Liberty’s 1st spin after freedom from AT&T

Aug 20, 2001  •  Post A Comment

Announcing a mixed bag of second-quarter earnings results for its complex asset portfolio, an autonomous Liberty Media Corp. had its first accountability session with Wall Street last week-without its boss.
John Malone, Liberty’s chairman and consummate deal-maker, was conspicuously absent from the company’s second-quarter earnings call with analysts and investors. Since he sold his TCI to AT&T Corp. in 1999, Mr. Malone has openly lobbied for Liberty’s independence.
With that achieved last week, there were no clear indications of what new acquisitions or investments Liberty may pursue that it couldn’t before as an AT&T Corp. tracking stock. Industry analysts raised many broad questions, which Mr. Malone will have to address in an annual investors’ conference next month in New York.
Liberty President and CEO Robert Bennett told investors during the Aug. 14 earnings call that the company remains focused on completing previously announced deals that will make Liberty the single-largest cable operator in Germany and Europe.
“Our attention is pretty well focused on the European opportunity and developing the other businesses we have,” he said.
On that same day, United Pan-European Communications and its UPC subsidiary announced a sizable second-quarter loss and the resignation of CEO Mark Schneider. Amsterdam-based UPC reported a second-quarter $774 million loss mainly due to phone business write-offs but said it remains on track to turn profitable in 2002.
Even before Liberty closes on its latest ownership restructuring with UPC and its proposed $5 billion acquisition of Deutsche Telekom, it has lent $856 million to debt-burdened UPC. Liberty also has a sizable interest in Denver-based UnitedGlobalCom, a 51 percent owner of UPC, which is headed by Mr. Schneider’s father, Gene Schneider.
Mr. Schneider, who is based in London, told investors during an earnings call that he wants to spend more time with his family stateside.
“[UPC’s] second layer of management is quite strong, and we have a good deal of confidence in the operating management of the company,” Mr. Bennett said.
Moody’s Investors Service lowered the debt ratings on UPC and UGC to a “negative outlook.”
Mr. Bennett confirmed that “Liberty 4,” referring to the four major transformations it has undergone, received more than $600 million in cash related to tax credits it enjoyed as an AT&T tracking stock.
Liberty executives said they are on the acquisition front in areas such as international cable, satellite and programming but declined to elaborate.
Mr. Bennett denied one analyst’s assertion that Liberty suddenly has shifted from a passive to a more active investment style that requires more capital and operating skills, putting the company’s overall holdings and strategy at risk. Liberty’s stock-like most media issues- has declined in 2001, and its investment strategies have been more closely scrutinized as some of its investments have proven to be failed bets.
“We are not in the business of making passive investments and in fact have been very active creators of and managers of businesses throughout our history,” Mr. Bennett said. He pointed to Liberty starting its Japanese-based investments and domestic regional sports businesses that eventually were traded for its 20 percent stake in News Corp.
“We’ve been in the business of starting businesses, growing businesses, developing businesses and then trying to increase their scope and scale. That sometimes has resulted in passive investments. I don’t think it’s fair to say we’ve changed our stripes dramatically,” Mr. Bennett said.
He said Liberty is committed to seeing “strong stand-alone entrepreneurial management” thrive at UPC and Deutsche Telekom, as it does at other of Liberty’s investment companies, and he said it will continue to be involved in all these companies only at the strategic and capital levels.
Liberty’s pending UPC transaction is expected to close by October under the originally announced terms, and a definitive acquisition pact with Deutsch Telekom could be announced within a week, the company said.
Liberty executives tried to assure analysts and investors that it would not be strapped by the funding requirements of either European investment but would not comment on what they will be.
UPC, which has said it will lay off 1,500 employees to offset its losses, has nearly $4 billion in loans to support its ambitious financial targets for the year and as much as $8 billion in debt due to rigorous acquisitions. Although UPC’s more than 7 million customers represent more than 10 percent of Europe’s cable market, its stock has dropped about 95 percent over the past year and could be delisted.
In other matters, Liberty officials conceded Discovery Communications has reduced its upfront prices by more than 10 percent to sell a little less than half its ad inventory in the upfront. Mr. Bennett said Discovery’s cable network group has seen a “low-teens decline” in its costs per thousand, which will be offset by a low-teens increase in audience levels, resulting in flat ad revenues overall.
Of its larger privately held companies, its 49-percent-owned Discovery Communications reported a 120 percent cash flow growth to $90 million, Starz Encore Group reported a 25 percent cash flow growth to $69 million, and QVC reported a 24 percent cash flow growth to $166 million.
For the second quarter, Liberty, with its complex public and private holdings, reported a $2 billion loss compared with a profit a year earlier on a 34 percent rise in revenues to $513 million.
Although its net debt increased by $1 billion to $4.5 billion from the first quarter of this year due to its foreign deals, Liberty officials said that is sufficiently offset by the company’s unrestricted public assets, cash and hedge securities.
Mr. Bennett conceded the company continues to try to make the investment community “more comfortable” with its balance sheet and underlying assets and to protect the company’s investment grade rating. In response to concerns that Liberty may have to sell assets to avoid being classified as an investment rather than as an operating company, he said: “We’ve been subject to these rules all along, and being spun off from AT&T does not change our status. We don’t at this time expect the need to or anticipate making transactions or taking actions specifically for changing our mix of assets. We believe we are in compliance.”
In the second quarter, Discovery Communications substantially grew its worldwide subscriber base and turned modest revenue growth into impressive cash flow growth through strict cost containment.
Revenue and cash flow at the Discovery Channel, Learning Channel, Animal Planet and Travel Channel were flat, although affiliate revenue was up 10 percent offset by flat advertising revenues. “We’re somewhat comforted by the fact that that’s somewhat better than all the other cable networks are seeing,” Mr. Bennett said.