Quote "One asset to keep an eye on is ACTV Inc."
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June 1999
Liberty's bells and whistles
Malone's various assets have metamorphosed into a huge cash cow
By Bob Diddlebock and John M. Higgins
John Malone has billions of dollars in his pocket and he's still not spending it.
Since Tele-Communications Inc. was taken over by AT&T Corp. in March, Malone's primary focus has shifted from the operating portfolio of the cable systems he amassed in his years as the MSO's chief executive, to shaping the massive collection of assets he accumulated at TCI's former parent company--Liberty.
What the media industry and Wall Street executives find so intriguing is not merely Liberty chairman Malone's track record at clever financial engineering. It's that the takeover of TCI left Liberty with a huge war chest for takeovers. Though technically still a subsidiary of AT&T, Liberty maintains a certain independence and sold the long-distance carrier $5.5 billion worth of assets, most notably its 60% stake in high-speed online service Excite@Home. The huge shares in companies that Liberty executives have acknowledged aren't a high priority to hang on to--like Sprint PCS--bring Malone's liquid holdings to about $17 billion. That doesn't count the amount of money Liberty can borrow against its other assets, which Malone has pegged at about $5 billion.
Malone acknowledges that one thing making him uncomfortable is that Liberty has almost no debt. After years of grappling with TCI's debt load, Malone finds himself under-leveraged, a concept that even many other corporate emperors get queasy about. Debt amplifies the key measure of any company--return on equity. After 25 years of preaching to investors about the benefits of leverage, Malone is in foreign territory.
But Malone is not making decisions in haste. His first post-TCI moves didn't touch his checking account--they were the sale of sports assets, a quick shuffle of Internet assets, a stock-swap acquisition of a longtime backer, and actually raising--not spending--more cash.
With assets around the world, from the United Kingdom to Hollywood to Tokyo, Liberty is a dazzling, sometimes confusing, always growing work in progress. Among its prime assets are stakes in some 100 companies, including new-media investments expected to be trailblazers in interactive video, e-commerce and the convergence of TV sets with personal computers.
Liberty executives hint at no master plan. Malone is merely gardening--spading and pruning. Big moves will come as the opportunities arise.
"We have a great portfolio right now, and we get to see most investment opportunities that come down the pike," Malone told an investment conference in May. "We still have a long list of bits and pieces that are growing rapidly and are designed to go somewhere."
Everyone else is looking for a land grab. Malone expresses his focus purely in financial terms, targeting superior long-term financial growth. "That's what Liberty is all about," he says.
Malone and President Dob Bennett have a lot to work with: Discovery Communications. Malone has described Discovery as one of his favorite investments, in part because it's stimulating. Discovery is in its third phase of development. After building its core channel into a cash flow machine, Discovery Chairman John Hendricks used that cash in the early 1990s to buy The Learning Channel and extend the company's reach overseas, starting networks in Europe and India. After eating through $250 million, TLC is now estimated to be worth $1 billion.
That was the second wave. Hendricks in now on a tear buying up problem networks he believes he can fix, like The Travel Channel and CBS' Eye On People. He has an array of seven digital cable networks, which he hopes to use to take advantage of the channel capacity opening on cable systems deploying digital compression. And Hendricks is committing $350 million to launch Discovery Health, a science-and-medicine channel aimed at taking advantage of consumer interest in health information and the explosion in drug companies' ad spending.
Investment banker Gerard Klauer Mattison pegs the value of Liberty's stake in Discovery at $2.6 billion this year. Next year, that could jump to $2.9 billion.
Liberty's other investments include USA Networks, with a 21.4 % stake, valued at $2.4 billion. USA comprises the Home Shopping Network, Ticketmaster, USA Network, Sci-Fi Channel and 12 broadcast stations--all run by the savvy Barry Diller. Even though his bid to acquire Internet portal Lycos tanked, Diller has the muscle to add $10 to Liberty's share price in the next year, according to Mattison.
There's the company's share in Time Warner: Liberty's 9% stake is Liberty's single largest asset, worth roughly $7.6 billion. Malone has essentially sold it. Liberty got the 114 million shares when Malone agreed to allow Time Warner Chairman Gerald Levin to take over Turner Broadcasting System Inc., of which Liberty owned a 21% stake. Because Time Warner owns so many cable systems, serving 12.9 million subscribers, Liberty was limited in how to exploit the investment. Malone was forced by antitrust regulators to accept a totally passive, nonvoting position after the Turner sale, and Liberty's continuing association with AT&T still leaves Malone hamstrung. He has now hedged the investment in a complicated deal with several institutional investors, lifting Liberty's gain to $158.33 per share (from around $70 now) but limiting its decline to $67.45 per share. A source of cash, but no longer a strategic investment.
The company's investment in News Corp. is a small piece in Liberty's scheme of things. Liberty got an 8% slice of Chairman Rupert Murdoch's operation by unloading its half of Fox Liberty Sports to partner News Corp. for $1.4 billion worth of News Corp. stock. Malone confessed that he exited because of the insane upward spiral of sports rights and the leverage of team owners. Malone and Murdoch have long been close, but this investment looks to analysts a lot like his involvement with Time Warner.
Encore Media Group is virtually Liberty's only wholly owned operation. After having difficulty getting carriage, the seven-year-old pay movie networks Starz! and Encore recently turned a positive cash flow. Thanks to carriage deals with AT&T, DBS and other MSOs, annualized cash flow should grow more than 30% this year. Encore is even more ambitious than Discovery when it comes to digital cable, creating a slate of a dozen different movie networks for digital customers. But Encore and Starz! have fuzzy images. Encore President John Sie has repositioned the marketing of the networks over and over. A first-time ad campaign is on the boards for Encore, which has carried older movies and is now mixing in newer releases. The big bullet comes when rights deals with Hollywood networks come in next year. Think of what happens when sports rights deals come up for renewal. Applying a multiple of 16 to this year's cash flows, Mattison pegs Encore's value at $2.1 billion.
Liberty owns 43% of QVC, the shopping networks, leaving the 57% majority owner to run it. Barry Diller gets all the sizzle at rival Home Shopping Network, but QVC has chugged along with strong, steady growth. Revenue and cash flow has grown annually at 17% and 22%, respectively, since 1995. And the company has aggressively moved into overseas markets, as well as to the Internet. But President Doug Briggs has shown no desire to create any more domestic channels after getting burned by an expensive failure when Diller was running QVC. Mattison pegs Liberty's QVC stake at $3.9 billion.
Liberty Digital has been dubbed Malone's home for dogs and cats, but really expensive ones. When it merged with another of TCI's spawn, TCI Ventures, Liberty picked up all sorts of investments in various interactive and Internet ventures, including Priceline.com, iVillage, Sportsline USA and Drugstore.com. In January, it created Liberty Digital, hiring former E! Entertainment Television President Lee Masters to make sense of the portfolio and expand it by pursuing interactive TV programming and digital deals.
Liberty startled investors by deciding to merge the digital unit into another, publicly traded arm, TCI Music. That company held two of Liberty's weakest investments over the years: The Box, a sort-of-interactive music video service, and DMX, a digital audio service for cable subscribers. TCI Music also held a more promising Internet music site, SonicNet. The effect was to make Liberty Digital a public company without a formal initial public offering that would raise cash, something Liberty doesn't need.
Internet sizzle being what it is, TCI Music's stock jumped tenfold from $6 per share to $57, before scaling back to $26. That boosted the company's valuation past $10 billion at one point. As Liberty's Bennett says of Internet assets, "They trade on a different dynamic."
So far Masters has cleaned up the portfolio by pushing most of TCI Music's operations into an online venture with MTV, which may in turn go public. He was stuck with DMX, a company that has burned through $170 million with only a small commercial music business to show for it.
One asset to keep an eye on is ACTV Inc. Though the interactive programming company has been around for almost a decade and generates very little revenue, ACTV recently bought a patent for an embedding process that works inside a TV program, a key element of interactive TV plans. ACTV is now positioning itself as a provider of software tools to interactive programmers.
Liberty's stake in TV Guide Inc., 44%, is valued at $2.5 billion. This could be the real sleeper in the bunch, an asset that Bennett has called "gigantic." CEO Pete Boylan's portfolio has it all: brand names, underutilized database assets, and interactivity sizzle. The portfolio includes TV Guide magazine; the TV Guide Channel; TV Guide Interactive; Superstar/Netlink, the C-band satellite programmer; and TV Gaming, an interactive horseracing channel that's a particular favorite of Malone's.
The company has a 24% stake in Sprint PCS, which is building the first nationwide, all-digital wireless telephone system. It already counts more than 2.5 million customers and was re-capitalized late last year.
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