ONCE CABLE'S KING, JOHN MALONE AIMS TO REGAIN HIS CROWN
c.2013 New York Times News Service
John C. Malone made a fortune wiring American homes for cable television in the 1980s and 1990s. Known as the King of Cable, he sold TCI — once the country’s largest cable operator — to AT&T for $48 billion in 1999.
Today, Malone, 72, is back on the prowl in the industry he helped create. Now chairman of Liberty Media, he is working behind the scenes to gain control of Time Warner Cable, the country’s second-largest cable operator by subscribers, behind Comcast.
Such a deal would thrust him back into the heart of the cable television world at a precarious time for the business. Overall pay television subscribers are declining as more people use services like Netflix and Hulu, content costs are soaring as cable and broadcast networks demand higher fees for their shows, and the profit centers at companies like Time Warner Cable and Comcast are shifting from providing television to providing high-speed Internet access.
Despite this changed landscape, and the fact that gaining control of Time Warner Cable will be no easy feat, Malone is energized by the prospect of returning to the fray.
“John looks out and says, ‘That’s an industry that I helped shape, that made me a lot of money, but more importantly that I care a lot about, and I want to see that industry set right,’” Gregory B. Maffei, Liberty Media’s chief executive, said in a recent interview.
Maffei, 53, who is leading Liberty Media’s day-to-day efforts to strike a deal, says Malone believes the cable industry is once again primed for transformation, and that cable operators should merge and cooperate more.
“We have expressed a view that consolidation is helpful,” Maffei said, adding, “Time Warner Cable is appealing.”
Malone declined to be interviewed for this article.
Liberty Media’s efforts to generate a deal for Time Warner Cable began in March, when it acquired 27 percent of Charter Communications, the fourth-largest cable operator in the United States.
With influence over Charter in hand, Malone and Maffei now want to see Charter make a bid for Time Warner Cable. Charter’s chief executive, Thomas M. Rutledge, is on board with the plan.
There are several obstacles to a deal, however.
For starters, Charter is a much smaller company, and would need to take on substantial debt to finance a bid that would top $40 billion. Liberty Media and other strategic partners might also be called on to contribute cash. These preparations have begun, with Charter contacting several banks in recent days.
Another issue is price. Glen A. Britt, Time Warner Cable’s departing chief executive, has said he is open to a deal at the right number. But with shares of Time Warner Cable up 24 percent this year on expectations of a deal — reaching a record high Friday — Charter will have to give a hefty premium to the already generously valued shares.
Finally there is the prospect that the industry leader, Comcast, could make a bid of its own. Time Warner Cable has contacted Comcast about a possible transaction, leading to preliminary discussions. But any deal between the two largest cable operators would be sure to draw close antitrust scrutiny.
Now that Malone has surfaced, however, a deal of some kind is almost inevitable.
“We’re always looking at how Malone gets a path to control,” said Jason Bazinet, a media analyst with Citigroup. “Malone is patient. He’ll sit there like a snake in the weeds for five years and then he’ll pounce.”
Regardless of how the pursuit of Time Warner Cable turns out, Liberty Media’s early efforts to secure a deal provide a look at the tactics and priorities of one of the media industry’s most mercurial investors.
“Some media companies are in it for generational control,” Maffei said. “That’s not Liberty. We’re in it for shareholder returns.”
By that measure, the company has been a success. Factoring in the value of its various spinoffs, Liberty Media has had a phenomenal 36 percent compound annual growth rate since 2006. A unit of stock purchased then for under $100 would now be worth nearly $800.
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It has achieved this through creative financial engineering, aggressive deal-making, and a relentless focus on minimizing its tax bill.
“We spend an awful lot of time trying to avoid corporate level income tax,” said Maffei, who joined Liberty Media in 2006 after stints as chief financial officer at Oracle and Microsoft.
One way it does this is by spinning out companies in its portfolio, rather than selling stakes to other companies. In doing so, Liberty Media avoids paying corporate taxes, instead passing along stock in newly public companies to its shareholders.
“The mother ship, Liberty Media, has spun out a ton,” Maffei said. “Why do we do that? Because if you put those securities in shareholders’ hands, you avoid corporate level tax.”
This strategy is so much a part of Liberty Media’s DNA that the company Maffei oversees today contains precisely zero of the assets it held when he took over seven years ago. Among the companies and stakes it has sold or spun out in recent years are Discovery Communications, Starz and DirecTV.
Today, in addition to its Charter stake, Liberty Media owns positions in SiriusXM, Barnes & Noble and the Atlanta Braves baseball team.
Liberty Media has also spun out two other holding companies over the years, both of which still count Malone as chairman. Liberty Global is the largest cable operator in Europe, and Liberty Interactive, where Maffei is also chief executive, is a collection of digital businesses.
Liberty Media’s strategy of relentlessly acquiring and shedding assets traces its roots to the time when Malone ran TCI. Liberty Media was originally a spinoff from TCI that held small stakes in lots of cable channels that it helped finance.
After AT&T acquired TCI, Liberty Media was on its own, with stakes in companies like Fox and Courtroom TV, as well as myriad other media businesses.
“Liberty ended up owning stakes in everything,” Maffei said. “We’ve spent the last years trying to get out of that stuff to try and avoid corporate level taxes.”
A favored disposal tactic is the tax-free spinoff known as a 355 transaction, which allows Liberty to exchange shares in a company for cash and assets without being taxed.
For example, Liberty Media owned about $1.7 billion of Time Warner stock. It exchanged that stake for $1.3 billion in cash and the Atlanta Braves. Similarly, Liberty Media wound up with a stake in CBS because it helped finance Black Entertainment Television. When it returned the stake to CBS, it received cash and a TV station in Green Bay, Wis.
“It was a terrible TV station, but it was better than paying the government,” Maffei said.
And Malone also continues to employ a variety of complex tactics such as tracking stocks and deals known as reverse Morris trusts.
“He is a much a financial engineer as a media mogul,” said Bazinet of Citigroup.
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Like most companies, Liberty Media was battered during the financial crisis. But while others panicked, Liberty Media went shopping.
It picked up a large stake in satellite radio provider SiriusXM when it was valued at less than $1 billion. Today it has a market value of $22.5 billion, representing one of Malone’s biggest wins ever.
When the opportunity to buy a stake in Charter came this year, Malone saw it as a chance to get back into the cable game. Indeed, he has publicly lamented his sale of TCI to AT&T. “I’m not sure John thinks it was the right thing to sell it back in 1999,” Maffei said.
Over the years, the deal machine that is Liberty Media has made both Malone and Maffei very rich. According to Forbes, Malone is worth at least $6.7 billion. He is also the largest private landowner in the country, with vast swaths of wilderness from Maine to Colorado. Maffei made $391 million in 2012 alone, mostly through stock options.
Today, Malone is looking to expand his empire. While his title at Liberty is chairman, he is the driving force behind the quest to combine Charter and Time Warner Cable.
“John has tongue-in-cheek described himself as a philosopher and investor, and suggested I had to do all the heavy lifting,” Maffei said. “But nothing of consequence gets done at Liberty without John being on board.”