more successful than either company alone. Thus far, the market agrees with our determination.
Managing Our Capital Structure
The past year was particularly active on the capital-raising front. Immediately following the AT&T acquisition in March 1999, we had approximately $5.5 billion in cash. Since then, we have invested approximately $4 billion in new initiatives. In order to maintain the financial flexibility required to take advantage of emerging opportunities, we issued two types of debt securities for a total of $4 billion:
In July 1999 and January 2000, we issued a total of $750 million of 10-year debt and $1.5 billion of 30-year bonds. These debt securities carry an investment-grade rating and have a weighted average interest rate of 8.18 percent. We paid a small premium for the longer-term securities, but felt it was prudent in view of the long-term nature of our assets.
We also sold a total of $1.7 billion of exchangeable debt securities. These instruments have 30-year maturities and are exchangeable by the holders into some of the shares of PCS common stock that we hold. By offering the exchange right, we were able to achieve a blended interest rate of 3.88 percent. The long maturity, connection to an underlying asset and very low after-tax interest cost created an efficient means of raising our debt leverage without risking our investment-grade debt rating.
The Future
As a result of our success (and some luck) in 1999 and the first quarter of 2000, Liberty Media Group's equity market value recently reached $80 billion. This figure is noteworthy, as it places us among the 40 largest American companies. It is staggering in comparison with our market value of $5 billion just three years ago. However, it also leads to a frequent question from shareholders: How will we sustain our rate of growth now that our base has become so large?
Our answer is simple: We will continue to apply the strategy that has proved to be so successful in the past. We will endeavor to create extraordinary returns for our shareholders through a combination of internal growth, aggressive management of our collection of assets and creative but conservative financial management.
Our approach is straightforward. We try to determine the leading trends that will shape the way consumers and businesses behave in the future. We then try to profit from these trends by owning companies that have a unique advantage in addressing these future needs. The inherent growth in the value of these businesses is compounded by their association with our affiliated companies and by our willingness and ability to combine assets to create scale or business synergy. Finally, whether we are buying, selling or merging businesses, we seek structures that lead to the highest after-tax return and the least risk.
In last year's Annual Report, we wrote: ''Our sole objective has always been to maximize the value of Liberty's stock. We pursue this goal with diligence, focus, energy and creativity. Liberty is managed by shareholders for the benefit of shareholders. Every corporate employee owns stock and has a direct stake in the success of our efforts. Each action we take in the future will be consistent with that goal.''
This statement articulates the philosophy that has guided us since we were founded in 1991. Our shareholders can expect that our tactics will evolve and vary as we adapt to changing conditions, that the scope of our business interests will broaden, and that the pace of our activity will quicken. But you can also expect that our key objective and our fundamental approach to achieving that objective will not change.
The accelerated pace and wider range of our activities recently required us to expand our corporate staff to 39 employees. While this is an all-time high for Liberty, the ratio of our market value per employee also rose—from $1.4 billion last year to more than $2.0 billion today. This result would not be possible without the enormous dedication of those 39 people and without their commitment to the principles of the Company. We thank each of them, and all of their counterparts and colleagues at our affiliated companies, for their contributions to our success.
On behalf of the entire family of Liberty employees, we would like to thank you, our fellow shareholders, for your continuing support and encouragement. We look forward to meeting the new challenges and seizing the exciting opportunities that the coming year is certain to bring. |
