When two of media’s biggest deal-makers-Rupert Murdoch and John Malone-start stockpiling ammunition for a major competitive advance, then it’s time for everyone else to start looking around for opportunities, or to take cover.
While the economy and the stock market are not expected to permanently rally any time soon, cash-flow multiples and stock prices have fallen far enough to make for some pretty attractive acquisition targets in every media sector for buyers with manageable debt, cash resources and strategic voids to fill.
Which is precisely what Mr. Murdoch and Mr. Malone are preparing to do.
News Corp. last week raised $1.2 billion through a secondary stock offering, which could be used to pay intercompany debt balances but invariably contributes to more than $3 billion in cash reserves to do deals. Failure to resolve its Rainbow regional sports partnership with Cablevision systems by a December deadline with the exchange of assets (which would give Fox sole control of five sports channels outside of New York) could force Cablevision to pay News Corp. another $1 billion in cash during the next three years.
Additionally, Fox has uncommon balance sheet strength, generating about $1 billion in free cash flow annually, bolstered by robust TV station, cable network and program syndication profits-even with the more precarious performance of the Fox TV network.
News Corp. and its Fox subsidiary are ready financially for the one and only big deal they must do: acquire General Motors’ controlling stake in Hughes Electronics and its DirecTV unit, valued at about $5 billion. In an effort to complete News Corp.’s already expansive global satellite reach with the world’s most influential market, News Corp. also could seek to acquire DirecTV’s foiled suitor EchoStar Communications. A Jan. 21 deadline, by which EchoStar and DirecTV must walk away from their dashed deal if it is not consummated, will unleash what is sure to be a second swift and decisive acquisition effort by News Corp., which will be supported by Mr. Malone.
Making another pass
Liberty, which is in the process of completing a rights offering expected to raise about $300 million that will allow it to repurchase more of its own shares, is a 20 percent shareholder in News Corp. Having pledged his continuing support to News Corp.’s U.S. satellite expansion, Mr. Malone has indicated that Liberty could double the $500 million in support it put behind News Corp.’s first pass at DirecTV.
What Liberty wants out of the deal is another pivotal stake in another media giant (about half of Liberty’s total holdings are made up of such stakes). But a News Corp.-owned U.S. satellite platform would ensure Liberty’s access to a growing base of television viewers for its valuable programming and new interactive services.
Sources said Mr. Malone considers News Corp.’s domestic satellite play a critical counter to a handful of dominant cable operators-such as AT&T Comcast and AOL Time Warner-to prevent them from monopolizing the price and distribution of the programming and services that now constitute the bulk of Liberty’s private and public holdings.
That may seem odd for a onetime cable mogul whose former TCI systems, which were sold to AT&T, are now part of its merged base with Comcast. But Mr. Malone is first and foremost an opportunistic investor, focused only on making money.
The News Corp. satellite deal would be one of a handful of key transactions expected to unfold within the next six months that most certainly would revive Liberty’s sagging stock.
Liberty moves a step closer this week in its jockeying for position in a spinoff of the U.S. studio and cable assets of Vivendi Universal, valued by analysts at about $20 billion.
Contributing Starz Encore and its 50 percent stake in Discovery Communciations, collectively valued at more than $11 billion, could land Liberty more than a 45 percent stake in a new venture that would flourish under the management of VUE Chairman Barry Diller, who also presides as chairman of USA Interactive.
Such a move, which would monetize Liberty’s 4 percent stake in Vivendi Universal in classic John Malone style, would be the first in what could be a string of content-related moves for Mr. Malone.
Liberty also could contribute Court TV if it acquires the 50 percent of the channel it does not own from AOL Time Warner, which has been discussed.
Both Mr. Malone and Mr. Diller would likely attract the participation if not select assets of other major media players such as General Electric Co.’s NBC, which is looking for ways to expand its own content and distribution reach. Liberty President Dobb Bennett told investors Nov. 14 the company would be interested in buying DirecTV or any of the VUE assets itself if the bigger deals expected didn’t work out. Liberty also could seek to sell its QVC stake or work with Comcast to spin off or better monetize QVC during a special window to do so in February.
In fact, Mr. Malone and Liberty will have some role in nearly every media deal that likely will play out in 2003, whether it is the dismantling of AOL Time Warner (through spinoffs of Time Warner Cable or AOL), the content expansion of AT&T Comcast (with whom it co-owns QVC), the possible acquisition of Cablevision Systems by AOL Time Warner or the continued acquisition expansion of Viacom, in which it is a new stakeholder. And don’t be surprised if the likes of MGM and The Walt Disney Co. also somehow get involved.
Measured, not sweeping
The fact that more than half of Liberty’s asset value rides on the fate of public company investments, including AOL Time Warner, USA Interactive and News Corp., may become less of a liability in a market that continues to recover and consolidate. The name of the game in media has become measured strategic moves rather than sweeping acquisitions, making it the perfect environment for Mr. Malone to use his estimated $20 billion in public assets and $20 billion in private assets like key pieces in a revived chess game.
Chances are, against the backdrop of gradually improving market conditions and a more sensible rearranging of assets, Liberty will increase the value of its holdings and overall stock, which has plummeted nearly 70 percent in the past two years, as did the 52 percent of its portfolio invested in publicly traded media companies.
Liberty also has a strong enough balance sheet and financial flexibility, with $14 billion in marketable securities, to continue engaging in its own side deals, whether acquiring the remainder of Wink it doesn’t own or gobbling up European cable.
So Mr. Malone hasn’t lost his luster in the past year so much as he has lost his deal-making momentum in a market that has been merciless to even the most shrewd investors.
After keeping their powder dry the past year, Mr. Murdoch and Mr. Malone clearly view the 10-year low in media deals and the general 50 percent to 80 percent decline in media company market values as an opportunity to resume their empire building. Things are about to get interesting again.