Malone’s New Direction for Liberty

May 19, 2003  •  Post A Comment

John Malone is contemplating ways to morph his Liberty Media Corp. into a conglomerate on par with News Corp. or Viacom that would be anchored by its existing operating assets and targeted acquisitions such as QVC and Vivendi Universal Entertainment.
The idea of shifting Liberty away from the bold, sometimes risky public and technology investments that in recent years have not done well for the company or its stock came during a more abbreviated than usual annual presentation to investors in New York May 15. “We would bifurcate the company as we have done in the past if an (acquisition) opportunity was too good to miss,” Mr. Malone said. A new entity might need to be created to protect Liberty’s capital structure and investment-grade rating, which it must maintain to engage in a wide variety of deals.
“An enormous pool of capital is available to us as long as we stay investment grade,” Mr. Malone said. “What do we do with this firepower?”
Mr. Malone, a consummate deal-maker whose ability to work magic has been challenged in a difficult deal environment, also offered ringing endorsements of Barry Diller, a longtime partner and chairman of USA Interactive, in which Liberty owns 20 percent, and of Brian Roberts, president and CEO of Comcast, the largest cable operator, in which Liberty would like to have a major stake. Mr. Diller and Mr. Roberts would play critical roles in Liberty’s proposed VUE and QVC acquisitions.
Without providing details, Mr. Malone made clear his intention to transform Liberty into an operating company anchored by existing partially owned or wholly owned private interests such as its 100 percent-owned Starz! Encore, its 50 percent-owned Discovery Networks and its 42 percent-owned QVC, which collectively represent an estimated $36 billion in net asset value, or about $7.50 per share of value to the company. Marked by high growth and free cash flow and relatively low required capital, these companies stand in sharp contrast to the complex, strategic public investments that have long been Mr. Malone’s hallmark and have provided him with valuable bargaining chips with which to do deals.
However, trying economics and financial markets and a media marketplace in extreme flux have changed all that. During the past year, Liberty was foiled in its effort to acquire cable interests in European countries such as Germany, where it would have become the largest operator. Liberty recently withdrew from the bidding for Hughes Electronics’ DirecTV almost as quickly as it had entered the fray, leaving the favored bidding to Rupert Murdoch’s News Corp., in which Liberty owns a nearly 20 percent stake.
“We keep kicking the tire on a lot of things,” Mr. Malone said in brief comments to TelevisionWeek. Liberty is negotiating to acquire from Comcast Corp. the 57 percent stake in QVC it does not own, valued by analysts at about $8 billion, and to acquire the U.S.-based entertainment assets of Vivendi Universal, including the Sci-Fi and USA cable networks and Universal Studios, which are valued at about $20 billion. Such deals-which are being complicated by lawsuits-would go a long way to immediately transform Liberty into a powerful operating media player with more influence in the intensifying struggle between content providers and distributors.
The move facilitates Liberty’s desire to avoid onerous taxes and deal limitations that would be imposed by the government if it deems, as it has threatened to, that Liberty qualifies as an investment portfolio under the Investment Company Act of 1940. “We have to shrink debt and equity proportionately,” but that would not be as attractive as “growing the business, if we can find the appropriate vehicles,” he said. “The ones you’d love to buy are not for sale.”
But Mr. Malone also made clear the need to focus Liberty’s future investments in companies that have low leverage, low risk and high return on investment-in part reflecting a frustration with costly investment failures in recent years and the toll they have taken on Liberty’s stock. Mr. Malone generally expressed frustration with changes in the parameters and environment for creatively financing media deals and investments.
“Our goal is simple. We are looking for leveraged cash flow growth so that return on investment to our shareholders is attractive on an after-tax basis,” he said.
Because its 75 percent-owned United Global Com does not meet the criteria, Mr. Malone left little doubt in his remarks that the European cable provider and its companion program company are headed for a public spinoff to Liberty shareholders due to its high leverage requirements even after an extensive restructuring. It is not clear whether any of Liberty’s other international companies or investments also would be wrapped into such a spinoff.
Mr. Malone and other company officials emphasized that they still are thinking through how to restructure Liberty, and that major acquisitions will determine what occurs.
Remarks by Mr. Malone, Liberty President and CEO Robert Bennett and Liberty Chief Operating Officer Gary Howard left investors and analysts flush with the sense that its deal-making options are exceeded only by its financial ability to do them. At the very least, Liberty has more than $10 billion in cash on hand, $6 billion in nonstrategic assets that can immediately be monetized, and billions of dollars in assets and investments it can use as deal-making currency.
Mr. Malone insisted Liberty has a competitive edge in the heated bidding for the VUE assets, despite its pending lawsuit against Vivendi. The suit is based on whether Vivendi’s deteriorating financial state has jeopardized its financial obligations to Liberty under the terms of Liberty’s 3 percent investment in the French company.
“Should we do a Vivendi Universal deal, we’d be more inclined to be a buyer than trader of these assets,” as a platform on which VUE’s and Liberty’s existing program businesses “become more valuable to us,” he said.
Liberty’s edge to do such a deal is its ability to unravel the complex terms surrounding Mr. Diller’s 5 percent stake in Vivendi in a way that would free the French company of an estimated $2 billion in tax and legal liabilities, preserve Mr. Diller’s ongoing interest in the VUE assets and increase Liberty’s stake in USAI. Liberty clearly would like to merge QVC with USAI’s Home Shopping Network to create a home shopping operating unit in its overall restructuring. Pulling off a VUE deal also would give Liberty de facto control of USAI.
“We own that company [USAI]. We have a lifelong commitment to Barry. I’m in love with Barry,” Mr. Malone said.
Sources close to the company say Jeffrey Katzenberg and his DreamWorks SKG could become secondarily involved in a VUE deal as a strategic managing partner.
“Would I like to put money behind Jeffrey Katzenberg? You bet. Is that opportunity presenting itself? I don’t know,” Mr. Malone said.
Other matters, such as a program license fee dispute between Liberty’s Starz! Encore and Comcast valued at about $270 million, as well as Liberty’s 50 percent stake in Court TV, also could become part of wide-ranging and complicated deal negotiations, sources said.
In a brief exchange with several hundred attending investors, Mr. Malone said that if Comcast sells QVC, which is the most profitable cable network, generating an estimated $1 billion in annual cash flow, it also should sell off its ownership stake in E!, which it co-owns with Disney.
“Then he [Brian Roberts, Comcast president and CEO] is clean, and he can beat the crap out of everybody on rates and not have to worry about antitrust issues,” Mr. Malone said. Comcast officials said they had no comment.
Although Mr. Malone conceded that consolidating cable operators are becoming less vetrtically integrated “and will drive program values by using distribution as a bludgeon or maximize distribution value to drive down cost,” he stopped short of saying Liberty would re-enter the cable operator fray. Liberty appears content to leave the heavy lifting in distribution to News Co
rp., which has proposed acquiring a controlling 34 percent stake in Hughes Electronics’ dominant DirecTV satellite service.
“The next two years will be telling in terms of who owns what platform and how they can use it to sell their services,” Mr. Malone said.
Investors clearly got more than they bargained for from Mr. Malone and Liberty, and a sense that the company’s deal-making days are back.