John Malone making his way in Europe

Mar 5, 2001  •  Post A Comment

John Malone is doing what comes naturally as he waits out grinding negotiations to become part of Rupert Murdoch’s proposed satellite domination play in the United States by buying DirecTV. He’s taking the rest of the world’s budding cable territories by storm.
Recent moves by his Liberty Media Group to acquire a major stake in systems serving 24 million cable subscribers, most of whom are in continental Europe, provide a glimpse of how Mr. Malone intends to globally reposition his $38 billion program and distribution holding company after it is completely spun off by AT&T Corp. midyear.
He is re-creating the content and service distribution platform model he built with Tele-Communications Inc. before selling it to AT&T in 1999.
“It puts us back into the operating cable business, which many of us came from, and is an effort to reinitiate the old TCI model,” Mr. Malone told analysts and reporters in a Feb. 23 conference call.
“This is a broad strategy by Liberty to repurpose some of our nonstrategic investments and assets in a tax-efficient way into operating assets that will be synergistic with a number of our other businesses,” he said.
Mr. Malone conceded it is a “large undertaking” to restructure a $1.4 billion investment in UnitedGlobalCom-and to acquire a 55 percent stake in Deutsche Telekom’s German cable assets for $2 billion in partnership with Klesch & Co.-in “an effort to build a telecommunications industry in Europe and to get enough scale economics into it so that enough products and services can be developed by ourselves and third parties.”
Also included in the transaction is the option for Liberty and Klesch to acquire another 20 percent stake in the cable systems in six regions serving 10 million customers; Level 4 operators and the operator of a digital platform in Germany. The complex UPC restructuring essentially leaves Liberty’s Telewest stake intact.
Revision of an already complicated deal still leaves Mr. Malone as the majority vote holder of UCOMA, which controls UPC, which still holds cable properties in Germany, Austria and other Eastern European countries.
Such moves prompted analysts such as Steve Schutzman of Salomon Smith Barney to question the “hidden agendas” in Liberty’s broad international plays.
“Agendas are hidden in the communications, media and entertainment sector-always have been and always will be. The fun is in guessing where the next play will be made,” Mr. Schutzman said.
“Malone has created a vehicle whereby he can start consolidating the European cable market, much like he did with TCI before he sold to AT&T,” Mr. Schutzman said.
“Liberty has been trying to get rid of its Telewest stake for some time now. Why the sudden change in strategy?” Mr. Schutzman asked in a recent report to clients. “Why Germany-and why on such a grand scale?”
However, Mr. Schutzman, a corporate bond analyst, said despite Liberty’s major realignment now in process, he does not expect the credit quality of Liberty’s bonds to suffer long-term, given its “broad portfolio of monetizable assets” and Mr. Malone’s “adept” leadership. Standard & Poor’s has placed Liberty on a negative credit watch.
Mr. Malone said, however, that Liberty will not tap its $3 billion cash hoard to complete its recently announced European cable deals. Instead, it will sell or barter in a tax-efficient way with its nonstrategic assets.
Mr. Malone said such assets will not include Liberty’s 100 percent owned private assets, such as Discovery Communications, and its potent stakes in News Corp., AOL Time Warner and USA Networks.
“We don’t intend to use our cash at all. In fact, we pick up another $600 million to $700 million in cash when we spin from our deferred tax benefits that AT&T used. So we should be in a very strong cash position when the smoke clears, and we don’t intend to use any of our cash hoard to finance either of these transactions,” Mr. Malone said.
Since the Feb. 23 cable transaction announcements, Liberty officials have declined to elaborate on their expansion plans because of their spinoff filing with the Securities and Exchange Commission places them in a so-called “quiet period.” The transformation of Liberty from an AT&T tracking stock to a publicly traded stand-alone entity is predicated on a favorable ruling from the Internal Revenue Service that there will be no onerous tax ramifications to the move, which is expected in the second quarter.
Mr. Malone has indicated he likely will resign from the AT&T Corp. board at the time of the Liberty spinoff. Liberty is in the throes of negotiating new preferred provider agreements for carriage of its programming and services on AT&T’s domestic cable systems.
While Liberty’s march on Europe comes on the heels of its expanded cable involvement in places such as Latin America and Asia, Mr. Malone said he is not prepared to pay high cash-flow multiples in the United States to re-enter the domestic cable system business.
“It depends on the price,” Malone said. “These things are all targets of opportunity. U.S. cable values are still quite high, and the economic opportunities look more attractive elsewhere. But that can all change with the passage of time.”
That’s where News Corp.’s hard-fought battle for Hughes Electronics and its DirecTV unit comes in to play. Mr. Murdoch’s proposed acquisition of the dominant U.S. satellite operator, valued at $45 billion, would be backed by Liberty, Microsoft and other equity investors and created from a virtually cashless stock and asset merger with News Corp.’s far-flung global satellite operations. Hughes and its corporate parent, General Motors, are pressing for more favorable terms and are said to have resumed talks with other interested bidders.
Sources close to the negotiations say Mr. Malone and Mr. Murdoch have too much at stake to allow the negotiations to collapse, as was speculated last week. None of the companies involved would comment.
Having too much distribution clout in too many places might, ironically, cause a quandary for Liberty, as Mr. Malone recently suggested. For instance, Liberty would be required to choose between stakes in News Corp.-controlled? BSkyB and cable operations such as Telewest in the United Kingdom. But there also are ways around such potential conflicts. News Corp. will likely wind up acquiring a 23 percent stake in BSkyB that’s being sold by Vivendi, and Liberty will simply increase its 20 percent stake in News Corp.
Mr. Malone said he is not inclined to trade Liberty’s stake in USA Networks to Vivendi for a bigger piece of BSkyB.
It is indicative of the kind of masterful building and checking that is contributing to Liberty’s rapid international growth, and that will help it morph yet again if and when News Corp.’s DirecTV deal and Liberty’s cable acquisitions abroad close.
A complete spinoff from AT&T will give Liberty the autonomy to pursue strategic initiatives.
In more plain-speaking terms, Morgan Stanley Dean Witter analyst Richard Bilotti credits Mr. Malone, who has the largest broadband footprint under common ownership assembled, with redeploying the “three stomachs of the cow” strategy he employed in the United States in the 1980s and ’90s before he sold TCI to AT&T.
“The first stomach consists of developing companies which require many partners and recurring equity financing,” and in which TCI and Liberty traditionally have owned less than 50 percent, Mr. Bilotti said.
“The second stomach consists of more developed companies, which use primarily debt financing, and of which Liberty and TCI traditionally owned between 50 and 100 percent,” he said. The “third stomach” consists of the mature businesses, which are producing excess cash flow and are wholly owned by Liberty.
Given the onerous nature of system upgrades and rebuilds in the United States, Liberty may have spooked some investors by not providing estimates on the amount of capital expenditures it will be expected to fund, although Mr. Malone said it would be more for advanced set-top boxes and other interactive devices for
consumers than for system upgrades.
“We’ll play it by ear. We do not want this to be a highly leveraged business. We’ll feel our way into cap X.” Mr. Malone said.