Malone at Liberty to prevail
Spinoff from AT&T brings freedom, hurdles
By Jennifer Beauprez
Denver Post Business Writer
denverpost.com
Sunday, June 17, 2001 - John Malone has called the shots for 30 years.
That's how the former chief executive of Denver-based Tele-Communications Inc. became a media mogul worth $2.4 billion and the man behind a deal-making machine called Liberty Media, which controls most of what we see on television today.
As Liberty's chairman, the 60-year-old Malone is in charge of a Douglas County-based company that employs just 40 people but closes an average of one deal a month, swapping assets worth $58 million to $2.8 billion each time.
The company owns stakes in more than 100 TV channels, 18 cable and satellite firms, six Internet-related ventures, and eight other media and manufacturing companies. Liberty has a market value of $48 billion - second in the state only to Qwest Communications International.
Liberty began as the programming arm of TCI and was acquired when AT&T Corp. bought TCI in 1999 for $44 billion. Malone swung a deal then to maintain control of Liberty, with a guarantee that AT&T wouldn't meddle with his management or strategy.
But the marriage hasn't worked as Malone and AT&T chief executive Michael Armstrong battled over where the newly merged company should go.
In the next few weeks, Malone will be set free from AT&T when Liberty spins off into its own publicly traded company. Liberty can then invest in companies that compete with AT&T and also will get $800 million from the phone company, a reimbursement for income tax credits that Ma Bell received from the cable programmer. Liberty's also angling to take a piece of TCI's old cable pipe for future interactive programming.
But Liberty's return to freedom will bring challenges - in particular, to Malone's deal-making and perhaps even to his omnipresent control of the company.
With its investments then separate from AT&T's, Liberty could come under more regulatory scrutiny, and, for the first time in its history, the company won't own the pipes to reach U.S. TV screens.
Liberty, set up as a public company, is run like a private one. Much like Malone did with TCI, he issued a separate super-voting class of stock for Liberty that has 10 times the voting power of its common stock.
This allows Malone to continue controlling the company even though it's traded publicly on the New York Stock Exchange. He owns 93 percent of that super-voting stock, which gives him 45 percent of the voting power for the company. Plus, Malone's employment contract basically states that he can't be fired unless he says so.
Essentially, Malone is Liberty Media. Analysts and investors often use the names interchangeably.
"If there's a single company in media that is the personality of one man, it's Liberty Media and John," said Leo Hindery, a Liberty shareholder and former TCI president. "He conceived it. He is the energy behind it. And now it's back to being his baby."
The structure from which that baby was conceived could be threatened by the Securities and Exchange Commission. When Liberty spins off from AT&T, it will no longer be a tracking stock and a part of AT&T's balance sheet.
That may cause regulators to question whether Liberty is an operating company, as Malone says, or a mutual fund. An operating company takes an active role in managing its investments, while a mutual fund, or investment firm, has minority investments and takes a passive role. Before the spinoff, Liberty could prove it was an operating company because it was a part of AT&T.
If Liberty has too many investments with minority stakes, the company could fall under the Investment Company Act of 1940. That would bring on more regulatory scrutiny and force the company to divest some assets. Malone could also be forced to ditch the super-voting stock structure that gives him absolute control.
Liberty spokesman Mike Erickson dismissed the issue of the Investment Company Act and said it's something the company has closely monitored since it went public in 1991. Malone could transfer the super-voting shares over to common stock, Erickson said.
But the regulatory intervention is definitely an issue, said Uri Landesman, chief investment officer of AFA Management Partners, a Liberty shareholder. "It's something they would like to avoid."
If Liberty were to be considered an investment firm, it would change Liberty's tax structure, passing capital gains and losses on to the investors, including Malone himself, Landesman said.
"One of the things people look for in a Malone investment is his ability to defer or avoid taxes," Landesman said. "Malone's motto is, "I avoid taxes; therefore I am.'"
Plus, for the first time, Malone won't have the cable pipes that have for so many years been his best bargaining chip.
"The issue is: Can (Liberty) still create value through deals?" said Matthew Harrigan, an analyst with Janco Partners in Denver.
When Liberty got its start, Malone was at the helm of a cable company that controlled the pipes to 20 percent of America's homes. If a programmer wanted to get on the cable dial, they had to deal with him. TCI began to take equity stakes in those programmers that it put on its system.
"If you didn't get on TCI, you didn't get anywhere," said Peter Barton, who became Liberty's first CEO. "There's no question that leverage is something we all understand and use well. We were good at taking advantage of our situation."
Or, perhaps, bullying them into collaboration. Early MTV executive Jack Schneider told Vanity Fair magazine last year that TCI wanted nothing to do with the music channel unless it got a piece of it when it started.
"John Malone, the head of the biggest operation, TCI, was a pure thug," said Schneider. "I went to sell him MTV, and he said, "I want 10 percent.' I said, "I'm not going to give you 10 percent of it.' And he said, "Then you're not going to get into my systems.'"
Malone and Barton grouped the assets TCI managed to buy inexpensively into a division and told Wall Street in 1991 that they would take it public. Barton asked 21 analysts if they liked the idea. All but one deemed it stupid.
Barton and Malone proceeded anyway and eventually moved a chunk of their TCI stock to Liberty. When the stock took off in the mid-1990s, Liberty made them rich.
Liberty went back and forth from there. In 1994, TCI reunited it with the cable company, in preparation for a $33 billion merger with Bell Atlantic. When that deal fizzled, Liberty became a tracking stock of TCI. It resumed that status when AT&T acquired TCI in 1999.
Now as Liberty goes off on its own - again - Malone is angling to get a piece of those cable pipes he sold to AT&T.
Liberty officials say AT&T owes the company a fat block of space on AT&T's cable systems - the equivalent of 12 to 14 channels. Liberty, which says the TCI-AT&T merger pact included the stipulation, wants the network capacity for future interactive programming.
Though Malone has said he'll step down from the AT&T board after the spinoff, industry observers don't expect him to leave until he gets what he wants.
Malone's exit will mark the end of a rocky marriage between TCI and AT&T. For two years, Malone butted heads with Armstrong.
Malone pushed to separate the company's cable-TV assets within Denver-based AT&T Broadband & Internet into a separate tracking stock. Eventually, after pressure from Wall Street, Armstrong agreed in November to break up Ma Bell into five companies. In the meantime, Malone watched his net worth drop $1 billion as AT&T's stock plummeted 60 percent.
"One of the toughest things in life is to sell a company that you spent 30 years involved in, with all the relationships and partners, then sit on a board and watch that company get managed by somebody else," Malone told The Wall Street Journal last week.
Meanwhile, Malone has been mapping out Liberty's survival, both overseas and at home.
He wants a piece of the nation's biggest satellite TV provider and is involved in News Corp.'s bid to buy DirecTV of El Segundo, Calif. Liberty is the second-largest investor in News Corp., one of the world's largest media conglomerates, and Malone owns 18 percent of the firm.
Liberty also has been pushing to get into the international cable and satellite markets. Malone hopes to leverage Liberty's $65 billion in programming assets to win those investment stakes.
The company already has indirect holdings in cable and satellite operations worldwide, including 2.3 million subscribers in Japan, Puerto Rico, Chile and Argentina.
In February, Liberty made a joint bid with London investment firm Klesch & Co. to buy a 55 percent stake in six of Deutsche Telekom AG's cable-TV businesses, which have half of Germany's 20 million cable subscribers.
Liberty also this month spent $1.4 billion and traded some Latin American assets for a 44 percent stake in UnitedGlobalCom, which has 10 million cable, satellite and Internet customers worldwide.
Malone gained the upper hand in that deal because UnitedGlobalCom is swimming in billions in debt as it attempts to upgrade old cable networks. Malone twice renegotiated the terms of the deal and ultimately drove down its price by 37 percent.
Malone is trying to squeeze Deutsche Telekom, too, demanding a lower price on the $2.6 billion deal.
"This is so classic Malone, what he's about to do to Deutsche Telekom," Landesman told Bloomberg News. "He doesn't have a deal until the ink is dry."
Malone's ability to wring concessions at the bargaining table has created a loyal following of analysts and investors who believe Liberty will only grow without AT&T.
"Liberty is going to emerge from AT&T as a renaissance company," said Barton, who is Malone's friend and a Liberty shareholder. "It's well-funded. It's filled with smart people. And it's run by possibly one of the greatest executives in the media business." |
