Kagan's Column: John Malone's Critics Need a History Lesson
By Paul Kagan
CableFAX's CableWORLD
June 7-20, 2004
To further support my theory that history repeats, sometimes to the letter, I present as evidence the Second Coming of John Malone, dba Liberty Media International (LMI). Although it's hard for newbies to rasp, the world's foremost financial engineer is recreating his TCI experience, right down to acquiring cable systems for single-digit multiples.
If you read the Liberty Internet message board, you'll learn that come people think he has lost his touch, because L shares fell 80% from their 2000 peak to their 2002 low, and have struggled to maintain a mere double recovery since. But the skeptics have no idea how spectacular TCI was, the patience it took to engineer the greatest appreciation in value in market history and how everyone in the world has left Malone alone to do it all again.
First, the past: If you had bought 100 TCI shares at the bottom of the market in December 1974 at a cost of $75, reinvested all of the dividends and spin-off cash you were given into TCI each time, then sold your stock (including further, interim share spin-offs) when it peaked as AT&T on Feb. 3, 1999, you would have turned your $75 into $891,367. That's a 24-year annual IRR of 47.6% (holy cow!) and a performance of 1,188,000%. Warren Buffett, eat your heart out. I doubt that any soul was smart enough to have taken advantage of the opportunity, but that hardly diminishes the real capital that Malone created with his strategies. And now he's trying to do it again.
John couldn't attend Liberty's annual analyst conference in New York May 13 because of a strep throat, but he said more than enough on the March 15 conference call to give us a clear blueprint of his new vision. Here is the essence of what he said then, in his debut
comments on the spin-off of Liberty Intl. shares:
"The idea of building a large cable enterprise with associated programming and technology is very appealing to me personally. I look forward to doing something I've done before and did for a very long time.
"LMI is the TCI of the next 10 years, with 13.7 mil. units and counting and with several large acquisitions pending. I don't see why LMI couldn't be the dominant international cable operator. The idea is to create a large international footprint and coordinate with Liberty networks. We can probably build an MSO even bigger than TCI. We can use investments in euros and yen to hedge the dollar. And there are a lot of private equity owners who will be looking to come out of their deals. LMI is a logical buyer for them.
"We'll be able to create synergies like we did with TCI in the 1970s and 1980s. Incremental rollups always have incremental synergies, including a multiple pickup of 1-2x. It's why I'm excited; it's why I want to do it. Besides, it looks easy compared to what Dob [Bennett] has done with Liberty so far."
Financial alchemy with a sense of humor—after 31 years as a cable exec, Malone has not changed one bit. The last time around, he built the MSO first and acquired the programming second. This time he is building the largest MSO outside the U.S. while already owning some of the largest cable networks in the world (100% of QVC and Starz Encore and 50% of Discovery).
Most investors and money managers know about the MSO-building that Liberty has been doing in Europe, Japan and Chile, but few have put a real number on it. Liberty has been penalized as a holding company, even though it is exiting that mode. Rarely do you see a company with an investment grade balance sheet spinning off high-growth divisions to trade separately. I think Wall Street's sum-of-the-parts estimates of $14-17 per share are too conservative, given the growth potential of the companies Liberty operates. |
