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Will John Malone Soon Be Singing Please Release Me to AT&T?
He loves to make deals--on his own. And many think his next big move is to sever his Liberty Media Group's ties with AT&T
John Malone has had one of those months that even baseball teams such as the New York Yankees can only dream about. Within a three week period, Malone's Liberty Media Group has swapped stakes it owned in companies for stakes in MCI WorldCom and Motorola, and combined its 44% stake in TV Guide with a company that has the industry's leading technology on creating portals for television sets. All told, Malone probably made more than $1 billion without leaving the sprawling ranch outside Denver that he now calls home.
In fact, today no one controls more of what you see on TV than Malone and the small band of 33 employees who work at Liberty's headquarters in Englewood, Colo. It's list of some 60 holdings includes an 8% stake in Rupert Murdoch's News Corp., 9% in Time Warner, 21% in the budding USA Networks shopping and media company run by Barry Diller, and pieces of cable channels that include Discovery, Bravo, QVC, and E!.
The question now: Is Malone maneuvering to break free from Liberty Media's parent company, AT&T. Liberty Media execs disavow any intention of a divorce in their eight-month marriage, but just about everyone expects it sooner rather than later. It could be the most contentious deal Malone has made in a long time.
CARTE BLANCHE. First, start with the unusual relationship that exists between AT&T and Liberty Media. As part of Malone's decision to sell cable company Tele-Communications Inc. to AT&T last year, Malone won the right to operate a semi-autonomous Liberty. Traded separately as a tracking stock, Liberty has its own nine-person board of directors, with Malone selecting six and AT&T three. AT&T bought some Liberty assets as part of the deal, giving Malone $5.5 billion in cash to go shopping. AT&T also gave Malone carte blanche control to run the company for the next seven years.
About all he can't do without AT&T approval is issue more stock. But he doesn't need AT&T approval for deals, and in September he paid $493 million for 50% of the holding company for a Amsterdam cable and high-speed access company that will likely compete with AT&T overseas.
For AT&T, the object was clearly to let Malone do what he does best -- strike deals that improve the value of the companies he buys. No question he can do that: Even with the recent stock market funk, Liberty Media is trading at $37.80, up from the $28.50 when the AT&T-TCI merger was completed in March. And that doesn't count Liberty's 95% stake in Liberty Digital, a holding company for Internet stocks that today is worth north of $3 billion.
SIMPLE FORMULA. With 41% voting control in Liberty, Malone made nearly $1 billion on his shares in just those seven months. What does AT&T get from all this? Nothing, although its shareholders who hold Liberty stock have seen their holdings soar. "If you're going to bet on any one company, you bet on anything John Malone runs, says Ted Henderson, an analyst with Denver-based Janco Partners, which that has a heavy Liberty Media stake. "Their formula is simple. They take minority stakes in companies with great brand names and top managers."
But the ties now appear to be fraying a bit between AT&T and Liberty. On. Oct. 6, Malone's handpicked successor at TCI, Leo Hindery, bolted from AT&T amid tension between him and AT&T Chief Michael Armstrong over issues of control and corporate culture. Then, in a recent Forbes interview, Malone took pot shots at the AT&T chairman, saying the company should spin off its wireless and cable holdings into a separate tracking stock. "It's a mistake to enslave yourself to earnings, and frankly, AT&T is in that trap," said Malone, a board member whose 32 million shares makes him AT&T's largest single shareholder.
Moreover, it's becoming obvious that AT&T may have to consider spinning off its Liberty holdings to appease federal regulators, who are in the middle of trying to set conditions on AT&T's May 1 deal to buy cable operator MediaOne for $58 billion. The Federal Communications Commission has been pondering whether AT&T should both serve nearly one-third of Americas homes with cable and also have an association with a company that owns much of its programming.
On top of that, MediaOne also owns a 25% stake in Time Warner's entertainment properties, including the Warner Brothers studio and Home Box Office. That gives AT&T an even greater programming stranglehold. "Eventually, AT&T may have to choose between whether they want to be in the distribution business or the content business," says Gary Howard, Liberty's chief operating officer and one of Malone's top dealmakers. Malone declined to comment for this article.
PIECE OF THE NET. The only thing that could be stopping Malone from pressing his case for freedom seems to be a provision that he tucked away in the AT&T-TCI merger agreement. It gives Liberty the right to put programming on 12 or more channels once AT&T begins to rollout digital set-top boxes with the ability to deliver literally hundreds of channels. Liberty recently bought Hollywood production house Todd AO, with the idea of making interactive advertising for the Net. And Liberty Digital owns pieces of more than a dozen Internet companies, including sportsline.com, priceline.com, and a brace of channels being created by Viacom's MTV. Clearly, John Malone wants his spot on the Internet.
He may want his freedom from AT&T even more. That's the word among investment bankers and others who know Malone, and how he operates. He loves making deals, and chafes even at the few restrictions that the AT&T deal put on him. With his stable of assets, he could issue more stock to the public and raise whatever money he would need for more acquisitions, or simply issue added shares for the purchases. Moreover, he is considering even taking Liberty private again, as he did in 1994 when TCI bought out shareholders and reunited the programming and cable assets.
The only thing for sure is that John Malone is thinking about his next deal. Since the AT&T deal closed, Malone has struck 11 deals valued at well over $12 billion. He has spread Liberty's reach overseas and further onto the Net. But the square-jawed Malone, a plain-talking kind of a guy, still very much is a lone wolf. It's just a matter of time before Michael Armstrong and the AT&T crew finds that out firsthand.
Grover is Los Angeles bureau chief for Business Week. Catch his column every week on BW Online
EDITED BY DOUGLAS HARBRECHT
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